While subsidies should be dismissed as a means of unhealthy competition, this does not mean that there are no grounds on which states may compete on tax policy. On the contrary, the grounds for competition are more fertile without corporate welfare in the mix.
States can compete on rather traditional grounds of having the lowest tax rates for all companies and individuals. Even-handed property tax policies that don’t penalize specific types of property (whether through selective higher tax rates or by creating exemptions for specific types of property but not for others) are also important.
Competition between states on the proper kind of tax base is also critical. In fact, states that do not have an income tax are competing on exactly this sort of dimension: they are committed to taxing the consumption in a state, not the investment or income-production in a state. States, therefore, can generate new economic activity simply by transitioning to a more investment-friendly tax base even if tax rates or tax collections remains the same. Tax credits that create a more investment-friendly climate for some and not for others suffer all of the economic distortions that have been discussed already. A neutral and investment-friendly tax climate, on the other hand, benefits all.