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The Region

Federal Reserve Bank of Minneapolis 1994 Annual Report

Congress Should End the Economic War Among the States

The Region
Volume 9 Number 1
March 1995
ISSN 1045-3369

This year’s annual report
is in the format of our Region
magazine, and takes the place
of this year’s first Region issue.




Federal Reserve Bank of Minneapolis 1994 Annual Report

Congress Should End the Economic War Among the States
By M elvin L. Burstein and A rth u r J. Rolnick
Federal Reserve Bank of Minneapolis

Burstein is executive vice president and general counsel of the Federal Reserve Bank of Minneapolis
and Rolnick is senior vice president and director of Research. The authors wish to acknowledge
the invaluable assistance of Thomas Holmes, economist, Federal Reserve Bank of Minneapolis,
and Gary Spiegel, a senior at the University of Minnesota Law School.
The views expressed herein are those of the authors and not necessarily those of the
Federal Reserve Bank of Minneapolis or the Federal Reserve System.

The Region

President s Message

Whenever I have the opportunity to meet with com­
munity leaders in the Ninth District, I’ve noticed that
perhaps the most frequently asked questions relate to
local economic development. They want to know,
“Which state seems to have the most effective plan
This topic has long interested Art Rolnick and

to lure business and workers?” or they might ask,
“In your travels throughout the district, which cities

Mel Burstein, both senior officials at the Federal

would you say are the more clever in promoting

Reserve Bank of Minneapolis, so I asked them to

themselves— and why?”

explore in depth the economics of government-sponsored development programs and to share their find­

I fear my answers to them have not been very

ings as the essay for the bank’s 1994 annual report.

satisfying, in part because I claim no great knowledge

I

of the subject, and also because my economic instincts

will tell you in advance that their conclusions

tell me that it just doesn’t make sense to have South

are controversial and, for most, at first blush, will seem

Dakota and North Dakota place billboards in each

antithetical to cherished ideas of liberty: big govern­

other’s states, each trying to entice business to cross

ment telling us what we can’t do. Rather, I take their

the border. When you take the larger view of it, apart

conclusion as a support of the free market and a

from the obvious neutralizing effect, it may even

theoretical move that would take us one step closer to

constitute a misuse of public funds.

a world where the government is more referee than
player.

Needless to say, my thoughts on the subject have
not been taken as enlightenment by those who are
concocting the next promotion. They see the state and
local units of government as appropriate players in
the marketplace who should provide the necessary
leverage to make the pitch to the XYZ Company.
Besides, they say, if you don’t involve the government,

Gary H. Stern

be certain that other cities/states will.

President




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[The Constitution] was framed upon the theory that the peoples

,

of the several states must sink or swim together and that in the long run
prosperity and salvation are in union and not division.
Justice Benjamin Cardozo, U.S. Supreme Court, 19341

0

The Region

Federal Reserve Bank of Minneapolis 1994 Annual Report

Congress Should End the Economic War Among the States
By M elvin L. B urstein a n d A rth u r J. R olnick
Federal Reserve Bank of Minneapolis

Recently, St. Louis, Mo., pursued an aggressive economic development initiative to
lure a professional football team, at a cost to state and local taxpayers estimated as
high as $720 million.2Last year, Amarillo, Texas, decided to undertake an aggressive
economic development initiative using a different strategy. Some 1,300 companies
around the country were each sent a check for $8 million that the company could cash
if it committed to creating 700 new jobs in Amarillo.3
What is so remarkable about these two initiatives is that they are not remarkable.
Competition among states for new and existing

libraries, police and fire protection, and the roads,

businesses has become the rule rather than the

bridges and parks that are critical to the success of any

exception. A 1993 survey conducted by the Arizona

community.5Surely, something is wrong with this

Departm ent of Revenue found that states’ use of

picture! As Justice Cardozo suggested, the framers of

subsidies and preferential taxes to retain and attract

the Constitution had something different in m ind in

specific businesses is widespread.4The survey found

granting Congress the power to regulate interstate

that half the states had recently enacted financial

commerce under the Commerce Clause. The objective

incentives to induce companies to locate, stay or

was to create an economic union, particularly by

expand in the state. Targeted businesses have ranged

ending the trade war among the states that prevailed

from airline maintenance facilities, automobile

under the Articles of Confederation. However, it was

assembly plants and professional sports teams to

the Supreme Court, not Congress, that applied the

chopstick factories and corn processing facilities.

