The fall semester is underway and so I will start this week with a question. What common issue is raised by the following local, state, and national policies?
- Pike County enacts a 4% tax on hotel rooms.
- Alabama’s $80 million incentive package of tax breaks and assistance induces Polaris to build a new all-terrain vehicle manufacturing plant in Huntsville.
- The Environmental Protection Agency’s (EPA) Clean Power Plan to reduce greenhouse gas emissions from electricity generation claims billions of dollars of benefits from reduced global warming.
Each involves how we should evaluate the effect of government policies on people who do not live in the enacting government’s jurisdiction. Let’s consider how each issue affects nonresidents in more detail.
A hotel tax will increase the price of rooms, and so economists would say that customers pay part of the tax. Many customers will be out-of-town visitors, meaning that the tax would be “exported.” Therefore visitors will pay in part for services provided by our local governments in Pike County.
The Polaris plant will employ nearly 2,000 people with an estimated payroll of $75 million. The new jobs with good pay and relocation of current company employees will benefit Huntsville. But Polaris was looking at sites in 13 other states, and the benefits to Huntsville would have materialized wherever Polaris built the plant. From a national perspective, Alabama’s incentive package to Polaris merely diverted the plant from some other state.
Global warming is a global problem, so greenhouse gas emission reductions by the U.S. (or any country) create benefits around the world. Bangladesh, for example, is a low-lying nation vulnerable to rising sea levels, and would benefit a lot from the reduction of greenhouse gas emissions. The U.S. may realize perhaps as little as 7 percent of the benefits from slowing global warming. Should we consider other nations’ benefits on par with domestic benefits for the Clean Power Plan?
The treatment of nonresidents or foreigners involves economic, political and ultimately ethical dimensions. How should we as Alabamians or Americans consider the effect of government actions on “outsiders,” and should our politicians concern themselves exclusively with the well-being of the people they represent?
A reasonable case can be made to count all benefits and costs regardless of the political jurisdiction. All lives matter because of our basic humanity, not because of whether someone votes in our elections. If we adopt this view, the international benefits for greenhouse gases should count, and we should dismiss the local gains in the site selection for Polaris’ new plant.
A reasonable case can also be made to exclude international benefits. Consider national defense. Many Americans, myself included, would object to a defense policy built around what is good for other nations. Our military should protect our interests, and we have no duty to serve as the world’s policeman, even if this benefits foreigners. If we adopt this view, then the EPA should consider the benefits of its regulations for the people who must abide by and bear the costs.
I do not see a good case, however, for why all Americans do not matter. Consequently we must view state and local economic development policies differently. Taxes on hotels and rental cars are “exported” beyond the community, but still paid (primarily) by Americans. Local economic developers view dollars diverted from elsewhere in the nation as a gain for the region or state. Furthermore, pursuit of tax breaks distracts businesses from what actually matters for the economy, namely locating plants where economic costs are lowest. Finally, taking advantage of neighbors through exported taxes fosters enmity among Americans and produces taxation without representation.
People across Alabama, America, and the world prosper when we cooperate and trade with one another. Cooperation creates wealth. Discounting the effects of our government acts on outsiders encourages policies that benefit some at the expense of others. Our state and local governments should follow the guidance of the Golden Rule.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision.