Taxing, spending and jurisdictional competition

Cite this Article
Larry Ribstein, Taxing, spending and jurisdictional competition, Truth on the Market (June 09, 2011),

Back in January Illinois raised corporate taxes to, as I said then, “try to bail Illinois out of the results of their fiscal profligacy.” But I added that raising taxes wouldn’t necessarily work “because of jurisdictional competition– there are many other places the would-be taxpayers can go.”  And that “the tax ‘solution’ will drive out the most mobile residents and investors.” The Governor was skeptical that firms like Caterpillar would leave Illinois, which he called the “strongest” state.  I responded, “yes, and remember when Detroit was Motor City?”

I added last March:

Potential exit of firms can be a powerful way to discipline a state where political discipline is profoundly weak.  If you don’t believe this, try driving through Peoria and imagining what it would be like without Caterpillar.

So how’s this tax increase thing working out for Illinois? Let’s check in with a WSJ editorial today:

according to the state’s Department of Commerce, Illinois has already shelled out some $230 million in corporate subsidies to keep more than two dozen companies from fleeing the state. And more are on the way.

The editorial focuses on the fact that high taxes empower the governor to dole out “corporate welfare” to favored firms. He can be a populist to his base while at the same time looking business friendly (except that Illinois is far from that).

I agree, but want to emphasize a different point. As I said last January and March, raising taxes just won’t work.  As the editorial notes: “The irony is that the recipients of these sweetheart deals are the very enterprises that Mr. Quinn was counting on to pay more taxes.” So the less mobile businesses and individuals end up paying the costs in the short run.  It’s too late for these firms, but a lesson not lost on other firms thinking about moving to or expanding in Illinois.  So in the long run the state loses.

In short, jurisdictional competition is a check on the sort of state profligacy that got Illinois into this fix. It can’t tax its way out of it without causing more problems.  The only solution for the long haul is spending restraint. 

Something the US might want to think about as it competes in the global economy.