Commerce Clause to end the trade war among

While states spend billions of dollars competing
with one another to retain and attract businesses, they
struggle to provide such public goods as schools and




the states.
In this essay we argue that it is now time for
Congress to exercise its Commerce Clause power to




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end another economic war among the states. It is a
war in which states are actively competing with one

The economic merits of ending
the war among the states

another for businesses by offering subsidies and
preferential taxes. While the Court has not confronted
the constitutionality of states engaging in these

To understand why economists conclude that the use

activities, it has expressed the view that these activities

of public funds to attract and retain specific businesses

may be “admirable,”6 and it would probably find that

does not serve a legitimate local public purpose, we

they fulfill a legitimate local public purpose.

need to understand what they mean by public

Economists reach a much different conclusion. They

purpose. Economists’ view of public purpose relies

find that there is a role for competition among states

critically on a distinction between public and private

when it takes the form of a general tax and spend

goods. A public good, unlike a private good, is one in

policy. Such competition leads states to provide a

which a single person’s consum ption of that good

more efficient allocation of public and private goods.

does not subtract from another person’s consumption.

But when that competition takes the form of

A lighthouse is an often cited example of a pure

preferential treatm ent for specific businesses, not only

public good: The light from a lighthouse used by one

is it not “admirable,” it interferes with interstate

ship on a foggy night does not prevent its use by

commerce and underm ines the national economic

another ship. Providing for the national defense, clean

union by misallocating resources and causing states to

air and a legal system are other examples of goods

provide too few public goods. Moreover, the success of

that any citizen can consume w ithout subtracting

a state in attracting and retaining particular businesses

from what can be consumed by any other citizen in

is not a mitigating circumstance.

the community.
Besides pure public goods there are some goods
that lack the explicit quality of a public good but give
off external effects that qualify them as such. Health
care provided to an individual is a private good
because it subtracts from the consumption of other
individuals; nevertheless, it may have external effects
that are public. For example, having one person
innoculated for some communicable disease makes
for a healthier environment, and a healthier
environment is a good that any person can consume




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W hile states spend billions o f dollars co m p etin g w ith one a n o th e r to retain an d
a ttrac t businesses, th ey struggle to provide such public goods as schools a n d libraries,
police a n d fire p ro tectio n , an d the roads, bridges a n d parks th a t are critical to the
success o f any com m unity. Surely, so m eth in g is w ro n g w ith this picture!

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w ithout subtracting from the consumption of any

provide for the use of public goods. Government, by

other person. Similarly, educational services

its very nature, can solve the financing problem for it

consumed by one individual subtract from the

has the power to appropriate funds from its citizens

consumption of other individuals, but education

(the power to tax) for the provision of public goods.

increases a com m unity’s stock of knowledge and is

Solving the provision problem of public goods is

critical to a well-functioning democracy, two highly

more difficult.

regarded public goods.
Economists have found that while the production

production of public goods should be the principal

Competition among states through general
tax and spend policies leads to the right
am ount o f public goods

role of government because the market fails to

For state and local governments there is a form of

produce enough public goods. The reason the market

intergovernment competition that guides them to

fails is that since people cannot be excluded from

provide the right am ount of public goods. This type of

consuming public goods, charging people for what

competition among government entities has been

they consume is difficult. It is often impossible to say

compared to the invisible hand that guides private

if and how m uch of a public good a person consumes.

business to produce the right am ount of

How much does one consume of a healthy

private goods.

of private goods is best left to market forces, the

environment, or national defense or a lighthouse

Charles M. Tiebout argued in 1956 that as state

beam? A private firm producing a public good might

and local governments compete through general tax

try to survey the citizens of its comm unity to uncover

and spending programs to attract people and

how much each consumes of a public good and charge

businesses, these government entities are led to

accordingly. However, knowing they will be charged

produce the desired level of public goods. Tiebout

based on how m uch they say they benefit from the

notes that people can vote with their feet and choose

public good, and knowing they will get to consume as

to live in the comm unity that provides them with the

much as they want, regardless of the charge, people

public services for which they are willing to pay. As a

will tend to understate the benefits. Moreover, private

result, people in effect reveal their true preferences,

firms could not enforce payment for such goods even

and state and local governments provide more public

if they knew how m uch to provide. Consequently, left

goods than if these governments were not competing.

to the market, too few public goods, if any, will

The problem of providing the right level of public

be produced.

goods is alleviated by competition among state and

We tu rn to the government, then, to finance and

local government entities.

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But competition among states
for specific businesses is harmful

possible outcomes of this competition.

When states compete through subsidies and

a new location. In other words, suppose that each state

preferential taxes for specific businesses, the overall

goes on the offensive to lure businesses away from

economy suffers. From the states’ point of view each

other states, but defensive strategies prevail; local

may appear better off competing for particular

subsidies and preferential taxes to businesses that

businesses, but the overall economy ends up with less

m ight consider moving, keep them from leaving.

of both private and public goods than if such

While each state could claim a victory of sorts (for no

competition was prohibited.

state loses a business), clearly all states are worse off

State and local officials often boast about the new

In the first outcome, no business actually moves to

than if they had not competed. Competition has

businesses they have attracted, the old ones they have

simply led states to give away a portion of their tax

retained and the num ber of jobs they have created.

revenue to local businesses; consequently, they have

And in many instances these officials should boast.

