The Free Market 18, no. 1 (January 2000)
A common misconception in popular thinking about business is that companies need to be helped along and supported by government. If a community fails to help business, it is said, it will miss out on jobs and prosperity. We see this happening across the country. Cities use public funds to build sports stadiums and arenas. States issue bonds and provide tax incentives to large corporations to entice them to locate in specific areas. Politicians then turn to the community and campaign for reelection based on bringing home the corporate bacon. This legal plunder is disguised as “urban renewal” or “community development.”
A prime example is the political controversy in Michigan this past year, when two cities battled it out for resources. The mayor of Warren denounced the Troy City Council, a citizens organization called for a full-scale economic boycott, and average people were quoted in the newspapers with every manner of threat.
What could cause this hostility between two neighboring cities? Why would one ask its citizens to stop shopping next door? It wasn’t about racism, busing, schools, or representation in the state legislature. Nor was it the fashionable arguments over pollution or the use of resources, like water. Instead, these cities were arguing over the oldest reason of all municipal trouble-taxes and jobs.
Everyone recognizes that Michigan is economically driven by the auto industry, particularly southeastern Michigan where Troy and Warren are located. This past summer the region was about to get a boost. General Motors announced that it would invest $1 billion in its Tech Center located in Warren. The work would have begun in August, and the goal was to finally modernize the aging 1953 complex. The project would allow GM to increase quality and satisfy more customers.
However, this investment would also cause an increase in the property value of GM’s 1,000-acre site. The mayor of the City of Warren, wishing to encourage this investment, agreed to abate $91 million in property taxes over 12 years. The result is that the tax bill GM would end up paying would only increase by $5 million to a total of $26 million annually. GM and the City Council of Warren were happy.
So far so good, but there was a catch. When GM completed the upgrade of its Tech Center, it would transfer 1,200 jobs from a non-permanent location in neighboring Troy. According to a state law passed in 1974, when the issues of job transfer and tax abatement are considered, the community that will lose jobs, in this case Troy-has to approve the abatement deal, such as the one made by Warren. The idea was to stop the “poaching” of jobs through the use of tax abatements and deferments. The only exception for a “worker exit visa” is if the poaching city is “economically depressed.” In other words, if it was created for the benefit of Detroit-to slow the flood of jobs leaving the city and allow it to poach jobs from the suburbs.
For the past 13 years, Troy, a relatively wealthy suburb, has followed a philosophical position of treating every business the same way-”a level playing field.” Every business follows the same rules, regardless of who they are and where they are located, even if that means businesses outside their city. There are many advantages to this policy. Resources are not distorted by government favoritism. Businessmen enjoy a sense of fairness and stability. Special interest groups look elsewhere for favors, because these politicians are not allowed to grant perks. As Mises might say, Troy is following a philosophy to minimize interventionism. Each reason alone is enough to justify such a policy, but then why was Troy being attacked from every side for its decision?
One could make a jurisdictional argument about how one community should not be allowed to interfere in the affairs of another. One could argue that without the tax abatement, GM may invest the $1 billion in Germany or Mexico (which they have hinted at). One could point out that tax revenues received in Warren are still increasing, so that other taxes may be cut. Or one could say that Troy has allowed other “non-depressed” communities to issue abatements and this time is simply “a bunch of rich people thumbing their noses at Warren.” Republican Governor John Engler’s solution was to repeal the 1974 law.
The arguments on both sides miss the crux of a much larger problem. The issue isn’t whether one community should have the right to independently use targeted tax abatements, or whether one community should be able to exercise its philosophy to create a level playing field. The central point is that taxes are too high. In this case, property taxes are too high.
Low general taxes would stimulate investment (like GM’s), foster more economic growth, minimize the amount of price signal distortion, and still allow tax revenues to increase (or allow for other taxes to be cut). If other municipalities would like to attract businesses, then they’d have to cut their taxes too. Lower taxes wouldn’t cause calls for boycotts or create animosity and resentment among neighbors. It’s the sort of competition these cities should be engaged in.
Paul F. Cwik, a former Mises Institute scholarship student, is assistant professor of economics at Campbell University.
