Coyote Blog

It is not that often I get the opportunity to find something about taxes and markets in Kevin Drum's column that I agree with, but his guest blogger Paul Glastris has a good series of posts on state and local tax breaks, and even direct subsidies, for relocating businesses (first post here).  Glastris argues for the elimination of these tax breaks and subsidies, and I agree 100% with this conclusion, though not necesarily his legal justification for doing so (more on that later).

I have written a number of times about my frustration with a particular type of these subsidies - the public financing of stadiums for private sports teams (here, here, and here).  This stadium construction is usually undertaken as a result of corporate blackmail, where sports teams threaten to move unless they get a new stadium.  The dynamics of other tax breaks and subsidies to relocating businesses referred to by Glastris are usually similar, though these companies don't tend to have the monopsony power of sports franchises so they often get a smaller payout.

Why do local governments pay out huge incentive to corporations who after all have to put their business somewhere?  The answer is that they are caught in a classic prisoner's dilemma.  Basically, in this "game", each participant has individual incentives that seem to point to a certain set of actions.  Unfortunately, when players follow these incentives, the result is sub-optimized for everyone.

In this example, local authorities see a business that may move to town, and decide it is better to have it in their city with tax concessions than to have it in another city.  Since cities lose some of these battles and win some, and since cities that lose one battle tend to pay more to win the next one, the end result is that businesses end up being distributed fairly evenly, but cities have all given up huge tax concessions.  Clearly the ideal state, at least for city governments, is to not give any tax concessions at all.  In this case, businesses would likely still end up being distributed fairly evenly, but cities would not have given out tax breaks.

The only way to get to this end state is 1) have a philosophic change, with local citizens rejecting the use of government to affect relocation decisions (ie become libertarians!); 2) collude - have the council of mayors get together and sign a no new subsidy pledge or 3) have some higher authority police the local governments (that is the option explored in the Glastris article - can the US Government or courts constitutionally stop this). 

The Washington Monthly, in opposing these tax breaks, has a problem, though.  As good technocrats and liberal interventionists, they wholeheartedly support the government's right to regulate the hell out of business and commercial decision-making.  They can't, therefore, take the much cleaner libertarian argument I do, that the government should not be interfering in free, arms-length commercial decision-making at all. 

They are stuck with narrowly opposing just one kind of government interventionism (tax breaks to business) and this leads to a couple of problems in Galstris's argument.  The first is a consistency problem, which you can see in the attorney's letter Glastris quotes.  He argues in the first paragraph of his letter that these tax breaks violate the commerce clause because they unduly influence interstate commerce, then argues in his second paragraph that these tax breaks have no discernible influence on corporate decision making.  Well, if the second part is true, then their logic in the first part can't be true.

The other problem with their argument is that liberals want a commerce clause, as redefined by courts in the 1930's, as enabling massive government intervention, but in this case Glastris is trying to use it in its pre-1930's use, which was restrictive.  If the Glastris wants to take the position that the commerce clause limits state and local businesses from trying to change the decision-making and cost structure of businesses engaged in interstate commerce, wouldn't this same logic extend to making unconstitutional state-based business regulations?  If you can't give a local tax break to a certain industry, doesn't that mean you can't give a higher tax (say on lodging) to another industry?  The specific words of the Ohio decision referenced says:

... the tax scheme discriminates against interstate commerce by granting preferential treatment to in-state investment and activity.

I might ask, if you take this argument, wouldn't laws that make in-state investment and activity less attractive than other states also be unconstitutional? 

One final note.  As a libertarian, I have gone through phases on targeted tax breaks.  There have been times in my life when I have supported tax breaks of any kind to any person for any reason, by the logic that any reduction in taxation is a good thing.  I know there are many libertarians that take this position.  Over time, I have changed my mind.  First, targeted tax breaks seldom in practice reduce the overall tax burden - they tend to be made up somewhere else.  Second, these tax breaks tend to be gross examples of the kind of government coercive technocratic meddling in commerce and individual decision-making that I despise.  Almost always, they are trying to get individuals to do something they would not otherwise do, so in practice they tend to be distorting and carry all kinds of unintended consequences (as well as being philosophically repugnant).