fewer resources to spend on public goods, and the

They have either managed to m aintain their tax base

country as a whole has too few public goods.

by enticing a local business to stay or they have added

It is unlikely, of course, that businesses will not be

to their tax base by enticing an out-of-state business to

enticed to relocate. In this second outcome, the

relocate. As long as the subsidies and preferential taxes

damage to the overall economy can be even greater. At

given to a business are worth less than the revenue the

first glance, when businesses relocate there appears to

business will contribute to the state over its operating

be no net loss to the overall economy; jobs that one

years, the citizens of the state are better off than if

state loses another gains. Yet on closer examination we

their state officials had not played this competitive

can see that this is not just a zero-sum game. As in the

game. The state has more jobs and hence more tax

case with no relocations, there will be fewer public

revenue to pay for public goods than if it had

goods produced in the overall economy because, in

not competed.

the aggregate, states will have less revenue. This

But even though it is rational for individual states

follows because the revenue decline in the losing states

to compete for specific businesses, the overall

m ust be greater than the revenue increase in the

economy is worse off for their efforts. Economists

winning states. (If this was not true, businesses would

have found that if states are prohibited from

not have relocated.) In addition to this loss, the overall

competing for specific businesses there will be more

economy becomes less efficient because output will be

public and private goods for all citizens to consume.7

lost as businesses are enticed to move from their

To illustrate this point, we will consider several

optimal locations.







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Each business that is enticed to relocate represents

having less expensive machines reduces the tax

a potential loss of efficiency for the overall economy

payment, more than compensating for the lower

and hence less output, less tax revenue and fewer

productivity. And since tax distortions generally grow

public and private goods. To be more concrete, let us

at an increasing rate, at higher tax rates relatively fewer

suppose a company chooses to relocate its

cars are washed.

manufacturing plant from a warm climate state, like

In general, it can be shown that the optimal tax

Louisiana, to Alaska, even though its operating costs

(the tax that distorts the least) is one that is uniformly

are substantially higher in a cold weather climate. We

applied to all businesses. Allowing states to have a

will assume that the company is more than fully

discriminatory tax policy, one that is based on

compensated by Alaska for the move and for the

location preferences or degree of mobility, therefore,

additional operating costs. However, it now takes

will result in the overall economy yielding fewer

more resources for this company to produce the same

private and public goods.8

quantity of output in Alaska than it did in Louisiana.
There is another reason businesses will be less

State competition for specific businesses involves
one additional loss that could make those already

productive when states are allowed to compete for

m entioned pale by comparison. We have assumed that

individual businesses. States may increase taxes on

states have the information to understand the

those firms that are less likely to move to offset the lost

businesses they are courting; that is, their willingness

revenue from firms that have moved (or have

to move, how long they will stay in existence and how

threatened to move). It is a well-known proposition in

much tax revenue they will generate. In practice, states

economics that taxes generally distort economic

have m uch less than perfect information. Assuming all

decisions and at an increasing rate. Business taxes, in

states are so handicapped, they will on average end up

particular, induce firms to produce less efficiently.

with fewer jobs and tax revenues than they had

Again to make the argum ent concrete, consider the

anticipated, and at times the competition may not

hypothetical example of a tax on machines like those

even be worth winning.

used in car washes. W ithout a tax or with a very small

For example, Pennsylvania, bidding for a

tax, the most efficient and profitable way to operate a

Volkswagen factory in 1978, gave a $71 million

car wash is to invest in high quality machines that

incentive package for a factory that was projected to

require only few workers. As the tax increases, the

eventually employ 20,000 workers. The factory never

most profitable way to operate the car wash will be to

employed more than 6,000 and was closed within

invest in less sophisticated machines that require more

a decade.

labor; although fewer cars will be washed per day,

M innesota’s 1991 deal with Northwest Airlines is




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T he com pany has yet to fulfill its p a rt o f the bargain. M oreover, the c o m m itm en t
to b u ild the tw o repair facilities th a t w ould em ploy 2,000 w orkers has been reduced
to a c o m m itm e n t to b u ild one very m o d est facility a n d an airline reservation
center, w hich to g eth er w ould em ploy fewer th a n 1,000 w orkers.

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another example of a Pyrrhic victory. A state agency
agreed to provide the company with a $270 million

Only Congress can end
the war among the states

operating loan at a very favorable rate of interest. In
return, Northwest agreed to build (with an additional
$400 million of state and local government funding)

How can this war among the states be brought to an

two airplane repair facilities that would eventually

end? The states won’t end this war, and the courts are

employ up to 2,000 highly skilled workers in an

not equipped to do so. Only federal legislation can

economically depressed region of the state. While the

prevent states from using subsidies and preferential

operating loan was made in the spring of 1992, the

taxes to attract and retain businesses.

company has yet to fulfill its part of the bargain.

