Carolina Journal News Reports
RALEIGH — In a case of swimming against a tsunami of opinion among his professional peers, the leader of a state economic development agency has announced his support for the elimination of certain targeted tax breaks for individual businesses.
Michael McMahon, executive director of the Rhode Island Economic Development Corporation, wrote on Oct. 6 that he agrees with the decision in the Cuno v. DaimlerChrysler case, in which the Sixth Circuit Court of Appeals ruled that some tax breaks granted by Ohio violated the Commerce Clause of the Constitution. The U.S. Supreme Court in September said it will consider the case. McMahon's opinion article was published by the Providence Journal-Bulletin.
"Rhode Island is not subject to the rulings of the 6th Circuit," McMahon wrote, "but we support the Supreme Court's decision to review the case, so that there will be one set of rules for all regions.
"In the spirit of that level playing field, we hope the high court will uphold the ruling against these types of tax credits."
The appeals court ruled in Cuno that a franchise tax credit based on a business's investments in Ohio was unconstitutional, because it discriminated against investment out of state. That was considered inhibitive to interstate commerce, a power that the Constitution reserves for Congress to regulate.
Opposition to tax incentives for companies is unusual among economic developers, who as a group generally endorse any tools that governments can offer to make business more attractive and less costly. McMahon said the response to his article has been mostly favorable, although it’s been from those who are already on the record in opposition to incentives. He said he has not heard from colleagues in economic development about it.
"The people I've heard from are members of the choir," he said. "I have not heard any direct push-back."
In a telephone interview with Carolina Journal, McMahon called himself a "recovering investment banker" who was fairly new to economic development, and who sees the incentives war waged between states as destructive.
"This was an issue where the conclusion we came to was at two levels," he told CJ. "From a national public policy, it's really a zero-sum game. From a Rhode Island perspective, we have a smaller checkbook."
In his opinion piece, McMahon said incentives "don't really create new jobs."
"They may make the difference in a company's decision of where to open a plant, make an investment, or expand operations," he wrote, "but though in one instance that might mean more jobs for Ohio…it comes at the expense of investment in another area….a gain for one state means a loss for another."
McMahon told CJ that he is not opposed to all economic incentives made by governments or quasi-government agencies — only those that amount to payouts to private businesses with little in lasting benefit to the state. For example, he cited workforce development and training dollars as one acceptable strategy to lure businesses.
"To me that's a good incentive," he said. "Well-trained workers stick around."
Part of McMahon's solution, which he proposed in his Journal-Bulletin article, was regional cooperation. He said his Rhode Island agency tries not to pirate companies from nearby states such as Massachusetts and Connecticut, despite the temptation.
"Instead of cannibalizing our neighbor states," he wrote, "we should be cooperating with them in regional job-creation efforts that bring economic development and benefits to the entire area."
But in the hyper-competitive world of incentives competition among the states, McMahon agreed that a federal solution — which could be partially addressed by the Cuno case — might be the only way to produce such regional cooperation.
"When I talk about a level playing field," he said, "altruism only carries over to the next big deal."
Paul Chesser is associate editor of Carolina Journal. Contact him at email@example.com.