Interjurisdictional Competition Under U.S. Fiscal Federalism

Similar to the decentralization of environmental policy, scholars and analysts also express concerns about the welfare effects of interjurisdictional competition on economic development under U.S. fiscal federalism. As taxing and spending powers are decentralized to state and local levels, subnational governments may offer tax breaks and public land at discount values to businesses to lure investment. Sally Wallace discusses the issue that local economic development strategies—such as property tax abatements, subsidized financing for investment, job training, land concession, expedited incorporation, and quality public service provision—are often used to attract businesses and individuals, but it is unknown if these strategies are welfare enhancing.

Based on the survey of existing theoretical and empirical literature and specific case studies on automobile plant locational incentive packages in the Southeast, Wallace concludes that there is no hard evidence to prove that interjurisdictional competition has either enhanced or reduced welfare. Wallace emphasizes that most studies did not focus on measuring welfare changes or the opportunity cost of incentive packages. She suggests that a case study approach may be a more effective assessment method.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2007 and is Chapter 9 of the book Fiscal Decentralization and Land Policies.