The powers granted to Congress under the

Moreover, the com m itm ent to build the two repair

Constitution enable it to fashion the legislative tools

facilities that would employ 2,000 workers has been

necessary to prevent the states from using subsidies

reduced to a com m itm ent to build one very modest

and preferential taxes to attract and retain businesses.

facility and an airline reservation center, which

For example, Congress could tax the receiving

together would employ fewer than 1,000 workers.

business on the direct and im puted value of these

Despite the fact that state deals have gone sour,

benefits, it could deny tax-exempt status on debt of

some may still be tem pted to argue that competition

states that offer such subsidies, or it could deny federal

among states for specific businesses will lead to a good

funding that would otherwise be payable to such

outcome for the overall economy. Some may be

states, much as it denies highway funds to states that

tem pted to make this argument because it seems, as

fail to meet federal pollution standards.

we argued earlier in this essay, people can vote with
their feet (or vote policymakers out of office). Hence,

The states

if people are unhappy with their state’s economic

The states won’t, on their own, stop using subsidies

development strategy, there is an internal political

and preferential taxes to attract and retain businesses.

check. People, however, may not be unhappy with

There is anecdotal evidence that some state and local

these strategies— the state is acting in their best

governments recognize they are all losing in this

interest. Not to compete, while other states are, may be

economic war. Nevertheless, as long as a single state

detrimental to a state’s economy. Moreover, there may

engages in this practice, others will feel compelled to

not be a place to go because all states may be

compete. New York, New Jersey and Connecticut all

competing. For this type of competition there is no

recognized that they were losing from this

invisible hand (or more accurately, no invisible foot)

competition, and in 1991 they informally agreed to

to lead states to do what is best for the country.

stop competing with each other. It was not long,

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however, before New Jersey broke the deal.

The 1787 meeting evolved into the Constitutional

Even if a num ber of states were interested in

Convention as it became apparent that the

formally agreeing to stop the practice of competing to

commercial problems could not be remedied by

attract and retain businesses, it would be a practical

simply amending the Articles.

impossibility to devise an arrangement that would

Under the Articles, the states had freely engaged in

both cover all the forms of subsidies and preferential

destructive economic warfare by imposing all types of

taxes the states m ight devise and provide an effective

trade barriers against one another. To address this,

method of enforcement. Also, such a multistate treaty

James Madison, the recognized father of the

might run afoul of the Compact Clause of the

Constitution, added the Commerce Clause to the

Constitution, which prohibits a state from entering

Constitution, to help promote an economic union of

into a compact with another state, in the absence of

the states. The Commerce Clause grants Congress the

the consent of Congress.

power to regulate “Commerce ... among the several
States. ...”10

The courts

Madison expected that Congress would do little to

To understand why this problem cannot be left to the

regulate interstate commerce. It was his concept that

courts, it is im portant to know something of the

the Commerce Clause would, in effect, preem pt the

history and purpose of the Commerce Clause and the

states from interfering with interstate commerce. In

role that the courts9played in its evolution and

practice, the Commerce Clause did not discourage the

application.

states from interfering with interstate commerce and
Congress did little, if anything, to constrain them. As a

The economic union— from the Articles
o f Confederation to the Constitution

consequence, while Madison intended that the

A driving force in the nation’s movement from the

fostering economic union, in the absence of

Articles of Confederation to the Constitution was that

congressional action the courts were left to implement

the Articles did not provide a national economic

the economic union through ad hoc interpretation of

union. The Annapolis Convention of 1786 was

the Commerce Clause.

Commerce Clause would almost be self operating in

convened to discuss the removal of the impediments
to commercial activity, both among the states and

The courts and the Commerce Clause

between the United States and foreign nations, under

The Commerce Clause contains an ambiguity: It gives

the Articles. It ended with a call for a meeting the

Congress the power to regulate interstate commerce

following year to discuss changes to the Articles to

but does not expressly prohibit the states from

correct the defects that adversely affected commerce.

interfering with interstate commerce. To address this




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Under the Articles, the states had freely engaged in destructive economic warfare
by imposing all types of trade barriers against one another. To address this,
James Madison added the Commerce Clause to the Constitution, to help promote
an economic union of the states.

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attracting and retaining businesses.

ambiguity, the Court developed a doctrine known as

In any case, the Court may not wish to act because

the “dorm ant” or “negative” Commerce Clause, which
it applies, in the absence of congressional action, to

Congress has remained silent.14The failure of

strike down state laws that it has determined

Congress to speak to an issue can have a profound

excessively burden interstate commerce.

effect on the Court. W hen Congress remains silent
after the Court has clearly expressed a position in the

