Let's Fix This Country
capitalism

How Corporate Welfare Fleeces American Cities

Will voracious Amazon set a new record?


It's nothing new. This Time
cover dates from November, 1998

Wasn't there a time when a business moved to a new town — chosen for proximity to rail or highways, for its educated workforce, for a reliable energy supply, etc. — built a factory and set to work as a valued addition to a community, content to support it by paying its taxes?

That time is long gone. Corporations now make colossal demands of any locale under consideration, imposing costs that the chosen state and town may never recoup, leaving the burden to taxpayers well into the future.

hq2

The latest example is, of course, Amazon looking for where to build the company's second headquarters now that its growth has come to overwhelm its hometown, Seattle. Its call for bids has drawn 238 applicants from all but seven states. Even remote Alaska and Puerto Rico made attempts.

The company says it will build in phases, making capital investments of $5 billion over the next 15 to 17 years leading eventually to 53,000 jobs. In its first phase Amazon says it will spend $300 to $600 million to build between 500,000 and a million square feet by 2019. To be considered a candidate must have at least a million in population, universities nearby, an international airport a reasonable commute away, fiber optic Internet and cellular connections and those are just a few items on a long list. The biggest item is that Amazon urges candidates to think "big and creatively" with the arch suggestion that new laws may be needed to handle the deal.

That's the tipoff taken to mean any town that wants to win had better come up with breathtaking dollar incentives and concessions for taxpayers to pay. Yes, the benefits will be considerable: the construction jobs and satellite local jobs that the winning town's new behemoth will spawn. UPS, for example, has its distribution center in Louisville and makes the claim that 156 companies have clustered around its hub generating 12,000 jobs and $348 million in annual payroll. But having outstripped 238 bidders, the Amazon winner is apt to be quite a loser. It’s a calculation and a gamble full of unknowns that will trigger much debate once the victor and the final terms of its offer are announced.

The Economist says the playing field is not equal, that few places stand much of a chance for lack of money, infrastructure, suitable workers, and enough appeal to attract talent to move there.

"The shortest odds are on cities already dripping with rich, highly skilled workers, which least need an injection of economic life."

Someday soon we will see a gaggle of politicians somewhere bleeding their town white to be on the stage with Jeff Bezos to announce the Amazon trophy.

outfoxed

That's what we saw when the Foxconn deal was announced. Wisconsin Governor Scott Walker and House Speaker Paul Ryan stood alongside President Donald Trump and Foxconn Chairman Terry Gou at the White House to celebrate the planned $10 billion factory and the 13,000 jobs the Taiwan company will reportedly bring to — well how about that! — Ryan's own district in the southwest corner of Wisconsin. Foxconn's 1.3 million employees around the world assemble iPhones for Apple, Kindles of Amazon, PlayStations for Sony. In Wisconsin, they will produce flat panel LCD displays for television.

The deal comes to nearly $3 billion in tax breaks — $1.5 billion in state tax credits tied to new jobs, $1.35 billion in state income tax breaks for capital investment, and up to $150 million in sales tax exemptions. Foxconn additionally enjoys special privileges such as suspension of environmental review of its site selection as well as its possible effect on wetlands, waivers which native Wisconsin businesses are not offered. It seems clear that, if you want to form a company in Wisconsin, be sure that you are not from Wisconsin.

For each of the 13,000 jobs, the cost of the Foxconn deal comes to from $15,000 to $19,000 — annually. The state's bureau that analyzes the cost of all impending laws concluded that Wisconsin's taxpayers would not recoup their investment until at least 2043. No matter. The deal sailed through the legislature.

That is what is pernicious about the competition for corporate relocation. As states compete with each other, it is a race to the bottom as one takes from another, with companies draining money from localities left either to raise taxes or curtail public services. Politicians are concerned mostly to make themselves look heroic by bringing jobs to their turf, earning the approval of a public that seldom knows at what cost to themselves. In fairness, politicians are somewhat trapped. They will be pilloried for letting a big fish get away, but to land it must throw in the whole bait bucket.

getting out of hand

The tax incentives of so called "economic development" deals have more than tripled over the last 25 years with companies pocketing 30% of the taxes they otherwise would have paid had they not been treated preferentially (and with local businesses given short shrift). A study of 47 cities in 32 states found that their deals were costing the states $45 billion a year. One healthy development is that the Governmental Accounting Standards Board has issued a new rule requiring state and local governments to reveal the dollar cost of their tax abatement handouts. Perhaps the public will learn what is happening to them.

Municipalities have learned some lessons, but all too easily the rush for the jobs headline has caused politicians to sign deals without recourse, only to find that the job promise has come up short. And there are cases of a town paying for building some new facility to lure a company, only to have it pull up and leave for a better deal elsewhere. That's what happened after 2011 when North Carolina put up $20 million to entice Chiquita Brands from Cincinnati to Charlotte; money paid, the new owners then decided a couple of years later to close the new headquarters and leave.

Cities may be learning that any relocation deal should be pay-as-you-go, with money changing hands only as jobs are created, and with clawback provisions for when the later-occurring quid quo pro in exchange for up-front money goes unfulfilled. Attention needs to be paid to whether, once tax credits are used up, taxpayers will begin to recover the subsidies given to companies. What guarantees that by then employees haven't become non-taxable robots? Wisconsin take notice: Last year, Foxconn replaced 60,000 workers with robots in a single factory.