By Federal law, U.S. Federal Government lands and property are exempt from state and local property taxes, just like sales to the U.S. Government are exempt from state sales taxes.  This means that, for example, the feds don't have to pay property taxes to Wyoming for the buildings and improvements in Yellowstone National Park.

Most states may sulk about this but they live with it.  However, a few of the most tax-avaricious states, including California and Washington, have found partial way around this. 

I just got my "Leasehold Excise Tax Return for Federal Permit or Lease" from the state of Washington.  What the heck is this?  First, some background.  My business runs campgrounds under concession contract with the US Forest Service in Washington State.  These concession contracts are legally like leases, in that I lease the facilities for a percentage of sales payment in return for running them for-profit.  Washington State can't charge property taxes on the campground itself, since its Federal property, so they charge a steep tax on the rent we pay to the Federal Government.  In Washington, the tax this year is 12.84% of the rent payed.

Yes, that's right.  The state only charges this special tax for rents payed to the US Government. No other rents get taxed.  The tax exists for no reason other than to get around the limitations on taxing the US Government's property.

If asked, Washington would piously state that, oh, we aren't taking any money from the feds, we are taking it from private entities.  Yes and no.  Yes, I as a private entity, I am paying it.  But, given how I bid for these leases, the state tax clearly comes right out of the Feds hands.  When I bid this project, I figured out what rent I could pay the government, and then backed out how much I would have to pay Washington State and bid the lower sum to the Feds.  In this case, Washington State is very clearly taking money right out of the US Government's pocket.

And for what?  Washington State provides no services or utilities to the campground.  The US Forest Service provides the fire protection, its own law enforcement officers, its own water and sewer systems, and its own roads.  There are no residents on the property, so no one associated with the property is using schools or other services.  And, because of sky-high sales and lodging taxes in Washington (from 10-12.5% of sales for camping), the properties are already contributing a ton to state coffers.

I am reading Olaf Gersemann's book Cowboy Capitalism and enjoying it immensely.  He points out that of the top 20 largest publicly traded companies in the US in 1967, only 11 are even in the top 60 today, much less the top 20.  In contrast, he points out that of the 20 largest German companies in 1967, today, thirty-five years and nearly two generations later, 19 are still in the top 60 and 15 are still in the top 20.

We think of European fascism as having been defeated in 1945, but, at least in terms of fascist economic ideas like the corporate state, it is alive and well in old Europe.  Take France for example.  France is run by an elite group from a couple of universities who circulate and criss-cross paths between government, large corporations, unions, and the military.  This group is loyal to each other first, and to ideology second.  What the US Government stands accused of doing to support Haliburton (forget what actually happened - just take the wildest accusations) happens routinely and as a matter of policy between the French Government and their largest corporations.

Though the US has from time to time made mistakes in this regard (e.g. Chrysler bailout), their actions are nothing compared to the total support that French and German corporations get.  In many industries, the government has gone so far as to fix current business models in place by law, effectively outlawing alternative business approaches (e.g. discounting is illegal in German retailing).  In addition, these countries make entrepreneurship extraordinarily difficult, helping to prevent competition from new upstarts.  For example, Gersemann points out that the cost of organizing a new business entity in the US costs an entrepreneur about a week's pay;  In France and Germany, it costs 4 months pay or over 20x more.

In my article "60 Second Refutation of Socialism, While Sitting on a Beach", I pointed out that wealth is created when people are free to use their mind to envision new things, AND free to pursue this vision without undue barriers.  Europe, in killing entrepreneurship and dynamism, is killing this second criteria for wealth creation.  Propping up aging basic industries, four day work weeks, 8 week vacations, immense public sector employment, and unlimited unemployment benefits may feel good for a while, but they destroy wealth.  Old Europe is like a retired person spending their investment principle:  Quality of life may be good today, but future income and wealth is at risk.

UPDATE

Marginal Revolution has been running a series on some small steps Germany may be taking to change itself.

I am all for restructuring the whole social security system, but, as I have written before, we cannot let the government invest social security funds in private equities.  The potential for manipulation and creeping socialism are astronomical.  Its easy to picture fights over whether the social security funds should be invested in tobacco makers, gun makers, hospitals that conduct abortions, Domino's Pizza (that donates funds to oppose abortion), Haliburton, etc. etc. 

I have always used government-funding of universities as an example -- the government uses the leverage of this funding (and the threat of its withdrawal) to force all kinds of regulations on universities.  Today, we have a good case example that is even more directly applicable. 

