The ACT is caught in the bind of competitive federalism. State and territory governments are competing for businesses. They think that by attracting new businesses, their states will benefit by providing employment and taxes. To some extent that is true. The trouble is the competition has got harder, especially since Jeff Kennett became Premier in Victoria and began a jingoistic campaign to attact events and businesses to his state.
Businesses are now not only asking the receiving government for an incentive to move, they are putting their hand out to their home government with a threat of moving unless they get tax breaks and other advantages. This happened this week in the ACT with Australian Optic Fibre Research and the Rally of Canberra.
None of this is good for the nation. Uprooting a business from one state to another is costly for the business, and for the staff, too, both emotionally and financially … whether they move too, or stay. There may, however, be an argument for engaging in competition for overseas businesses.
There is an inconsistency in the arguments of those who favour competitive federalism. Usually, they are pro-business, free-marketeers. They think competition brings out the best. They like small government and lower taxes. However, that school of economic thought also holds that special incentives, subsidies, industry protection and uneven taxes result in market distortions and inefficient misallocations of resources. Yet this is precisely what competitive federalism does.
A state that sucessfully attracts an interstate business through subsidies, incentives, tax breaks and the like deprives existing businesses in that state. Resources go to the new subsidised business that would ordinarily have gone to existing business.
Normally business rubs its collective hands in glee at competitive federalism thinking that money is being diverted from the wasteful public sector to the efficient private sector. Overall, however, this shifting about of businesses based on state government incentives falls into the same category of inefficiencies and distortions as all the old tariff barriers, restrictive labour rules and state monopolies that business has been riling against for years.
Further, there is a manifest unfairness about the new business getting a different tax rate than the exisiting business next year. A lot of these subsidies are hidden. It is not a big jump for the subsidies to take the form of payments to individual executives of the moving company. The tax breaks and reverse tax auction that is going on with stamp duty, payroll and petrol taxes is also eroding the states’ tax base.
Where will it end? Will states engaging in disincentives for those causing budgetary burdens, so that the sick, jobless and aged will be encouraged to move to another state?
It is about time state and territory governments called the bluff of some of the comanies that threaten to move. They should also get together to end this nonsense with some ground rules about poaching businesses.
That does not mean they should abandon the process of making their public sectors more efficient so that there is more money to meet social responsibilities.