An Interstate Compact to End the Economic Development Subsidy Arms Race

Abstract

Targeted economic development subsidies do not work as advertised. In fact, the balance of economic theory and empirical evidence suggests that they are more likely to undermine development than to enhance it. Yet policymakers face strong incentives to continue to offer subsidies. Because subsidies are economically costly but politically valuable, they create a situation similar to a prisoner’s dilemma. An interstate compact offers a solution by changing the political payoffs. Importantly, interstate compacts enable policymakers to credibly commit to ending what many already see as a race to the bottom. Ending the mutually destructive subsidy war would allow state and local governments to repurpose up to $95 billion annually to tax relief and other projects with better payoffs.