The stark contrast between the United States’ widespread prosperity and the deep-seated poverty afflicting many of its people and communities underscores the nation’s complex economic landscape. Equally complex are the political and legal landscapes surrounding our nation’s anti-poverty efforts. States currently have much of the responsibility for administering federal anti-poverty programming and for directly serving the people and places suffering from economic hardship. Simultaneously, however, states are restricted in their abilities to pursue social welfare goals because of the mobility of capital and labor within the United States. States have responded to these challenges by turning to investment-based tax credits to drive development, but that approach has been disfavored by many progressives and often fails to deliver help to the in-state people and places in need.
Michelle D. Layser offers a unique assessment of this difficult situation in her recent article, Removing Barriers to State Tax Incentive Reform. In that piece, Layser weaves together her knowledge of the political economy of community development, place-based tax incentives, and the federal constitutional restrictions under which states operate to argue that tax incentives likely remain the best path forward states under current conditions. However, states will need help to overcome some key barriers, including the dormant Commerce Clause, to ensure the success of those programs.
Layser and others have previously explored the many problems that exist with the federal government’s place-based tax credit programs, and there is no shortage of criticism for provisions like the Opportunity Zone Tax Credit that was implemented as part of the 2017 Tax Cuts and Jobs Act. Those programs tend to increase investments in the targeted locations, but often without helping the current residents in those areas. Against this backdrop, we might expect that Layser would promote an entirely different approach for the states, but she identifies a critical factor suggesting caution in abandoning place-based tax incentives at the state and local level—the political economy of community economic development. Her article is thus unique and refreshing in that it does not just dwell in the negative aspects of the current system. Instead, she offers a new way to think about reform from within the current construct.
Layser does not just concede the field to those focused on economic growth. Instead, she makes the case that place-based incentives, properly tailored, can serve efficiency ends while also resulting in social welfare gains. Here, she draws from economic research and from her own prior work to help to sway progressive reformers to think more openly about place-based incentives. She is of course careful to note that only reformed incentives are likely to bring long-term success on social-welfare metrics.
From that point in the article, Layser shifts to a detailed analysis of two major aspects of state-level reform. She first analyzes the strengths and weaknesses of three different types of state-level place-based incentives—state enterprise zone laws, state opportunity zone laws, and state new markets tax credit laws. Her critical insight in this analysis is that states’ programs often are either not limited to, or do not actually result in, investments that benefit in-state places or people. Instead, state tax credits can be obtained for investments that benefit workers from outside a targeted place or even for investments made in other states. That extraterritorial flow of state funds likely undermines a state’s goal of helping those most in need within its own borders—a critical flaw.
Layser next identifies the types of reforms that might make those incentives better suited to promoting social welfare within a state’s borders. She breaks those reforms into two categories, minor and major, and evaluates each with the goals of better serving low-income residents and of serving local distressed places. Her next point is critical and one of the key insights of her article. She recognizes that, although states would best serve their own interests by limiting their tax incentives to investments specifically directed at in-state persons or places, the Supreme Court’s dormant Commerce Clause doctrine prohibits tax incentives that discriminate in that way. And while that doctrine allows for direct spending of that kind, states face significant obstacles to making those types of appropriations. Ultimately, then, the dormant Commerce Clause stands as a significant barrier to the types of reforms that Layser identifies, and state tax-incentive programs suffer as a consequence. (It is worth noting that the article is comprehensive in that Layser also analyzes the potential limitations of the Privileges and Immunities Clause and the Equal Protection Clause, but the dormant Commerce Clause is the real impediment to the reforms that she suggests.)
So, what do we do about these issues? Layser concludes by providing suggestions for overcoming the legal and political impediments to reform. On the law, she rightfully notes that Congress can override the Supreme Court’s dormant Commerce Clause doctrine and allow states to discriminate against interstate commerce. Congress could thus allow states to tailor their programs to in-state residents or in-state places and thereby help states to better fulfill their anti-poverty responsibilities within their borders. States can also take advantage of the disconnect in the Supreme Court’s doctrine between discriminatory taxes and discriminatory cash subsidies. If the political process allows for direct spending—a far from assured thing—this route might help states to target their incentives more appropriately. Layser also addresses the politics of these proposals at the state and federal level and provides ways to engage with politicians at both levels.
Despite the “War on Poverty” being waged in America since the 1960s, deeply impoverished people and places continue to exist throughout the country. Layser’s article provides an important explanation of how state-level approaches are being undermined by the political economy of community economic development, by poorly designed state incentives, and by federal law that prevents states from doing better. Her article is a must read for anyone interested in helping to improve place-based tax incentives and our overall national approach to addressing poverty in America.
