Economic development vs. tax giveaways

While I have great respect for Chris Gregoire, and was enormously impressed with the outcome of the last legislative session, I worry that her economic development plan is not very sophisticated. I saw the coordinator of her GMAP process on TVW talking about economic prosperity (is there another kind?), and she seemed to indicate it the Governor’s efforts are the usual parade of officials showing corporate potentates around the local industrial sites and promising to "work with them."

There is a certain intuitive attraction to the notion that economic development means luring new companies to your shores, but the idea fails the direct look test. Every other state is doing the same thing, the tax breaks and siting bonuses tend to compete away any net positive economic impact. Most problemmatic may be that in order to get the concessions, you need to move your company (or threaten to move, as with Boeing).

State incentives ought not to be targeted to individual companies, or even industries, but to activities that are beneficial. Let the state reward investment in human or physical capital – the activity itself. Let the market invest where the entrepreneurs see the advantages coming.

If we could ever get the small-minded, me-first anti-tax vigilantes out of the way, the state itself could invest to great effect. Transportation infrastructure, for example, is a public good that yields many times its purchase price in real money to real businesses and real individuals from reduced costs and increased opportunity. (The opposition to the gas tax in the recent election was numbing in its stupidity.) A major advantage of infrastructure is that it is not portable, as for example, are the proceeds of a tax break. Infrastructure is here for anyone who wants to be in Washington.

Education is great. Excuse me. Good education is good, great education is great, economically. Employment is high. It improves individuals’ lives. Reduces burdens on other state services. Provides spin-off possibilities. Draws revenue from other states. Focuses communities. Supports local trades and industries. (I get teary-eyed.)

Aside from direct investment, there are three other mechanisms for the state to increase the number and quality of jobs and thus the climate for business: (1) direct hiring, (2) reducing the cost of Washington-made goods, and (3) progressive tax reform.

Direct hiring may seem too obvious, but there is a debate. The Heritage Foundation will tell you that the taxes necessary to fund government programs are themselves obstacles to economic development. The facts are arithemetically and logically conclusive, but lie in the opposite direction.

A dollar spent in taxes hires a worker in the taxing jurisdiction. A dollar spent by a private individual buys a product or service that may be, but often is not, in the taxing jurisdiction. This dilution of the first dollar spent echoes through the economy. (Notice that the person of part one then becomes the person of part two, so nothing is lost, only the government job is gained. This is the root of the concept of the economic multiplier.) The Governor’s insistence in fulfilling the class size and COLA mandates for teachers will do more for Washington’s economy than any number of fenced assembly plants.

[I’m getting off the point here, but one thing that really bugs me is when construction projects are treated as "job producers" and cutting teachers salaries or laying off people in government is called "management efficiency." Maybe this is purposeful spin, maybe it is sincerely believed, but it is wrong.]

Quickly! (Economist rants are so dull)

Reducing the cost of Washington products means more will be bought and production will go up. State government can do this by favorable taxation and by efficient regulation, as well as by infrastructure. The state’s B&O tax is really, really bad at this, since its pyramiding burdens in-state firms while letting out-of-state firms and big, vertically integrated corporations (Wal-Mart) skate.

Progressive taxation. Poor people spend all their income. If they get more income, they will spend more. It’s the multiplier again. The three most fundamental problems (it’s always three, isn’t it) with the our state's notoriously regresssive tax system are: it’s morally offensive, the poor can't produce enough revenue anyway, and it reduces spending in the local economy. Better we should tax people who have the money and let low-income people help local businesses by buying what they need to survive.

Economic development cannot be accomplished by competing with other states. It's a race to the bottom. Promote investment in human and physical capital, emphasize our natural advantages, and do what we can internally to create good jobs and an attractive base of demand.

Sunday, December 04, 2005