From a new paper by economist Ralph Ossa:
U.S. cities, counties, and states spend substantial resources on subsidies trying to attract firms. According to a New York Times database which I describe in detail later on, expenditures for such subsidies range from $33.4 million per year in Nevada to $19.1 billion per year in Texas and total $80.4 billion per year nationwide. This amounts to $12 per citizen per year in Nevada, $759 per citizen per year in Texas, and $254 per citizen per year nationwide. Regional governments provide these subsidies using a variety of policy instruments including tax abatements, cash grants, loans, and so on.
What motivates regional governments to subsidize firm relocations and what are the implications of the subsidy competition among them? In this paper, I address these questions using a quantitative economic geography model which I calibrate to U.S. states. I show that states have strong incentives to subsidize firm relocations in order to gain at the expense of other states. I also show that subsidy competition creates large distortions so that there is much to gain from a cooperative approach. Overall, I find that manufacturing real income can be up to 3.9 percent higher if states stop competing over firms.
We all know that subsidy competition is bad for overall economic welfare. This paper tries to quantify just how bad it is in the context of U.S. states competing for firms. It has lots of equations I can't follow, but unless somebody comes up with an alternative calculation, I'm going to rely on these figures. (I haven't seen figures relating to similar competition by national governments.)
The real challenge, of course, is not the calculations, but the politics: trying to convince governments to end this competition.
