Ending the ‘subsidy war’

Every year, state and local governments spend more than $80 billion, or roughly 7 percent of their budgets, on subsidies to attract businesses, according to The New York Times. But some trade experts argue that these resources could be better used, and that foreign trade models could be used to put an end to interstate “subsidy wars.”

Last week, Texas Gov. Rick Perry and other local officials confirmed Toyota’s American sales headquarters will relocate from Torrance, Calif., to Plano, Texas, according to The Wall Street Journal. The plant will bring an estimated 4,000 jobs with it, but will cost Texas $40 million in subsidies, one of the largest payouts the state has given through its Texas Enterprise Fund – an incentive program run by Perry’s office to attract businesses to his state.

Last year, Washington granted a subsidy package worth $8.7 billion to keep Boeing from moving its production to South Carolina – the largest such payout in American history, according to The New York Times. Currently seven states, Texas, Arizona, New Mexico and Nevada, are competing to secure the new Tesla Motors factory, which will employ 6,500 people.

“From a national perspective, this is about as dumb as it gets,” wrote Edward Alden and Rebecca Strauss, co-authors of Curtailing the Subsidy War within the United States, in their The New York Times editorial. They argue that instead of competing with one another, states could instead invest in themselves, becoming more attractive to business and a better place to live for residents. Studies show this is the outcome most Americans want.

“State governments would be better off if they collectively ended the handouts and competed for business in other ways, such as making investments in infrastructure or education or offering lower overall tax rates,” wrote Alden and Strauss. “But no state wants to stop first and risk losing jobs if other states don’t follow suit.”

Curtailing the Subsidy War, released by the Council on Foreign Relations, argues that in order to solve the problem, international trade models should be adopted domestically. The report says that for decades The World Trade Organization has upheld restrictions on foreign government subsides, and The Organization for Economic Cooperation and Development limits financing subsidies to exporters. These international models could be used at home to put an end to costly interstate competition.

Putting an end to longstanding economic practice is difficult, according to the report – but not impossible. The first step would be to show the public what subsidies are costing. To do this, the report says the federal government should demand greater disclosure on the local and state subsidies already reported to the World Trade Organization. Transparency on these figures would make political action against subsides more favorable.

The second step, according to the report, would be for states to voluntarily enter into agreements limiting subsides, using international trade models as examples. Some states are already working on such agreements, such as Kansas and Missouri, which are working to limit subsidies offered to business to move from one side of Kansas City to the other.

Finally, the federal government should challenge more foreign business subsides through already-existing World Trade Organization rules to prevent outsiders from taking advantage of greater domestic restraint.

“The only way for states to stop corporations from playing divide-and-conquer is to figure out ways to work together,” write Strauss and Alden in The New York Times. “The United States has helped develop models for doing this internationally. It’s time to do the same at home.” Download the full text of Curtailing the Subsidy War within the United States here.

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