The Court has supported the ideal of an economic
union through its application of the dorm ant

area of interstate commerce, the Court is likely to

Commerce Clause. However, contrary to Madison’s

regard that silence as tacit approval. Therefore, the

vision of the Commerce Clause, the Court will tolerate

Court, having clearly expressed the view that state

some state action that imposes a burden on interstate

subsidies to attract and retain businesses do not

commerce if the burden is not excessive in relation to

interfere with interstate commerce, including twice

the benefit accruing to the state from a legitimate local

during its 1993-94 term, may take the silence of

public purpose. A legitimate local public purpose is

Congress to be tacit approval.

one for health, safety or welfare, including the

Finally, the courts are not a practical vehicle for

economic welfare of the state. The Court recently has

preventing the states from using subsidies and

said that “a pure subsidy funded out of general

preferential taxes to attract and retain particular

revenues ordinarily imposes no burden on interstate

businesses. The courts, including the Supreme Court,

commerce, but merely assists local business ”n

do not have the power to prevent the states from

(Emphasis added.) In an earlier decision, and more

interfering with interstate commerce. A court can only

directly to the point of this essay, the Court said that

consider the constitutionality of a state law in the

“a State’s goal of bringing in new business is legitimate

context of a particular case that is before it. As

and often admirable.”12 (Emphasis added.)

a consequence:

Therefore, if the Court were to consider the

Spasmodic and unrelated instances of litigation

constitutionality of a state subsidy or preferential tax

cannot afford an adequate basis for the creation of

to attract or retain businesses, one would expect it to

integrated national rules which alone can afford that

hold13that subsidies or preferential taxes impose no

full protection for interstate commerce intended by

burden on interstate commerce. Even if the Court

the Constitution. We would, therefore, leave the

were to decide that such a state subsidy or tax

questions raised... for consideration of

preference burdens interstate commerce, it would

Congress. ...15

weigh that burden against what it would undoubtedly
regard to be a legitimate local public purpose,




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Consider the variety of subsidies and preferential taxes a city and state might
use to attract a sports franchise: tax-exempt debt, bargain rent, rebuilt streets and
highways, tax increment financing and real estate tax abatements.

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Congress can and should
prohibit state business subsidies
and preferential taxes

congressional finding if there is any rational basis for
the finding. No Supreme Court decision in at least the
past 50 years has set aside federal legislation on the
ground that Congress did not have a rational basis for
such a finding.16The Court has recognized that the

The Supreme Court m ust be credited with

power of Congress under the Commerce Clause even

implementing the Commerce Clause and preserving

extends to intrastate activities that have a substantial

Madison’s objective of an economic union. Congress

effect on interstate commerce. Moreover, Congress can

has done little to foster the intended purpose of

legislatively supplement, revise or overturn any of the

the Commerce Clause. However, the Court can

Court’s decisions under the dorm ant Commerce

only decide the cases and controversies that come

Clause doctrine.

before it. It can’t create laws to implement the

To illustrate how Congress might discourage states

Commerce Clause.

from using subsidies and preferential taxes to compete

Only Congress has the power to enact legislation

with one another for businesses, consider the variety

to prohibit and prevent the states from using subsidies

of subsidies and preferential taxes a city and state

and preferential taxes to compete with one another for

might use to attract a sports franchise away from

businesses. In addition to its power under the

another city. It would not be unusual for them to offer

Commerce Clause, Congress has the ancillary power it

some or all of the following: 1) build a stadium

derives from its power to tax and appropriate money,

funded by public, tax-exempt debt, 2) lease the

and the power to make all laws that are needed to

stadium to team owners at bargain rent, 3) rebuild

carry out its enumerated constitutional powers.

streets and highways to provide stadium access, 4)

Moreover, under the Supremacy Clause the

loan or grant the team owners relocation funds, 5) pay

Constitution and the laws of the United States are the

for land with tax increment financing on which team

supreme law of the land.

owners can build an office building, and 6) grant the

The power of Congress under the Commerce

team owners a real estate tax abatement on the

Clause is so sweeping that to enact legislation to

building. To implement a legislative prohibition,

prohibit the states from using subsidies and

Congress could impose sanctions such as taxing

preferential taxes to compete with one another, it need

im puted income, denying tax-exempt status to public

only make a finding, formal or informal, that such

debt used to compete for businesses and im pounding

subsidies and taxes substantially affect interstate

federal funds payable to states engaging in such

commerce. The Supreme Court will defer to such a

competition.




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Conclusion

agreements, because it appears that the incentive to
cheat is too great.
The Supreme Court, which has, for the most part,

Unfettered competition among private businesses has

been the surrogate for Congress in preventing

generally proven to be a very successful economic

activities that interfere with interstate commerce, is

system. As Adam Smith predicted over 200 years ago,

not equipped to end this economic war among the

individuals acting in their own best interest are led, as

states. To the extent that it has power to do so, there is

if by an invisible hand, to produce what is best for the

little, if anything, in its decisions to date that suggest

overall economy. And experience has shown that

that it would.

