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For many years the states have supported local economic development efforts. State departments of commerce provide information on the state and try to guide firms to municipalities within the state. States have offered a huge variety of financial incentives, such as investment tax credits, low- interest loans, infrastructure grants, labor force training grants, and the like, to encourage firms to locate or expand within the state's borders. A majority of states have overseas trade offices in Europe, the Far East, or both to help develop overseas markets for their firms and also to encourage investment in their state by overseas firms. Most importantly, states have become increasingly involved in major industrial and commercial relocations and expansions, and are increasingly willing to spend large sums of money to attract economic activity.

For example, in the 1990s, Mercedes-Benz opened an automobile assembly plant in Vance, Alabama, and BMW opened one in Spartanburg, South Carolina. The subsidy for Mercedes was estimated to be in the $250 million range, and that for BMW at about $150 million. On a per-job basis, the Mercedes subsidy was about $168,000 and the BMW subsidy in the $65,000 range. The subsidies were a mixed bag of direct payments to the companies, public investment on infrastructure for the companies, and a variety of preferential tax treatments.

In some cases states have offered major packages to firms not to move in, but simply not to move out. Perhaps this trend is inevitable. Bids to move will be matched by bids to stay.

Illinois officialdom breathed a collective sigh of relief last June [1989] when word came that Sears, Roebuck and Company had chosen the Chicago suburb of Hoffman Estates as the new location of its 6,000-worker merchandise group. Sears had announced earlier in the year that it would leave its landmark building, the Sears Tower, in downtown Chicago.

Although keeping Sears cost the state some $178 million and didn't create a single new job, Gov. James R. Thompson hailed the decision as "a great victory" for his state.3

The State of Illinois no doubt had numerous other good uses for the $178 million (almost $30,000 per job saved) it spent on relocating Sears. But it had little choice about making the expenditure. One reason for its having little choice was that the Sears distribution center, with its 6,000 jobs, would be quite a prize for any economic development agency and had undoubtedly attracted other substantial offers. Illinois thus had no choice but to make a counteroffer. In a purely political sense, Governor Thompson had no choice either, since if Sears had moved out of the state he would have been bludgeoned with that fact day and night in his next election campaign.

Possibly the largest incentive package ever offered was that given to Boeing in February 2014. The company's main location in in the Seattle, Washington area where it employs about 60,000 workers. The company and its union became locked into a very serious dispute which turned on the issue of retirement payments. The company wanted to switch to a 401k (defined contribution) plan from their traditional (defined benefit) pension plan. The dispute was so acrimonious that Boeing threatened to move the production lines from its 777X and possibly its 737MAX aircraft to a right-to-work state in which it would not have to confront a militant union.4 Alarmed at the potential loss of 20,000 jobs, in November 2013 the state legislature passed legislation providing for $8.7 billion in tax breaks for Boeing between now and 2040, contingent upon Boeing keeping production of the 777X and 737MAX in the State of Washington. In the end Boeing made the union, the International Union of Machinists and Aerospace Workers, a final offer which included pay raises and signing bonuses, but it did not budge on the pension issue. By a close vote the union accepted and Boeing will stay. One factor that made Boeing's threat to relocate plausible was that the company had numerous offers from other states, the details of which it did not have to disclose. You might ask: was Boeing's final offer really final? No doubt Boeing's top executives know the answer to that question but no outsider does. Similarly, you might ask whether a sum smaller than $8.7 billion would have sufficed and, if so, what was the minimum package that would have done the trick? Again, Boeing knows, but no outsider can know with certainty. This matter of information asymmetry is discussed further on page 272.

For the state or locality that provides a big subsidy package in order to attract a new industry, the net payoff may be positive or negative. On the positive side, there are incomes from new jobs and increased tax revenues from the additional economic activity and property development. On the other hand, economic growth generally promotes population growth, and so there will be additional expenses for schools, social services, handling the increased flow of traffic, and the like. Whether, after taking account of the costs of subsidization, the increased revenues will be either more or less than the additional expenses will vary from case to case. Whether or not a new firm will raise average wages in an area may also be problematic. One would expect the general tightening of labor markets caused by increased employment to raise the average wage. However, if the wage profile of the new firm is substantially below the average of employers already in place, the new firm may have the unexpected effect of lowering the average wage.

Beyond using their own funds to attract firms, states will often pursue federal investment within their boundaries. That attempt might mean using the influence and power that the state's congressional delegation has to push for having parts of a multibillion-dollar weapons system made in their state. It might mean pushing for the opening of a new federal facility built in their state rather than somewhere else. Or it might mean having the state's congressional delegation do everything it can to resist a decision to close a military base in the state. Pursuit of federal funds for highway construction is another example, as accessibility is an important consideration when firms make location decisions.

The necessity to compete with other states by holding down tax rates becomes an argument for cutting services, laying off state employees, and weakening the power of public sector unions. It has also become an argument for adopting "right-to-work" laws in states that do not have them. Viewed at a national level, cutting back on state expenditures to lower state taxes may be a zero-sum game; however, viewed from the perspective of a single state it makes some sense. Tax rates are far from the biggest consideration when firms decide to relocate or expand, but they are of some importance. The same may be said for right-to-work laws. If all states had them the net effect might not be much different than if no states had them. But if one state has a right-to-work law it will give it an advantage over a state that does not have one, since, all other things being equal, many firms prefer locations where labor unions are weak.

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