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Time for States to Shift Away from Tax Breaks to Lure Companies

March 18, 2016 at 1:30 PM

Alabama Gov. Robert Bentley sounded an alarm recently about the state’s underinvestment in its people — an alarm that Alabama and other states should heed.

“While we rank number one in football teams and economic development accolades, our state consistently falls dead last in virtually every quality of life ranking from infant mortality to obesity,” Gov. Bentley said in his February 2 State of the State speech.  “While we excel in job recruitment, on average we have more people in poverty than the country as a whole.  Too many Alabamians are under-educated, under-trained, unhealthy and unable to break the cycle of poverty and the cycle of dependence.”

Whether intentionally or not, Gov. Bentley indicted the counterproductive ways that states have tried to lure jobs from other states through tax breaks.  Alabama has relied heavily on this economic development approach, awarding huge subsidy deals to Mercedes-Benz, Honda, and Hyundai, among others.

These subsidies reduce state revenue, making it harder for Alabama to strengthen its education system and otherwise invest in its people.  Alabama’s general K-12 school funding per student is down 17 percent since 2008 — more than any state except Oklahoma.  Funding per student for higher education is down, too, by 37 percent since 2008, as of last year — more than every state but three.  And the state’s infrastructure spending as a share of its economy fell between 2002 and 2013. 

As we’ve written, the vast majority of jobs in any state are created by businesses that start or are already present in the state, not by firms lured from other states.  “Many state policymakers pursue economic development strategies that are bound to fail because they ignore these fundamental realities about job creation,” my colleagues Michael Mazerov and Michael Leachman concluded.

Alabama isn’t alone in following this dead-end path.  And like those other states, Alabama needs to reverse course and invest in its own entrepreneurs and workforce.


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