Smith was right. Those countries that have relied on a

Only Congress, with its sweeping constitutional

m arket-oriented economy have outperform ed (based

powers, particularly under the Commerce Clause, has

on virtually all measures of success) those countries

the ability to end this economic war among the states.

that have relied on a central planning strategy.

And it is time for Congress to act.

But what is true of individuals acting in their own
interest is not necessarily true of state governments
acting on behalf of their local citizens. Competition
among governments based on their general tax and
spend policies leads to a better outcome for the overall
economy. However, when that competition takes the
form of preferential financial treatm ent for specific
companies, the overall economy is made worse off.
Such competition results in a misallocation of
resources and, in particular, too few public goods.
Com petition among states for specific businesses
is commonplace and growing more costly. Most states
today have put in place some type of economic
development program to attract and retain businesses.
While some state officials have questioned the
economic wisdom of this type of competition, there is
little likelihood that the states will successfully
establish either formal or informal non-compete




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Only Congress, with its sweeping constitutional powers, particularly under the
Commerce Clause, has the ability to end this economic war among the states.
And it is time for Congress to act.

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Endnotes

1Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 523
(1934).
2John Helyar, “Beat Me in St. Louis,” Wall Street
Journal, January 27,1995, at 1A.

is very small and turns negative if the tax on immobile
firms becomes too high.
9Most of our discussion about the judiciary’s role in
effectuating the Commerce Clause concerns the U. S.
Supreme Court, which we will sometimes refer to as “the

3Jane Seaberry, “Amarillo Lures Business With $8
million Checks,” Dallas Morning News, September 13,1994,
at ID. Until this economic development initiative, Amarillo
was best known for its farming, ranching and flat terrain.
4William Schweke et al., “Bidding for Business: Are

Court.” Although the Court reviews only a very small
number of all the cases involving the Commerce Clause, its
holdings are controlling in the absence of federal legislation
on the subject. Occasionally, however, we will make more
general references to “the courts,” which apply decisions of

Cities and States Selling Themselves Short?,” 18

the Court on the Commerce Clause to the cases before

(Corporation for Enterprise Development, Washington,

them. The term “the courts” will usually include both

D.C. 1994).

federal and state courts. Our use of the terms “the Court”
and “the courts” is deliberate and the difference in meaning

5Unless the context clearly indicates otherwise, all
references to “state” or “states” are intended to include local

should be clear from the context within which the term
is used.

government units as well. For purposes of the Commerce
Clause it should not make any difference whether subsidies
and preferential taxes are offered by states or local
governmental units. Most, if not all, subsidies and

10U.S. Const, art. I, sec. 8, cl. 3.
11West Lynn Creamery, Inc. v. Healy, 114 S. Ct. 2205,
2214 (1994).

preferential taxes are offered by the local government under
state enabling legislation, and part of the cost of the benefit

12Metropolitan, 470 U.S. at 879.

is, directly or indirectly, borne by the state.
13The term “hold” or “holding” refers to the specific
6Metropolitan Life Insurance Company v. Ward, 470
U.S. 869,879 (1985).

issue being decided by the Court. For example, in the West
Lynn Creamery case the Court held that the Massachusetts
tax on fluid milk unconstitutionally discriminated against

7For a formal analysis of this proposition, see Thomas
Holmes, “The Effects of Tax Discrimination When Local
Governments Compete for a Tax Base,” Research
Department Working Paper 544, Federal Reserve Bank of
Minneapolis, 1995.
8Holmes (1995) finds that, in general, the overall
economy is worse off when states use preferential tax
treatment to attract or retain businesses. In those cases
where the overall economy might be better off, the net gain

interstate commerce. The holding of the Court should be
distinguished from observations the Court makes in its
opinions. Although such observations may be persuasive
evidence of how the Court or a particular justice might rule
in a future case before the Court, the observation cannot be
cited as authority for a legal proposition.
14

See, e.g., Federal Baseball Club of Baltimore, Inc. v.

National League of Professional Baseball Clubs, 259 U.S.
200 (1922). In this case, the Court held that professional

The Region

baseball was exempt from antitrust legislation because it
was not engaged in commerce among the states. No one
today would seriously argue that professional baseball is not
engaged in commerce among the states; nevertheless, the
Court has never overturned that decision, in part because
Congress has been silent on the issue.
15McCarroll v. Dixie Lines, Inc., 309 U.S. 176,189
(1940), (Justices Black, Frankfurter and Douglas
dissenting).
16See United States v. Lopez, 2 F. 3d 1342,1363 (5th Cir.
1993), cert, granted 114 S. Ct. 1536 (1994).




