The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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 m The Region [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 The Region 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 The Region 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! m The Region 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. The Region 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. The Region 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 The Region 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. m The Region 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, The Region 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 11 The Region 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. The Region 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, 13 The Region 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. The Region 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. 15 The Region 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 The Region 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. 17 The Region 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