We’re Not in Kansas Anymore
On Wednesday, June 1, the Kansas City Star reported that Applebee’s will receive tax breaks to move its headquarters from Kansas to Missouri. For those of you who aren’t familiar with the area, this particular move will involve a distance of less than 15 miles. Our Department of Economic Development (DED) has agreed to award $12.5 million dollars in tax breaks for this move. Is it really worth that price?
Missouri’s economic development officials claim that the tax breaks will create a net gain for the state. According to the best estimate I could come up with, the state can only expect to receive a total of $838,000 over 10 years. And, starting with a figure provided by Applebee’s itself, a second estimate predicts a loss of $1.1 million.
Why is the state choosing to award Applebee’s? Why not lower the tax burden across the state by $12.5 million? And what of Applebee’s competitors? Are they receiving a tax break? Will the subsidy allow Applebee’s to outcompete other companies? If the answer is yes, we must ask ourselves if the state should be the one picking winners and losers in the economy.
It is perplexing that the DED is awarding millions of dollars to move a company 15 miles across the state border. Clearly, this does not improve the Missouri-Kansas economy; it merely helps an individual company. Again, why Applebee’s? Why not spread the millions in aid across the entire state of Missouri in the form of lower taxes?
Even if it weren’t for the fact that the state is taking a huge risk by awarding a tax break to Applebee’s, we all need to wonder why the state doesn’t instead simply lower the tax rate for everyone.
Why would one party unilaterally disarm in an arms race for economic activity?
It makes no sense, from just about any perspective. However, when governors, mayors etc. are measured by jobs, jobs, jobs, it makes sense. This gives a good pr story for the government, highlightable successes, while diffused shortcomings [general loss of revenue]. Kind of like free trade in reverse [a factory closes greatly effecting hundreds, but everyone in the population gets lower priced cars].
I can’t say I blame Applebee’s. Missouri and Kansas are not going to sign a non-poaching pact, but I would love it if they did.
Comment by Papillon — June 6, 2011 @ 10:52 a.m.
Actually, there is a research showing that unilaterally disarming in the subsidy war does cost your jurisdiction jobs and/or taxes (think of the East-West Gateway TIF study of St. Louis cited earlier in this blog). That is why states continue to poach jobs and engage in bidding wars for new investment. A non-poaching pact won’t do anything unless there is some way to enforce it. Two have been tried in the U.S. (one sponsored by the Great Lakes Governors Association, the other between NY, CT, and NJ), and both failed miserably. The answer, as Burstein and Rolnick of the Minneapolis Fed wrote in 1994, lies in federal action. No individual state will take into account the impact on the country as a whole.
I cover these issues and a whole lot more in my books *Competing for Capital* (2000) and *Investment Incentives and the Global Competition for Capital (2011).
Kenneth P. Thomas
University of Missouri-St. Louis
Comment by Kenneth Thomas — June 6, 2011 @ 1:54 p.m.