In the 2016-17 Queensland Budget being handed down today, among other measures, the State Government will allocate $40 million to “aggressively” attract businesses to the State, no doubt through a combination of payroll tax concessions, grants and similar financial incentives (see the Brisbane Times report). But offering financial incentives to encourage businesses such as Virgin or major events such as a Grand Prix to relocate can make us worse off, taking into account the actions of other States trying to do the same thing. We just end up continually poaching businesses and events from one another and competing to attract international businesses that would come to Australia anyway. The big winners are shareholders, not taxpayers. When we offer financial incentives to businesses, other States are likely to retaliate and do the same thing, so while we may gain some businesses and events, we may lose others. We would all be better off cooperating and agreeing not to offer selective financial incentives.
Former Productivity Commission Chairperson Gary Banks was highly critical of State Government selective industry assistance programs in an excellent speech to CEDA in Brisbane in 2002 (see Inter-state bidding wars: Calling a truce). In his speech, he observed:
“…the situation represents a classic prisoners’ dilemma, because while all States would be better off by cooperating, in some cases individual States will see benefits in defecting.
The need to avoid mutually impoverishing ‘beggar-thy-neighbour’ policies was an important reason for the formation of Australia’s Federation in the first place. Elimination of tariffs at State borders was critical in enabling a national economy to develop from early last century. Over time, regulatory and other impediments were also gradually removed or reduced, including through cooperative agreements on Mutual Recognition, National Competition Policy and Government procurement over the past decade or so. But selective assistance remains a growing threat to the realisation of this nationally beneficial goal…
…If governments can agree to a truce on inter-State bidding wars and other selective corporate support, they can then concentrate their forces on a much more worthy and productive battle: improving further their economic governance, tax regimes, infrastructure and other service delivery. These are the real mainstays of the contribution of State and Territory Governments to economic performance in the long term.
Very wise words. Instead of offering selective industry assistance and risking retaliation from other States, the Queensland Government should instead focus on improving the State’s economic fundamentals and providing tax relief to all businesses, not just the lucky few.
Thanks for the article Gene. I agree with what you say. But what economic principle here makes cartel behaviour (states cooperating to charge higher taxes) desirable?
Thanks John. Good question. I wouldn’t interpret it as states cooperating to charge higher taxes because the special assistance (e.g. payroll tax relief, grants) to the fortunate few businesses who receive it has to be paid for by others. Industry assistance of this kind means taxes on the bulk of businesses or on households have to be higher than otherwise to fund it. I would rather the Government aim for a low level of taxes on all businesses, rather than providing special tax breaks for selected businesses.
Agreed. This article brings to mind a Planet Money podcast on such “poaching”, which I enjoyed listening to.