Imagine you're a governor. A major employer with 5,000 jobs announces it's "exploring options" in neighboring states. The press release doesn't say they're leaving, but the implication is clear. Your phone starts ringing—business groups, union leaders, worried mayors. What would you do?

This scenario plays out constantly across America, and governments almost always blink first. The result is a peculiar economic game where businesses extract billions in tax breaks while communities compete away the very resources they need to be attractive places to work and live.

Mobile businesses hold a powerful card: the ability to leave. A manufacturing plant can be built anywhere with decent infrastructure. A corporate headquarters can relocate to whichever state offers the best deal. This mobility creates what economists call locational bargaining power—the capacity to extract concessions simply by mentioning alternatives.

The leverage works because the threat is asymmetric. If a company leaves, the governor faces immediate, visible consequences: job losses, angry headlines, blame from voters. But if the government gives away $200 million in tax breaks to keep the company, the costs are diffuse and invisible. Roads that don't get repaired, schools that stay understaffed, services that gradually decline—these don't make the evening news.

Politicians operate on electoral timelines that reward preventing visible disasters over building long-term prosperity. A governor who "saves" 5,000 jobs gets a press conference. A governor who refuses a bad deal and invests that money in education might see benefits in fifteen years—long after they've left office. The incentives are stacked entirely in favor of caving to corporate demands.

Takeaway

When the costs of saying yes are invisible and the costs of saying no make headlines, governments will almost always say yes—even when it's the wrong choice.

States and cities now spend an estimated $95 billion annually on business tax incentives. These packages include property tax abatements, income tax credits, job creation bonuses, infrastructure grants, and sometimes cash payments. Amazon's infamous HQ2 search in 2018 saw cities offer over $7 billion in incentives, essentially begging a trillion-dollar company to accept free money.

The economic logic behind these giveaways is shaky. Studies consistently show that tax incentives rarely determine where businesses actually locate. Companies care about workforce quality, infrastructure, supply chains, and market access. Taxes matter at the margins, but they're rarely decisive. One comprehensive study found that incentives influence location decisions only about 10-20% of the time.

Yet the competition continues because governments can't coordinate. If your neighboring state offers a package and you don't, you might lose a deal. Even if you're skeptical about incentives, you can't unilaterally disarm. This creates a classic prisoner's dilemma: every jurisdiction would be better off if nobody offered incentives, but each individual jurisdiction feels compelled to offer them because everyone else does.

Takeaway

Tax incentive competition is an arms race where the weapons are money that could fund schools and roads, and the prize often would have gone to the winner anyway.

Here's the bitter math: when every state offers roughly similar tax breaks, companies aren't actually choosing based on those incentives—they're choosing based on the underlying fundamentals. But now every state has less revenue because they've all given away the store. The incentives largely cancel out, while the revenue losses compound.

This is a textbook race to the bottom. State and local governments forgo revenue that would otherwise fund the very things that make places attractive for business: skilled workers, good schools, reliable infrastructure, quality of life. A company might save $50 million in taxes while operating in a state that can't afford to maintain its roads or adequately train its workforce.

The cruelest irony is that tax competition often shifts the burden onto less mobile taxpayers. Small businesses can't threaten to relocate, so they pay full freight. Homeowners can't move their property, so their taxes fill the gap. Workers can't easily leave, so their services get cut. The most mobile actors extract concessions, while everyone else pays the price.

Takeaway

When governments compete by lowering taxes, the winners are mobile corporations—and the losers are the immobile citizens and small businesses who end up subsidizing them.

Tax competition represents a collective action problem with no easy solution. Individual governments acting rationally produce an outcome where everyone—including the governments themselves—ends up worse off. The companies that exploit this dynamic aren't evil; they're simply responding to incentives that reward their behavior.

Breaking the cycle requires coordination that's politically difficult: interstate compacts, federal limits on incentives, or simply more governors willing to say no. Until then, the game continues—and the house always loses.