Over the past several years, Calpers (the California state workers retirement fund) has been a great example of how government control of equity investments can be a disaster.  In the case of Calpers, their huge pension investments automatically make them one of the largest investors in each company in their portfolio.  Calpers has used that power wisely at times, promoting improvements in corporate governance, but has also used it astronomically poorly. 

Under Sean Harrigan, Calpers portfolio has been unbelievably politicized, up to and including having the portfolio use its ownership in several grocery chains to support striking members of the grocery union run by... Sean Harrigan.  Professor Bainbridge has a couple of good roundups here and here.

If we are change how social security funds are invested, let individuals make their own investment choices. 

I just got back from about 10 days on vacation.  My bookkeeper takes care of all the mail that is vendor related, and I get what is left.  Unsurprisingly, I had about 60 pieces of mail, which is actually pretty low since we are in our off season.

However, when I started going through it, I was struck by how much was government related.  Out of those 60 pieces of mail, 5 were small checks (pay phone commissions, that type of thing), about 5 were from private parties and the rest was all government -- department of labor, department of revenue and taxation, vehicle registrations and issues, etc.  Have we really come to the point that 80% of my correspondence is with government regulatory and taxation authorities?  Part of this is because we are in 10 states, as I have discussed here, but it still seems excessive.

The one dominant piece of mail was a survey from the Department of Labor in every state we operate in.  The first thing I do with these surveys, as discussed here, is check to see if they are voluntary.  If so, they immediately get circular filed.  I don't want to spend the time, and I don't think the government needs the information.  In large part data is just the job security of the bureaucracy - more data means more people collecting and analyzing and reporting, and, the worst, proposing new regulations and taxes based on the data.

Two states, California and Florida, required the survey get done, so I did it.  Actually completing these surveys really got me irritated,  There is very little on this thing that we don't already report to the government.  Already, we have to report every individual person's wages each month or quarter.  Why is this not enough?  Mostly, this survey just asks me to aggregate the data the government already has in different ways.  Why can't they do that?  What are computers for, anyway?

UPDATE #1

I got the following comment:

And you'd like them to propose regulations based on incomplete data?

It is not the accuracy of data that is objectionable - it is the ridiculous detail.  For example, does the government really need to know monthly employment levels by detailed SIC code by county?  This just leads to some government staffer saying - hay, the employment in the tourism business in Maricopa county fell by 1% in August - we need a taxpayer funded initiative to promote tourism there, yada yada.  And whala, pork is born.  See examples here.

Our company operates in 10 states, so that means, each month, 16 sales tax reports (including counties and cities with separate reports), 10 withholding reports, 10 SUI reports, several workers comp reports not to mention annual health inspection reports, occupancy permit renewals, federal and state income tax forms, foreign corporation annual reports, etc, etc.

So, as happened today, when I get an optional monthly or quarterly survey to help support the commerce department data (or maybe it was labor department) it goes straight to the trash. I am sure this makes me a bad American, but does any small business owner really have time to fill out this junk, especially since the data will probably be used by some Congressman as an excuse to regulate me in some new and intrusive way?

The Commerce and Labor department data are often criticized for under-weighting small businesses and self-employment. I certainly believe it, and am proudly part of the problem.

OK, today I got an email from yet another associate that claims that the US Government is making up the story that the Pentagon was attacked on 9/11. Again, please Google these things and check Snopes or urban legends or FactCheck.org before you send them to me. The Snopes article on this one is here.

Presumably, since it is ludicrous to think that the feds could gen this event up within minutes of the WTC attacks, the proponents of this theory must also believe the WTC attack was faked or staged or created by the US Government. Beyond fever-swamp conspiracy theory lovers and rabid America-haters, I guess this also appeals to the reality avoiders who would like to believe that there are not islamo-fascists out there trying to kill us.

UPDATE

The Washington Post had an article on Internet conspiracy theories, including the Pentagon one mentioned above. The article also mentions this conspiracy was spread in part by a guy on his "libertarian web site". I have got to find some other name to call myself. Ayn Rand, who many libertarians (including myself) admire, always hated being called a libertarian. I start to understand why. There is a difference between wanting smaller government and living in constant X-files type paranoia about what vile plots the government is hatching.