This highly fragmented system of governance can be very responsive to local demands, but it can also lead to inefficiency and lack of regional coordination. A case in pointis the competition for economic development among local jurisdictions. Recently this competition has become more prevalent and intense. Yet there is compelling evidence that these fights for local fiscal stability are causing fiscal harm. Localities often make deals that fail to generate the expected benefits.
Officials forgo revenue by bidding down their tax rates against other jurisdictions.
The immediate losers are often the local jurisdictions themselves and smaller tax payers. But competition for tax base is of broader concern. Competition for tax base has been intensified by dwindling federal funds, devolution of services to the local level, and local opposition to new taxes. Jurisdictions are not just competing for new businesses, they also compete to retain businesses. Whereas tax breaks used to dominate, local governments now also provide job training funds, issue government backed bonds, and provide low-interest financing.