Tax Abatements

Another kind of subsidy that can affect competition is also a form of competition, ironically enough. It is competition between locations.

States or other political sub-divisions offer tax incentives to companies they would like to attract to their location. It could be a foreign company making its entry into the U.S. market, or a U.S. company moving to a more favorable labor market with an added benefit of a tax advantage.

The local governments realize that they are in a competitive market and must be very aggressive regarding tax rates and other business climate issues to attract new business. They want to create jobs and all the peripheral things that result, which is a good thing. The balancing act involves locally attractive labor rates, so that it is attractive to business but will also improve the local prosperity level, all things considered.

The real problem is that the basis for a very competitive tax incentive is that other local businesses and citizenry must subsidize it, at least initially, and could resent unequal treatment. Their share of tax must somehow offset the incentive. The tax incentive for a foreign entrant or a migrating company seems to advance the consumer’s interest, as these companies should become more competitive. It will help to make any company more competitive, but at the expense of others.

There are Southern states that have attracted a large number of businesses, including well-known foreign auto companies, with tax abatements. Is it possible that those states may now have a tax system marginalized by those subsidies? Their ability to stay current in infrastructure, highways, and public services in general in a population expansion environment may be strained. The new jobs promised are low paid on average and may not bring the anticipated prosperity to those states. It could be a difficult situation when the auto market cools or if a deep recession occurs. There was substantial worldwide excess auto capacity even before construction of these Southern facilities, so competition will be very tough for the foreseeable future.

A greater reason for success of these transplanted operations will be their own ability to develop a totally green workforce, which is free of Detroit paradigms, into one that is world class effective. The labor costs will be better for three reasons: a competitive hourly rate, the workforce attitude (a version of a W3 environment), and minimal retirement benefit burden in the early history, a major handicap for the Detroit companies.

A basic truth involving any subsidy is that by itself, it will do nothing to improve the overall basic operation of any enterprise. In fact, the subsidy can cause the recipient management to defer or to forget about more serious efforts to refresh a substandard competitive base. The new lower local labor rates and tax burden will help but that may mask a more serious deep-seated problem.

Subsidies can have serious negative effects on the provider, distort the free enterprise competitive environment, and impose penalties on other local businesses and citizenry. It can create low paying new jobs in one area at the cost of presumably better paid jobs somewhere else. It is likely that to make the move in the first place, except to enter a new market as in the case of the auto companies, there were problems difficult to solve any other way, surely a symptom of more serious problems in competing. Even attractive subsidies are no substitute for Yankee ingenuity.