Krit Chanwong
In Federalist Paper No. 7, Alexander Hamilton warns that commercial policy could be a source of contention and even violence among states. This warning was farsighted: Although interstate violence has been rare, many states have engaged in “subsidy wars” to attract businesses.
Take the Kansas-Missouri subsidy war as an example. From 2009 to 2019, both states engaged in a costly and wasteful corporate subsidies competition in the Kansas City metropolitan area. In 2019, political leaders from both states agreed to a six-year truce. Unfortunately, this truce has ended a year early as Kansas attempts to lure the Missouri-based Kansas City Chiefs and Royals.
The First Kansas-Missouri Subsidies War (2009–2019)
Kansas City straddles five Kansas counties and nine Missouri ones. Because of this geographical arrangement, the two states regularly compete for businesses. Competition escalated significantly in 2009 when Kansas created the Promoting Employment Across Kansas (PEAK) program. PEAK allowed businesses to keep 95 percent of their state income tax withholding for seven years. Missouri responded in 2013 with a program that allowed companies to keep all payroll withholding taxes. These two programs were the first skirmishes of the Kansas-Missouri subsidy war.
Both states’ programs failed to significantly increase economic growth in the Kansas City area. From 2009 to 2018, both states’ incentives programs cost $335 million. However, the Kansas City area only netted a gain of 1,200 jobs.
Moreover, Kansas’s and Missouri’s relocation incentives were broadly unpopular. In 2011, Kansas City’s business leaders (the ones who stood to benefit from relocation incentives the most) penned a letter criticizing the new subsidies war as counterproductive. The Kansas City Star, a leading local newspaper, called the border war “cannibalistic.”
The Kansas-Missouri Truce (2019–2024)
Efforts to stop the border war began in 2014 when Missouri’s legislators passed Senate Bill (S.B.) 635. This bill would have prevented businesses locating within Missouri’s border regions from receiving tax credits. S.B. 635 was contingent on Kansas passing a similar law. But Kansas rejected Missouri’s 2014 olive branch. In 2016, then Kansas Governor Sam Brownback also offered an olive branch that Missouri rejected.
In June 2019, Missouri tried again, passing an identical bill to the 2014 one. This time Kansas’s new governor, Laura Kelly, accepted Missouri’s offer and signed an executive order halting the use of relocation incentives for Kansas’s border counties. The Missouri-Kansas truce was a major victory for the taxpayers of both states. According to the think tank GoodJobsFirst, the truce meant that “Kansas and Missouri have thus joined the European Union as the only areas with legally binding no-raiding rules.”
Although groundbreaking, the truce itself was flawed. Firstly, many deals were to be grandfathered in, such as the $100 million relocation of the financial services firm Waddell & Reed from Kansas to Missouri. Moreover, the agreement stopped all state-level incentives but allowed local-level incentives to continue. Most importantly, the truce did not go far enough: for example, the truce only prevented the usage of “economic development incentives programs” in border counties. No mention was made of direct subsidies, and exemptions were made for projects that created “net new jobs.”
Yet the spirit of the deal yielded some immediate results. In June 2019, the US Department of Agriculture (USDA) accepted a joint Kansas-Missouri proposal to relocate two of its departments to Kansas City. Regrettably, Kansas and Missouri offered $26 million in relocation incentives to the USDA. Nevertheless, the magnitude of the relocation incentive would have likely been higher if both states were still at war.
The Second Subsidies War
In early 2024, the baseball team Kansas City Royals announced plans to build a new $2 billion stadium in Kansas City. The football team Kansas City Chiefs also announced a $800 million plan to renovate their Kansas City stadium. The Royals and the Chiefs pledged $1 billion and $300 million to their renovation plans, respectively. The rest of the money would come from a 0.375 percent park tax in Jackson County, Missouri, that would expire in 2060. In April 2024, Jackson County’s residents rejected the tax, with Jackson County executive Frank White describing the measure as “not a good deal for taxpayers.”
In a June 2024 special session, Kansas’s legislators passed S.B. 2001, which Governor Kelly promptly signed. This bill would allow Kansas to sell new Sales Tax and Revenue bonds to fund the building and renovation of sporting complexes. In a not-so-subtle signal to the Chiefs and Royals, S.B. 2001 specifically targeted football and baseball teams. Interestingly, Governor Kelly argued that the bill was not a violation of the 2019 truce since sporting teams were never mentioned in the original agreement.
Missouri’s politicians were not so sure. White, for example, urged “all stakeholders to honor the spirit of the 2019 truce and refrain from engaging in a counterproductive stadium bidding war.” Kansas City Mayor Quinton Lucas stated, bluntly, that S.B. 2001 “regrettably restarts the Missouri-Kansas incentive border war.”
And Missouri seems to be responding in-kind to S.B. 2001. On July 8, Missouri Governor Mike Parson traveled to Kansas City to discuss ways of keeping the Chiefs and Royals in Missouri, which will undoubtedly involve more incentives and subsidies for both teams. The 2019 truce is now in tatters.
Fortunately, there seems to be light at the end of the tunnel. Parson’s second term ends in November 2024. Two of Missouri’s three gubernatorial candidates have already signaled their opposition to offering more handouts to sporting teams. Moreover, officials from both Kansas and Missouri have signaled that they do not wish to start a prolonged second subsidy war. Thus, the second subsidies war may be short and not as harmful as the first war.
The Unseen Costs of Corporate Subsidies
Politicians often favor corporate subsidies because they can claim credit for new projects and job creation. The jobs created by these new subsidized projects are the “seen” benefits of subsidies. However, the expenditures used to subsidize corporate projects could have been returned to the taxpayers, creating more economic benefits than targeted subsidies. Unfortunately, these costs are usually ignored since they are “unseen.”
Later this summer, the Cato Institute will release a policy analysis focusing mainly on the “unseen” costs of corporate subsidies. Hopefully, this policy analysis will persuade legislators to avoid corporate subsidies and focus on pro-growth economic reforms.
