Few targets for the burgeoning stimulus package are as worthy as aid to state and local governments. Gaping revenue shortfalls are swelling the ranks of the unemployed and severely crimping public services, and they will only get worse. But, as with other public bailouts, accountability should accompany these transfers. The national stimulus package's proposed pass-throughs to the states offer an opportunity to eliminate insidious business tax expenditures that are large contributors to current state/local budget problems.
   
State and local governments cannot, as the federal government can, deficit finance. If revenues plunge, they must cut spending, even in the face of higher demand for services.  Skyrocketing unemployment, consumer belt-tightening, business downturns and property foreclosures have cut into sales, income and property tax receipts. The worst is yet to come, the consequences of spiraling layoffs and business closures and huge tax write-offs due to stock market and Ponzi scheme implosions.
     
Few elements of the forthcoming stimulus program would pump money into the economy faster and more efficiently than the funds to states to refresh depleted unemployment insurance, social safety nets, and college aid programs. As new Congressional Budget Office research shows, these infusions and others that will forestall state and local public-sector layoffs will move much more rapidly into the economy than funding on highways and public-school building projects.

Yet state and local government budget crises are also partly of their own making.  Significant portions of state budgets are committed to paying off bonds for past infrastructure projects. These can't be cut. Large extended tax giveaways to companies for job creation have stunted revenue growth and shifted tax burdens from corporations to residents. A Kentucky budget analysis found that more than 70 percent of that state's "spending" on economic development takes the form of tax incentives that can't be rescinded. And Kentucky is not unusual.
   
The cost lives on
Such tax expenditures, as economists call them, were often awarded years ago but endure long after the job creation they supposedly induced. Since 1980, foreign automakers have been profiting from more than $3.6 billion in forgone taxes from southern states, contributing mightily to their supposed competitive superiority over American auto firms.
   
When companies pay less in taxes, citizens end up shouldering a larger share of the public tax burden. Economist Peter Fisher found that effective state tax rates on new investment have fallen more than 30 percent over the past 20 years. As a result, the business tax share has fallen from 10 percent to 5 percent of state revenues, though services to businesses have not declined. 
   
Such lavish giveaways often yield disappointing results: fewer jobs created than promised, jobs located in richer suburbanized areas rather than job-needy rural and inner-city areas, and huge majorities of jobs going to outsiders rather than state/local residents.  Recruitment and retention incentives offer soft corruption opportunities to politicians who put the budget consequences far off into the future. In many states, citizens don't have the right to know the extent of tax subsidies or who receives them. Although Minnesota has a pretty good sunshine law regarding tax incentives, citizens have had trouble getting access to the identities of recipients, and size, of state corporate income tax breaks.
   
Little interest in enforcement
Many tax incentives come with commitments to create and maintain jobs. But when incentivized businesses shrink, move away, or close up shop, few governments demonstrate the will to hold them to their promises. In the coming months, as many more firms renege on contracts, states and cities should enforce such clawbacks. And they must resist pleas for additional tax subsidies. It is hard to square Gov. Tim Pawlenty's call for new business tax breaks with his long-time commitment to fiscal responsibility, especially given economists' inability to show that incentives actually account for the jobs they are credited with creating.
   
From the national point of view, subsidy competition distorts business location patterns, moving jobs from one place to another and limiting resources available for other public purposes. State and local governments have a responsibility to nurture jobs, but economic-development programs should compete directly with other pressing priorities rather than receive tax monies through the backdoor.
   
With the stimulus package, Congress could stop wasteful incentive competition by requiring that states and cities place a moratorium on new business tax incentives and enforce existing clawbacks. If states and cities take federal cash infusions with one hand and dole out more tax subsidies with the other, they will cancel out fiscal relief as well as deepen their dependency on the federal purse. Minneapolis Federal Reserve Bank Vice President Art Rolnick and colleague Melvin Burstein propose that the feds simply tax away state and local subsidies. Whether by rule or tax code, the new president and Congress should demand reforms, sunshine and accountability in state and local tax subsidies in return for a chuck of the stimulus. And Minnesota should resist the temptation to squander more public-sector resources on iffy business incentives.

Ann Markusen is a professor and director of the Project on Regional and Industrial Economics at the Humphrey Institute of Public Affairs, University of Minnesota, and author of "Reining in the Competition for Capital" (2007).