Creative Politics: Taxes and Public Goods in a Federal System

5. Tax and Spend or Spending Taxes— Economic Development in the States

Chapter 5 Tax and Spend or Spending Taxes—Economic Development in the States Although legislators differ on issues pertaining to the means by which to ‹nance government, they are united in their pursuit of enlarging tax bases via economic development. Since the 1970s, state of‹cials have substantially increased their attention to economic development (Eisinger 1988; Brace 1993; Beyle 1983). Thirty of the legislators in this study (23 percent) either described themselves as specializing in economic development or considered economic development an important legislative priority. The half dozen representatives who resisted discussing economic development because they lacked expertise nonetheless described in detail their preferences for particular components of economic development policies. There is considerable evidence detailing various state economic development efforts (Brace 1993; Dye 1990) and the ef‹cacy of these policies (Courant 1994), yet less is known about how legislators and legislatures produce development policies and why they choose one set of development tools over others. Legislators share the goal of expanding their states’ economies and creating new jobs and investment opportunities. They differ on how to pursue this collective goal. Two strategies exemplify legislators’ choices between particular-bene‹ts and public-goods strategies . Economic development policy provides clear cases of representatives deciding between public goods and particular bene‹ts in the pursuit of the same goals—growing economies and expanded tax bases. In addition to legislators’ individual preferences for public-goods and particular-bene‹ts strategies to enhance economic growth, state policy histories, citizen participation , and horizontal tax competition among states in›uence the development of state economic development policy. The economic development case studies from Tennessee, Mississippi, 71 New York, Colorado, and Washington and the individual interview data enhance the understanding of the variance among state development processes and illuminate the roles of state policy histories and policy interactions , opportunities for citizen participation, and intergovernmental relations. Despite empirical evidence that state development efforts may expend more marginal resources than they attract or generate (Courant 1994), most legislators believe these policies are worthwhile. This chapter offers an understanding of legislators’ perceptions about interstate competition for employers. Although other studies have offered considerable evidence for interstate competition, few have reported directly on legislators’ views about interstate competition and legislative responses to it (Eisinger 1988; Brace 1993). Representatives are aware of and contend with the relationships and linkages among different policy areas. In the case studies of New Jersey, New York, and Washington, legislators expressed frustrations that general tax policies mitigated state development efforts. This “paradox of development” is not apparent if one views state economic development policy isolated from other state tax and spending policies. Both public-goods and particular-bene‹ts strategies provide political advantages for elected of‹cials. Legislators can point to public goods such as community colleges and infrastructure improvements and claim credit for bringing the particular bene‹ts, or positive externalities, of such goods to their districts. More directly, when particular bene‹ts such as tax abatements or ‹nancial underwriting result in a state attracting a speci‹c employer, legislators can claim credit for speci‹c jobs in their districts. The avenues of federalism available to state legislators for economic development are largely those between states and localities. And it is on these state and local avenues that the creative politics regarding development policies take place. State legislatures enact tax policies that circumscribe and preempt local tax policies. They rationalize that foregone local revenues can be offset by larger revenue bases. Alternatively, state governments may provide funding for employment and training at local or regional community colleges or funding for roads and infrastructure that will bene‹t municipalities. With respect to speci‹c tax policies, state legislatures in Florida and Mississippi have used their incorporation powers either to create new special-district governments or to abate local taxes to lure employers. To the extent that avenues of federalism run between the federal and state governments, they assume characteristics more akin to back alleys 72 Creative Politics than to broad, clearly de‹ned avenues. The lack of a national federal development policy has left states considerable latitude for developing their own policies (Eisinger 1988). In addition, federal spending, particularly defense spending, has implicitly in›uenced state development by funneling federal resources into speci‹c states. The states have in turn used Department of Defense facilities and their contractors as anchor employers in their efforts to attract various high-technology ‹rms (Schulman 1992; Mintz and...