Debates about public policy, particularly budget policy, are about choices: what is the best way to use limited resources to achieve important goals. Among the most important goals toward which all states strive is the building of a strong and prosperous economy that expands opportunity for everyone.

With limited resources, state governments need to be thoughtful and efficient in identifying and pursuing the strategies that are most likely to be effective and not waste resources on less-effective strategies. Because state governments are required to balance their budgets, every proposed tax or budgetary expenditure for economic development needs to be examined in the context of whether it will be more effective than alternative uses of the same resources.

This paper examines the economic evidence on two related sets of policies: public investment and state economic development, specifically in the areas of infrastructure, health care, and all levels of education; and, state tax policy, specifically in two areas: the effects of tax cuts and on state economic development, and a comparison of the performance of state economies that have a combined-reporting requirement for multi-state corporations to those states that have a separate-entity filing system (as Massachusetts currently does). The Massachusetts governor has recently proposed a series of reforms to reduce tax avoidance.

The debate over these proposals has, at times, focused on whether companies that are taking advantage of existing loopholes are behaving inappropriately. That debate, however, distracts from the more important issues at stake. As long as some tax avoidance strategies remain legal, most multi-state businesses with the accounting and legal capabilities necessary to take advantage of these loopholes will likely do so.