Business Tax Breaks: State Budget Busters

States face a combined $112 billion in projected budget shortfalls for their coming fiscal year (2012), according to the Center on Budget and Policy Priorities, showing that states continue to suffer from the shrunken revenues caused by the recent recession. So you might wonder why, as Bloomberg Businessweek reports in its current edition, states continue to allocate an estimated $70 billion a year in tax breaks to lure businesses to locate within their borders.

In essence, states are responsible for this mess. One state offers a tax break to lure a company to relocate, prompting another to offer a bigger tax break, prompting still another to join the action, and, before you know it, you have a bidding war among states.

At a time of high unemployment, elected officials are desperate to show their constituents that they’re doing something to create jobs. A new corporate headquarters or plant in, say, Indiana, will mean more jobs in the Hoosier State, lower unemployment, and a more contented public.

Even a governor like Ohio’s John Kasich, the former House Budget Committee chairman in the late 1990s who had criticized “corporate welfare,” told Bloomberg Businessweek, “When other states come in and they offer significant ways for people to have lower costs, you either compete with it and win, or you lose.”

Well, that’s one way of looking at it. But, here are two others:

First, let’s think about the $70 billion in lost revenue.  That’s money that states could have invested in education to build a more skilled workforce, or infrastructure to ensure that people can get to work more efficiently and companies can move goods from factories to stores.

Though not in every case, over the years many corporate executives have said that a skilled workforce and a modern infrastructure are far more instrumental in location decisions than tax breaks.  If so, states are merely rewarding companies for location decisions that they would have made anyway.  Perhaps states should save their money and invest in the future.

Second, the states themselves admit that, in allocating these tax breaks, they’ve suffered a bit of buyer’s remorse.  In late April, the Wall Street Journal reported that some states are demanding that companies return some of their tax breaks because the companies didn’t come through with all of their promised new jobs.

That’s still another reason for states to think about getting off the treadmill of business-luring tax breaks.