Most Americans have the majority of their savings tied up in their home. Beyond making a mortgage payment, few savers are able to put away excess income. The government encourages saving in homes. Mortgage interest is tax-deductible. Credit card interest is not. Profit on the sale of a residence is tax-exempt up to $500,000. Government programs support firsttime buyers and lower interest rates for low-income homeowners.
Realtors play up the savings aspect of homeownership. Savers are shown charts of home appreciation and tax savings compared to renters. This leads to overconfidence. Despite government support, a family home is an erratic savings vehicle.
The value of a dollar invested in a family home is not fixed. Home equity can swing up and down. When the local economy is bad, homeowners who lose their jobs often find out that they have lost all the savings in their home as well. In the late 1980s, the oil belt recession forced a massive loss of both jobs and homes. In the early 1990s, New England had a similar episode caused by the collapse of the real estate industry. The massive closing of military bases and defense plants a few years later caused thousands of Southern California residents to lose both jobs and homes. When a
home is worth less than the mortgage, even employed homeowners have lost all their savings.
Competitive considerations have heavy and pervasive impacts on state policies. Concerns over non-competitive tax burdens translate into pressures to keep spending, and thus taxes, low. Concern over the effects of taxes on economically attractive, mobile taxpayers encourages states to minimize taxes on footloose firms, high-income households, and affluent retirees. Competition for economic development motivates huge outlays for industrial parks, sports stadiums, convention centers, highways, and other programs.
The Economic War Among The States: State officials are in constant economic competition with each other. Candidates for state offices campaign on platforms including promises of enhancing their state’s economic development — bringing more jobs, higher incomes, and fiscal dividends for state and local governments. They point with pride to signs of economic success such as statistics on increased employment and examples of new plants. They seek track records including not losing existing employers to the lures of other states, encouraging the growth of existing firms, and drawing new employers to their state. Their challengers leap on signs of failure such as high unemployment, plant closings, layoffs, and even losses of
professional sports teams. Business groups lobby states to eliminate signs of what they call a “poor business climate.”
There is strong evidence that decisions of firms to locate, expand, and remain in particular states are heavily influenced by state policies including state and local tax levels. Firms planning to establish new plants or contemplating moves routinely solicit competitive offers from states. There are many examples of firms relocating or deciding to put their new plants in different states because of home-state taxes they consider too high.
Nearly all states respond to these solicitations for offers to draw new plants, often with tax concessions tailored to the soliciting firm. But offering such concessions only to firms considering relocation produces criticisms of state officials for not pursuing even-handed policies. More important, it induces all footloose firms to consider moves if for no other reason than to induce concessions from home states.
The impact of interstate competition has been apparent in tax policy perceived as affecting firms’ location decisions. In legislative sessions in 1997 and each of the two previous years, at least 20 states passed legislation to reduce business taxes in some way in order to encourage economic development. In addition, nearly all states allow local officials to offer concessions reducing or eliminating local taxes. The changes in Tennessee taxes shown in the Tennessee Department Of Revenue paper Business Taxes: Current Structure And Options For Change are typical of the kinds of changes being made by most states.
Successive moves of this type suggest that taxation of footloose firms, particularly those in manufacturing, is gradually being reduced. State policies have been moving in the direction of ending: (1) sales taxes on equipment and supplies using in constructing new facilities, (2) property taxes on manufacturers’ inventories, machinery, and equipment, (3) for limited times, property taxes on new plants and expansions, and (4) corporate profit taxes associated with out-of-state sales. In addition, states are enacting special tax concessions for particular industries such as oil and gas exploration and production, processing of agricultural commodities, aircraft maintenance, banking, and insurance.
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