Business incentive costs continue to rise. States competing to land a prospect do not know what each is bidding, while the footloose enterprise is in the best position for egging on the multiple states to bid more than necessary to close the deal. When this occurs, it's called the "winner's curse", because the winner of the particular "auction" pays more than any of the other bidders believe it is worth, possibly more than the company's target, and may be more than the government can afford.
There is a solution, however, if states through the National Governor's Association would agree to the following rules and sign a compact, with the following elements and justifications:
- The marketing and courting of important business recruitment projects would continue as it is conducted today. Both state and prospect would get acquainted, would be able to show-off and “strut their stuff,” and would progressively gain, during negotiations and site visits, a clearer understanding of what the project has to offer each party.
- Each state government would only participate in a competition for footloose investment if it took the form of a sealed bid format.
- Each state would submit a sealed bid by a particular date to an agreed-upon and trustworthy third party, whose job it would be to disclose the actual bids.
- The high bidder would win, but pay the second-highest bid.
- Such a set-up encourages all bidders to offer a price that truly reflects their genuine evaluation of the project.
- A further virtue is that the project goes to the state or locality that wants it the most, while the business prospect receives the price that he or she would have gotten if this was an ordinary “open bid” auction and the high bidder did not attend.
Because each state would not like to disclose its bid before the "contest" was completed, policymakers would not be able to go to the state legislature in an eleventh hour effort to cobble together enough public funds that would be needed to make the bid they want to make. This would avoid forcing legislators to approve multi-million dollar packages within a timeframe too short to adequately deliberate.
It would also have the effect of creating a "hard budget constraint" and force a state Department of Commerce to more accurately estimate its annual incentives budget, as well as force its leadership to weigh the trade-offs more carefully between on-budget and off-budget expenditures, attraction spending versus other economic development priorities (e.g., entrepreneurship, business retention and expansion, etc.)1
This reform of the "incentives' arms race" would not require mandating that competition for capital should end, would not set a national ceiling for allowable costs per job, and would not terminate any especially egregious type of incentive. All of these changes might be desirable, but they are out of the realm of possibility. The sealed bid auction is simpler and easier to police.
Dear reader, what do you think of the idea?
How might we advance it?
1 A further (and complimentary) improvement in budgeting and fiscal stewardship would be to adopt the Canadian "envelope" system, whereby each agency is given a set fiscal ceiling that can use for tax and/or direct expenditure. This system avoids treating tax incentives as costless and again forces an agency to make tough decisions about how it allocates its finite funds.