19




The Region

References and Suggested Readings

Brown, Ernest J. 1957. The Open Economy: Justice
Frankfurter and the Position of the Judiciary. Yale Law
Journal, Vol. 67: 219.
Cohen, William. 1985. Federalism in Equality Clothing:
A Comment on Metropolitan Life Insurance Company v.
Ward. Stanford Law Review, Vol. 38: 1.
Frankfurter, Felix. 1937. The Commerce Clause Under
Marshall, Taney and White. Quadrangle Books: 1963.
Holmes, Thomas J. 1995. The Effects of Tax
Discrimination When Local Governments Compete for a
Tax Base. Research Department Working Paper 544. Federal
Reserve Bank of Minneapolis.
Mathesian, Charles. 1994. Romancing the Smokestack.
Governing (November): 36 38.
Samuelson, Paul A. 1954. The Pure Theory of Public
Expenditures. Review of Economics and Statistics, Vol. 36,
No. 4, (November): 387-89.
Schweke, William, Carl Rist, and Brian Dabson. 1994.
Bidding for Business: Are Cities and States Selling Themselves
Short? Corporation for Enterprise Development,
Washington, D.C.
Taylor, Mark. 1994. A Proposal to Prohibit Industrial
Relocation Subsidies. Texas Law Review, Vol. 72: 669 713.
Tiebout, Charles M. 1956. A Pure Theory of Local
Expenditures. Journal of Political Economy, Vol. 64, No. 5,
(October):416 24.

20




The Region

Federal Reserve Bank of Minneapolis

Statement of Condition
Earnings and Expenses
Directors
Officers

21




The Region

Statement of Condition (in thousands)

Assets
Gold Certificate Account
Special Drawing Rights
Coin
Loans to Depository Institutions
Securities:
Federal Agency Obligations
U.S. Government Securities
Cash Items in Process of Collection
Bank Premises and Equipment Less Accumulated Depreciation of $39,393 and $42,172
Foreign Currencies
Other Assets
Interdistrict Settlement Fund

December 31,
1994

December 31,
1993

$ 230,000
186,000
20,777
10,922

$ 243,000
186,000
15,365
4,300

80,090
8,027,738

106,173
7,599,809

380,107

465,435

54,224
588,722
187,716
(1,896,665)

43,626
585,294
172,676
(1,003,850)

$7,869,631

$8,417,828

$6,552,810

$7,048,384

611,857
3,766
15,235

676,876
3,642
5,327

630,858

685,845

Deferred Credit Items
Other Liabilities

379,599
109,840

435,376
66,535

Total Liabilities

7,673,107

8,236,140

98,262
98,262

90.844
90.844

196,524

181,688

$7,869,631

$8,417,828

Total Assets
Liabilities
Federal Reserve Notes1
Deposits:
Depository Institutions
Foreign, Official Accounts
Other Deposits
Total Deposits

Capital Accounts
Capital Paid In
Surplus
Total Capital Accounts
Total Liabilities and Capital Accounts

1 A m o u n t is n et o f notes held by the B ank of $1,491 m illion in 1994 an d $1,171 m illion in 1993.

22

The Region

Earnings and Expenses (in thousands)




1994

1993

$425,703
23,864
4,162
42,443
313

$347,125
32,740
1,749
41,659
129

496,485

423,402

45,521
11,224
2,784
5,830
573
1,465
2,226

43,306
10,513
2,728
5,814
500
2,143
2,431

1,143
868
965
1,523

866
1,149
1,046
1,440

1,003
4,194
2,873
5,389
4,840
1,888

970
5,130
3,029
3,945
(870)
2,048

For the Year Ended December 31,
Current Earnings
Interest on U.S. Government Securities and
Federal Agency Obligations
Interest on Foreign Currency Investments
Interest on Loans to Depository Institutions
Revenue from Priced Services
All Other Earnings
Total Current Earnings
Current Expenses
Salaries and Other Personnel Expenses
Retirement and Other Benefits
Travel
Postage and Shipping
Communications
Software
Materials and Supplies
Building Expenses:
Real Estate Taxes
Depreciation - Bank Premises
Utilities
Rent and Other Building Expenses
Furniture and Operating Equipment:
Rentals
Depreciation and Miscellaneous Purchases
Repairs and Maintenance
Cost of Earnings Credits
Net Costs Distributed/Received from Other FR Banks
Other Operating Expenses
Total Current Expenses

94,309

86,188

(10,886)

(6,894)

83,423

79,294

413,062
64,171

344,108
(13,149)

3,925
7,545
5,684
452,661

3,739
8,021
5,321
303,003

Reimbursed Expenses1
Net Expenses
Current Net Earnings
Net (Deductions) or Additions2
Less:
Assessment by Board of Governors:
Board Expenditures
Federal Reserve Currency Costs
Dividends Paid
Payments to U.S. Treasury

$

Transferred to Surplus
Surplus Account
Surplus, lanuary 1
Transferred to Surplus - as above
Surplus, December 31
1 Reim bursem ents due from the U.S. Treasury and o th er Federal agencies;
$2,327 was unreim b u rsed in 1994 and $1,890 in 1993.
2 This item consists m ainly o f unrealized n et gains or (losses) related to revaluation
o f assets denom in ated in foreign currencies to m arket rates.

