The story out of Indiana is that the state is trying to convince Harley Davidson to move in and open up a motorcycle assembly plant. The state is offering an undisclosed amount of tax breaks to lure the bike maker. Kentucky and Tennessee are also trying to get Harley Davidson to move into their states and are also offering tax incentives. Pennsylvania -- where the plant is currently located -- is also offering tax incentives to Harley Davidson to stay in the Commonwealth. Tax incentives of this sort are terrible tax policy. They violate every principle of sound taxation. Here is why. Tax incentives create horizontal inequities. If Harley Davidson gets a tax break for moving into Indiana, what do you tell the corporation that has been there for years? Tax incentives violate the rule that the tax laws should have as minimal effect on economic decision making as possible. When state governments try to influence where companies should operate, it is not much different from a Soviet planned economy.

Most importantly: tax incentives do not work. State taxes are a small part of the overall cost of doing business. Companies make location decisions based on labor costs and access to markets. Where ever Harley Davidson decides to move it won't be because of the tax incentives. Those incentives will just be a sweet, albeit unnecessary, bonus.