Friday, July 17, 2009

The Trade-Off

Say you're a businessperson. A pretty successful one, and you've got the phat loot to prove it - you know, the house, the car, clothes, the private plane, the nookie on the side - everything that makes it known that you're money. You have all of this because you happen to be in control of a fairly substantial enterprise. So... you make it known that you're not happy with the present location of your little empire. What happens?

Well, city, county, state and (depending on just how big your business is, and where it is located) maybe even national governments start booking space on you calendar to pitch the advantages of their little corner of the world (usually including, it should be said, the government(s) whose jurisdiction you're planning on leaving). So far, so good. That's one of the things that government types are supposed to do - drum up opportunities.

The representatives of the governments will woo you with all kinds of present and future gifts. The present gifts will be small - little things like a free dinner or maybe they'll pick up the tab for you to come to their place and have a short vacation, so you can see it in person. The future gifts are where the money is at - maybe they'll give you the land for your new headquarters for free, promise not to charge you property taxes on your new factory or shell out for the infrastructure that you'll need to get everything set up.

Of course, all of these things cost money, and that money's got to come from somewhere, right?

Gary Lawrence, who heads the Economic Development Alliance of the city of Lubbock, in the Texas panhandle, explains that one electronics investment he backed cost the city $4.7m in revenue forgone over ten years. But in return the company undertook to create 165 well-paid jobs, creating a demand for houses that is increasing income from property taxes as well as sales taxes. The $4.7m should be written off in as little as three years.
Tex-Mix. The Economist. July 11th, 2009
It's a common bargain. In return for low or non-existent tax burdens, businesses supply states, counties and municipalities with people who will pay taxes, and higher ones than they would have otherwise, to get jobs. It's not about lower taxes - it's about shifting taxes from businesses to individuals. And there's nothing inherently wrong with the plan. But it has to be realized that it can't go on forever. And when it ends, there's always another place ready and willing to take businesses that are looking for a better deal, and the citizens who'll be the ones to subsidize it.

Secure in an ironclad understanding of their own powerlessness, or maybe just because they don't do the math, citizens seem to always be willing to pay someone to bring them an opportunity. Of course, not everyone will like it. While the common refrain is that a rising tide floats all boats, some of them are, in reality, just washed away. Poorer people who don't see any benefit in the coming of a new business, may be pushed out by the higher property taxes that increased assessments of their homes will bring. Or perhaps the inflationary pressure that more money in the community sparks will do the trick.

It's not, in the end, that this is always a bad trade off. Far from it. A boost in income can, and many times does, more than make up for the boost in taxes and overall cost of living that shifting the burden away from businesses entails. But, despite the promises of politicians, it's not an unmitigated good. It has its downsides. And if you don't understand them, you can't make an informed decision about what's in your best interests.

You the successful businessperson would never go along with a deal without understanding what it entails, good, bad and indifferent. Why should you do so as an everyday citizen?

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