Tax Subsidies for Footloose Firms: Two New Reasons to Stop.

• Author: Peirce, Neal R.
• Position: Economic development planning - Brief Article

If you're dubious about the gusher of state and local government subsidies to footloose private corporations, take heart.

Right now there are two powerful new reasons to cut back dramatically on the losses--by some estimates as high as $15 billion a year states and localities bear from tax breaks and outright gifts to firms that come begging for funds to come to town, or just to stay put.

Reason #1: The American economy is in overdrive. In most states, unemployment is at record lows. The big shortage in America isn't lack of jobs, or lack of capital to finance start-ups and expansions. The economy's awash in money for that. The meaningful shortage of these times is quite different: it's in educated, trained workers.

Reason #2: There is an alternative--a way that states and localities can under-gird their local economies for the long haul, and with jobs of real quality.

This new path offers less high-octane benefit for politicos in search of credit and publicity. It tends to create lots of little ribbon-cuttings, not big ones.

But despite its unsexy name--the Sector Solution--this new approach generally delivers new wealth, new synergies, higher wages, and reliable economic expansion for the long term, reports the Center for an Urban Future (www.citylimits.org), a New York-based policy institute.

The process starts when state or local governments--and then the economic consultants they enlist--start rigorous examination of all industries and economic clusters in a region. The goal: to identify rapid-growth fields that pay good wages, are poised for growing national and international trade, and appear capable of employing many more people in the region.

Take Massachusetts, where Governor William Weld's working group on business clusters discovered in the mid-1990s that the Boston area already had more than 240 medical device companies employing 22,400 people. The firms produced such a variety of products--from heart valves to precision scalpels--that they rarely competed. But they'd never worked together on such projects as international trade shows and making pitches to venture capitalists.

With state encouragement, the medical appliance firms set up MassMEDIC, a common trade organization. With shared, aggressive marketing, the Bay State's exports of medical devices has soared 69 percent.

California, in the early 1990s, was reeling from defense cutbacks, factory closings, and a severe recession. In less than seven years, 500,000 jobs...