I’ve been scratching my head over this story in today’s Washington Examiner. It’s basically a long lament by Loudoun County officials over having missed out on an opportunity to attract the Volkswagen HQ. What a big get that might have been for the Washington area, right? Except that the Washington area did get the VW HQ, in Herndon, a little Fairfax County business enclave about 2 miles from the Loudoun County line. In all probability, from the right spot in Loudoun, you’ll be able to see the new headquarters.
Now, I understand that Loudoun wishes to broaden its tax base beyond residential property taxes, but there are at least three good reasons that this kind of intra-metropolitan competition is no good. On the one hand, it might easily create a situation where neighboring counties are throwing incentives at a company simply to lure it a few miles in one direction. This is ludicrous. At that point, the firm will have presumably decided that the area is a good potential location for it, and the gains to the local market will be on the way; all incentive battles will do is shift unnecessary taxpayer money to the corporation. And if it’s just a case of one county trying to poach a firm from another, that’s no good either. There are gains to concentrating near other firms, which is why companies pay higher rents for the privilege of doing so. Paying an incentive to get a company to leave such an agglomeration might compensate the company for its loss from moving away, but it won’t compensate the other companies who would have benefited from having the target firm near them.
And, of course, Loudoun County is farther out, farther away from central business districts, and is served by a less developed infrastructure network. Having jobs there will heavily burden local roads and will increase the incentive for workers to move farther out, adding to the problem. It also perpetuates sprawl. If Loudoun succeeds in attracting a strong commercial base, we can expect strong residential growth in the counties beyond, who might, in turn, wish to attract businesses outward. This is a terrible regional growth strategy. As the density of the area lessons, the productivity of metropolitan firms falls, transportation costs increase, and per capita infrastructure spending shoots up.
The region is better off if Loudoun doesn’t begin drawing lots of employers, but Loudoun obviously feels it’s better off if it does. The optimal solution, then, is for the rest of the metro area to pay Loudoun to not offer VW incentives. If Loudoun wants additional revenues to balance property taxes but their efforts to attract businesses will harm the region as a whole, then the region should simply negotiate a payment, less than the gains to the region of keeping businesses closer in but more than the gain Loudoun would receive by attracting firms. (Of course, this could never happen, because arranging such a payment would require cohesive negotiation on the part of the region, and there’s just no institutional framework within which that could take place).
I should stop this post here, but I have to take the analysis a step further. The thing about such a payment is, it would effectively subsidize residency in Loudoun County, since the county could then provide a greater level of services than justified by property tax rates. That’s bad, because Loudoun would then attract more residents, leading to bad outcomes, not the least of which is that with a larger residential base, the county would be more likely to attract businesses.
What the region needs is for people who want to move to Loudoun to instead move somewhere closer in. That is, rather than subsidizing residents of Loudoun County to not try and attract firms, the region should penalize residents of Loudoun County in an effort to deter them from moving there in the first place. The problem in many metropolitan areas is that tax rates tend to decrease as you move outward, which tends to bias resident movement outward, which tends to heighten the need to increase taxes in the center, exacerbating the problems of the original rate structure. It’s not hard to see why this is the case. Central areas get built up and need to pay for lots of infrastructure and services. As such they raise taxes, squishing some people out into the burbs. This puts more revenue pressure on remaining center city taxpayers, squishing more of them out, and so on.
In inner suburbs, the population of squished out people grows until infrastructure needs grow and tax rates rise, squishing people farther out still. The end result is a terrible distribution of infrastructure investment, since inner infrastructure is, on the whole, underused while outer infrastructure is overused (example: Prince William County can’t build schools fast enough, while the District has school buildings sitting empty). What ought to happen, what I’d expect to happen in an enlightened area with a strong regional authority, is that tax rates would decline as you moved inward, not outward. In that case, taxpayers would pay more for moves that necessitate outward expansions of infrastructure and reductions in agglomeration externalities.
That outcome is also practically impossible to imagine. Except. If we had a carbon tax, it’s possible that just that kind of dynamic might result. Total tax burden would, in all likelihood, increase the farther away you lived from central business areas. Something to think about.