Missouri and Kansas End Economic Border War
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Missouri and Kansas End Economic Border War

Missouri and Kansas reach deal to stop using subsidies and tax incentives to get businesses to move across state lines.

Earlier this month, the Kansas and Missouri governors smartly signed off on a treaty that ends the economic border war that had been draining the pockets of both states.

The deal ends the practice of using economic incentives to entice businesses with tax credits and bonuses to relocate from Kansas to Missouri or vice versa. Some economic developers claim these incentives and subsidies create jobs for a state, but the treaty shows the entire practice was a net loss for Missouri and Kansas. It also highlights a valuable lesson about government intervention in the economy.

“Sometimes common sense does prevail,” Missouri Gov. Mike Parson said. “Because you don’t have to be a scientist to figure out this was a bad deal for both states.”

There are several different qualities of a city or state that may impact business location decision more than incentives, including personal freedom, presence of creative classes, quality, and cost-value of public services, and business and tax climates.  These are typically valued by most businesses and available to everyone equally, unlike incentives which pick winners and go only to chosen firms.

However, proponents counter that incentives are effective in instances where all these qualities are equal between locations, as perhaps may be the case in Kansas vs. Missouri. But even in such a situation, there are reasons to doubt the efficacy of economic development incentives. The point of emphasis in my own research has been that economic growth is a complex process that is too random and volatile for an incentives program to work.

All factors being equal, imagine that Kansas outbids Missouri on 100 companies and wins them all.  Should Kansas celebrate its victory over Missouri?

Typically about 75 percent of those businesses will be closed in the next 10 years—just the natural churn of the market. Yet, there is no pricing mechanism between what Kansas paid for those companies and the odds that those companies will actually achieve their projected growth and put that money back into the local economy in the 5-, 10-, or 20-year plan negotiated with economic developers.  The price was not set with a market mechanism but was determined solely by competition between governments.

Out of any 100 incentive deals, what happens is that the program grossly overpays for 75 or so businesses that fail, and then hopes the remaining 25 businesses grow enough to cover all of the losses.  Impact studies commissioned by governments to highlight the economic effect of a business moving to an area are notorious for adding up the gains from growing companies but never subtracting the losses from the failing or closed ones.  Additionally, these impact studies are not done with actual financial data. They are typically heavily simulated models making hefty assumptions about how much money individuals and firms have, how they spent that money and therefore cannot return an actual return on investment.

The result is that economic incentives programs are doomed to be a net negative because they fail to have an appropriate pricing and accountability system to account for the volatility in business success. On Wall Street, investing in individual companies is considered one of the most volatile and risky investment strategies and it puts many investment firms out of business, yet state and local governments do this with billions of taxpayer dollars every year.

This deal between Kansas and Missouri shows that both sides finally realized they were not getting what they were paying for, and ultimately affirms that economic growth is too complex to be improved by selective government interventions.  The economy of neither state is truly “grown” by enticing businesses with tax bonuses. Over time, both states would lose money gambling on subsidies and incentives for various companies.

There’s a similar battle taking place between Florida and Georgia over the film industry. That incentives fight shares many parallels with the Missouri-Kansas fight and Florida and Georgia could benefit from striking a similar deal.

Moving forward for both states, they should remember that growth economics is not a zero-sum game.  There are no fixed amount of jobs to be created in any given year that either Kansas or Missouri is going to get. Both states have non-exclusive opportunities to start, grow, and attract business with policies that make their state good for business and job growth.