IT PAYS TO STAY.(The Talk of the Town)

In the late nineties, the city of Toledo, Ohio, faced a crisis. DaimlerChrysler, which ran a Jeep factory there, announced plans to build a new plant, but offered no guarantee that it would be built in Toledo. So the city and the state came a-courting. They promised Daimler a ten-year exemption from all property taxes, offered hundreds of millions of dollars in tax credits, and bought out eighty-three homes and sixteen small businesses, in order to give the company more land. Crisis averted: Daimler is still building Jeeps in Toledo.

This arrangement, while extraordinarily generous, is fairly typical. Across the country, cities and states routinely lavish on companies what economists call "location-based incentives." No one outside of Ohio would have paid Toledo's largesse much mind had it not been for a surprising development: a few months ago, the Sixth Circuit Court of Appeals, in Cincinnati, found that Daimler's tax credits in Toledo were unconstitutional. (The Court ruled that the credits interfered with interstate commerce, which only Congress has the power to regulate.) Months, or years, of appeals lie ahead, but, for the moment at least, much of what we know as corporate welfare may be technically illegal.

Thirty years ago, such news wouldn't have meant much. Cities and states used to lure new businesses the old-fashioned way: cheap labor, low crime rates, good schools, better country clubs. Beginning in the seventies, though, the combination of stagflation, increased global competition, and greater corporate mobility turned local governments into rival suitors showering companies with the Chamber of Commerce equivalents of flowers and chocolates. With tax breaks, cheap loans, and outright giveaways, states and local communities hand out almost fifty billion dollars in incentives every year. The logic is simple enough: businesses create jobs, so governments should do whatever it takes to attract them. And even though tax breaks are rarely the determining factor in where companies choose to go--Irvine, California, for example, has become an auto-industry hub without offering any tax breaks at all--companies would be foolish to turn down free money. So they have mastered the location-shopping racket, pitting cities against each other in search of a sweetheart deal.

The cities are often easy marks. The classic example, of course, is the new sports stadium: a team threatens to leave, and the home town panics, spending hundreds of millions of dollars on a white elephant. But it happens with other businesses as well. New York City has been one of the worst offenders, especially under former Mayor Rudolph Giuliani. It gave hundreds of millions of dollars in tax breaks to firms that weren't going anywhere; most infamously, Giuliani committed the city to subsidizing a new, billion-dollar ...