23

7,418

$ 10,875

$ 90,844
7,418

$ 79,969
10,875

$ 98,262

$ 90,844




The Region

Directors

Federal Reserve Bank of Minneapolis

December 31, 1994

Helena Branch

Gerald A. Rauenhorst
Chairman and Federal Reserve Agent

Lane W. Basso
Chairman

Jean D. Kinsey
Deputy Chair

Matthew J. Quinn
Vice Chairman

Class A Elected by Member Banks
Susanne V. Boxer
President
MFC First National Bank
Houghton, Michigan

Appointed by the Board of Governors
Lane W. Basso
President
Deaconess Medical Center
Billings, Montana

Jerry B. Melby
President
First National Bank
Bowbells, North Dakota

Matthew J. Quinn
President
Carroll College
Helena, Montana

William W. Strausburg
Chairman and Chief Executive Officer
First Bank Montana, N.A.
Billings, Montana

Appointed by the Board of Directors
Federal Reserve Bank of Minneapolis

Class B Elected by Member Banks

Ronald D. Scott
President
First State Bank of Malta
Malta, Montana

Duane E. Dingmann
President
Trubilt Auto Body, Inc.
Eau Claire, Wisconsin

Donald E. Olsson, Jr.
President
Ronan State Bank
Ronan, Montana

Dennis W. Johnson
President
TMI Systems Design Corp.
Dickinson, North Dakota

Nancy McLeod Stephenson
Executive Director
Neighborhood Housing Services
Great Falls, Montana

Clarence D. Mortenson
President
M/C Professional Associates, Inc.
Pierre, South Dakota
Class C Appointed by the Board of Governors
David A. Koch
Chairman and Chief Executive Officer
Graco, Inc.
Golden Valley, Minnesota
Jean D. Kinsey
Professor of Consumption and Consumer Economics
University of Minnesota
St. Paul, Minnesota
Gerald A. Rauenhorst
Chairman and Chief Executive Officer
Opus Corporation
Minneapolis, Minnesota
Federal Advisory Council Member
John F. Grundhofer
Chairman, President and Chief Executive Officer
First Bank System, Inc.
Minneapolis, Minnesota

24

The Region

Officers

Federal Reserve Bank of Minneapolis

December 31,1994

Gary. H. Stern
President
Colleen K. Strand
First Vice President
and Electronic Payments Product Director

David Levy
Vice President and
Director of Public Affairs

Melvin L. Burstein
Executive Vice President, Senior Advisor
and General Counsel

Susan J. Manchester
Vice President

Sheldon A. Azine
Senior Vice President

Preston J. Miller
Vice President and Monetary Advisor

JoAnne F. Lewellen
Assistant Vice President
Kinney G. Misterek
Assistant Vice President
H. Fay Peters
Assistant General Counsel
Richard W. Puttin
Assistant Vice President

Susan K. Rossbach
Vice President and
Deputy General Counsel

Paul D. Rimmereid
Assistant Vice President

Arthur J. Rolnick
Senior Vice President and
Director of Research

Charles L. Shromoff
General Auditor

David E. Runkle
Research Officer

Theodore E. Umhoefer, Jr.
Senior Vice President

Thomas M. Supel
Vice President

Claudia S. Swendseid
Assistant Vice President

John. H. Boyd
Senior Research Officer

Warren E. Weber
Senior Research Officer

Kenneth C. Theisen
Assistant Vice President

Scott H. Dake
Vice President

S. Rao Aiyagari
Research Officer

Richard M. Todd
Assistant Vice President

Kathleen J. Erickson
Vice President

Kent C. Austinson
Assistant Vice President

Thomas H. Turner
Assistant Vice President

Creighton R. Fricek
Vice President and Corporate Secretary

Robert C. Brandt
Assistant Vice President

Niel D. Willardson
Assistant Vice President

Karen L. Grandstrand
Vice President

Marilyn L. Brown
Assistant Vice President

Mildred F. Williams
Assistant Vice President

Caryl W. Hayward
Vice President and
Electronic Payments Product Manager

Jacquelyn K. Brunmeier
Assistant Vice President

Marvin L. Knoff
Supervision Officer

James T. Deusterhoff
Assistant Vice President

Robert E. Teetshorn
Supervision Officer

Debra A. Ganske
Assistant General Auditor

Helena Branch

Michael Garrett
Assistant Vice President

John D. Johnson
Vice President and Branch Manager

Jean C. Garrick
Assistant Vice President

Samuel H. Gane
Assistant Vice President
and Assistant Branch Manager

James M. Lyon
Senior Vice President

William B. Holm
Vice President
Ronald O. Hostad
Vice President
Bruce H. Johnson
Vice President
Thomas E. Kleinschmit
Vice President
Richard L. Kuxhausen
Vice President




Peter J. Gavin
Assistant Vice President
Linda M. Gilligan
Assistant Vice President

25