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Kansas Governor Laura Kelly answers questions from reporters after signing her executive order aimed at ending an economic "border war" between her state and Missouri over jobs in the Kansas City area.
An executive order by Kansas Governor Laura Kelly and legislation signed by Missouri Governor Mike Parson mark the first time in U.S. history that two states have had a legally binding agreement that ends subsidies for corporations relocating within one labor market—in this case the Kansas City metro area—but across a state line.
“I think it's significant that two very red states did this first. I think it proves that this is not an elite coastal democratic idea but it is a local business fairness idea,” says Greg LeRoy, executive director of Good Jobs First, a Washington, D.C., organization that advocates for accountability in economic development.
Companies can make huge amounts of money in tax breaks and other perks by skipping over the Kansas-Missouri state line in the Kansas City area and taking economic-development subsidies. This has been nicknamed the economic “border war,” with Kansas and Missouri state governments doing combat to lure businesses across the line—and artificially juice jobs statistics for their state.
When companies collect on these subsidies, they've added zero jobs for the metro region—they're just moving a few miles. The only winners in this scenario are the corporations that enjoy welfare subsidies for pitting states against one another.
"The idea that the corporate tax incentives was going to produce prosperity was just false,” says Mark Funkhouser, former mayor of Kansas City who is now the publisher of Governing Magazine. “And it’s being demonstrated to be false over and over and over."
Multistate job markets are common. In a 2013 national study by Good Jobs First, metro areas that straddle state lines, such as Memphis, New York, Charlotte, and Boston, face similar problems. The organization recommends that these states enact their own agreements.
Under the Kansas-Missouri agreement, corporations would only receive incentives on the net new jobs. Both states created the same requirements under the bill.
This is the first time in the historic economic rivalry between the two states that they have signed what amounts to a nonaggression pact. “The biggest takeaway is that 17 business leaders finally knocked some sense into two state governments,” LeRoy says. That the business community in Kansas City, which mourned the erosion of the tax base and the wasted effort, recognized the absurdity of this before the governments handing out the subsidies is instructive.
Good Jobs First has long advocated for an agreement like this between the two states. LeRoy said in a statement that “this practice, which we call ‘interstate job fraud' because it requires the arriving state to call existing jobs ‘new jobs' for purposes of qualifying for tax breaks, is the most outrageous aspect of the ‘economic war among the states.' It is also the flip side of ‘job blackmail,' when corporations threaten to leave a state and demand subsidies for ‘retention.'”
The Kansas City Star reported that it still remains to be seen if the truce will hold. The agreement is between the two states’ governors, so it will require the compliance of the two cities in the Kansas City area. Though Kelly’s executive order asks for the cities to comply, they don’t have to. Nonetheless, LeRoy explained that local governments face a lot of pressure to comply with this state agreement. LeRoy said most of the loss had been at the state level.
“The local money is the small money, and the state money is the big money,” he told me in an interview.
According to the Star, local property tax abatements in Kansas are limited to 10 years but can go as high as 25 years in Missouri. These subsidies had been one way for Kansas to compete with Missouri. LeRoy said that localities typically don’t offer abatements up to 25 years. Even so, the costs before the nonaggression pact were high. According to the Hall Family Foundation, since 2010 Missouri has spent nearly $151 million on incentives to attract companies, while Kansas spent $184 million. But the money wasn’t actually going to creating new jobs; it was just enriching the companies.
“The crazy thing about the old system is that it was a net loss game,” LeRoy said. “A small group of companies are gaming the system and eroding the tax base at the expense of everyone else.”
Other state administrations have tried and failed to create cooperation, such as when Kansas Governor Sam Brownback refused to sign a bill on the subject after Missouri Governor Jay Nixon did.
But the notion of economic development as a job creation engine is starting to be reconsidered. Amazon famously awarded a location in Long Island City, New York, a share of the HQ2 sweepstakes, in exchange for billions of dollars in state and local subsidies. Residents fought back and Amazon eventually pulled out of the project. The company then continued to expand in the New York City area while not taking subsidies, suggesting that cities don’t need to bestow corporate welfare on corporations in order to attract them.
The high-profile HQ2 reversal, combined with the border war truce, could signal a new path, where cities invest in transportation, education, and infrastructure to create a favorable environment for business, rather than dangling a wad of cash.
By putting this money in state coffers instead of into corporate welfare, states can invest “in social services, in infrastructure, in clean water, efficient effective transportation—especially in education and infrastructure,” says Funkhouser, the former Kansas City mayor. “Those are the keys to economic success.”
Funkhouser has recommended a federal law like the truce established in Kansas and Missouri. It should be modeled on the Foreign Corrupt Practices Act, which prevents corporations from bribing foreign government officials. The economic development subsidies “are essentially legal bribes,” he says.