The company has a very sketchy sense of obligation. In 2015, Foxconn pledged to invest $5 billion in the Indian state of Maharashtra over five years and create 50,000 jobs, with a dozen more factories to follow. Nothing came of it. A plan to invest $10 billion in Indonesia to produce electronics got pared down to $1 billion, and then no plant was built. A Brazil project was to yield 100,000 jobs; six years on, only 3,000 had materialized. Nothing came of a $30 million plant in Pennsylvania that was to hire 500 workers.

money for nuthin'

Less apparent in the Amazon list of particulars was the question of whether the candidate city's offer of tax credits will include cash refunds. Tax crer. One healthy development is that the Governmental Accounting Standards Board has issued a new rule requiring state and local governments to reveal the dollar cost of their tax abatement handouts. Perhaps the public will learn what is happening to them.

Municipalities have learned some lessons, but all too easily the rush for the jobs headline has caused politicians to sign deals without recourse, only to find that the job promise has come up short. And there are cases of a town paying for building some new facility to lure a company, only to have it pull up and leave for a better deal elsewhere. That's what happened after 2011 when North Carolina put up $20 million to entice Chiquita Brands from Cincinnati to Charlotte; money paid, the new owners then decided a couple of years later to close the new headquarters and leave.

Cities may be learning that any relocation deal should be pay-as-you-go, with money changing hands only as jobs are created, and with clawback provisions for when the later-occurring quid quo pro in exchange for up-front money goes unfulfilled. Attention needs to be paid to whether, once tax credits are used up, taxpayers will begin to recover the subsidies given to companies. What guarantees that by then employees haven't become non-taxable robots? Wisconsin take notice: Last year, Foxconn replaced 60,000 workers with robots in a single factory.

The company has a very sketchy sense of obligation. In 2015, Foxconn pledged to invest $5 billion in the Indian state of Maharashtra over five years and create 50,000 jobs, with a dozen more factories to follow. Nothing came of it. A plan to invest $10 billion in Indonesia to produce electronics got pared down to $1 billion, and then no plant was built. A Brazil project was to yield 100,000 jobs; six years on, only 3,000 had materialized. Nothing came of a $30 million plant in Pennsylvania that was to hire 500 workers.

money for nuthin'

Less apparent in the Amazon list of particulars was the question of whether the candidate city's offer of tax credits will include cash refunds. Tax credits are used to absolve companies from paying the taxes they accrue in the course of doing business. But especially with companies doing business nationwide or worldwide, taxes owed locally might not amount to much. So relocating companies began lobbying years ago for the right to sell unused tax credits to other in-state companies.

But such sales only make sense to buyers if they are at a discount. So in the latest trend relocating companies want to be able to sell their unused credits back to the state or taxing jurisdiction for 100% in cash. This is a liability of a dangerous sort for a city or municipality, a potentially huge cash obligation to be paid for by taxpayers well beyond the cost of taxes sacrificed by tax credits. Deep in the Foxconn deal one finds the guarantee that Wisconsin pay as much as $2.85 billion of refunds in cash.

hollywood handouts

The movie industry might have invented the cash back scheme. Having Hollywood stars and film crews set up in one's state became a prestige item a few decades ago. States like North Carolina granted tax credits equal to 25% of a film's production budget. Thirty-five states have tax credit programs; it’s a line in the budget for every major studio film.

Trouble was, the crews — spending on hotels, restaurants and supplies — didn't run up a tax bill anywhere close to credits equal to 25% or so of a movie's production cost. So the studios began to demand that unused credits be "refundable" — turned back to the state for cash. But states have begun finding out that film deals are the worst. In the North Carolina example, a state fiscal agency review found that $30 million in credits led to just 55 to 70 jobs. That's $545,000 and $429,000 per job. The industry is seeing doors slam when they come expecting the usual deal.

Amazon and Foxconn have made the headlines but the shakedown of cities by industry is everywhere with some states having an annual budget to lure businesses away from other states. Kentucky has bid extravagantly to lure auto assembly plants. So has South Carolina. In April it announced that it will chip in $120 million toward the $500 million cost of an assembly plant for Volvo — now a Chinese-owned company. It could lead to as many as 4,000 jobs at $30,000 per. For Florida it has been the pharmaceutical industry, with grants of more than $1 billion. In recent years North Carolina ponied up $320 million to Apple and $250 million to Google for server farms. A study by Pew Research found that "no state regularly and rigorously tests whether those investments are working".

Companies looking to move hold winning hands at both ends. For big corporations, bids pour in from other cities. And the home town enters the bidding to stop the move. Consider Boeing. The company announced that it was thinking of building its 777X jetliner somewhere other than Everett, Washington. That set off a bidding frenzy. But bids by other states were deemed not enough and and Boeing decided to stay in Washington after all. The price? An $8.7 billion package that included tax breaks on airplane production, a sales-and-use tax exemption for new buildings, even taxpayer-funded training for employees. All for just staying put. It's a ruse that any number of other companies can follow. Make a threat to leave town every so often to pocket a new freshet of subsidies from one end or another.

three strikes

The masters of threatening to leave are sports teams, and best at that must be the Atlanta Braves. A Bloomberg analysis found that over 15 years the club…

"extracted nearly half a billion dollars in public funds for four new homes, each bigger and more expensive than the last."

First came three stadiums for its farm system, most of them owned by the Brave organization —%

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2 Comments for “How Corporate Welfare Fleeces American Cities”

  1. John doyle

    The best case you didn’t mention was rhode island and curt schilling’s game company.

  2. David Barnett, Ph.D.

    Perhaps the problem is that politicians want big quick fixes. Therein lies the real danger. When a town depends on a single industry (or worse, a single enterprise) to underpin its prosperity, it is vulnerable to changes in the economic wind. Boom can easily turn to bust. (Think of former gold rush towns or even Detroit).

    Th only real defence against risk industry bust is diversity of the economy. The best politicians can do is create conditions where small enterprises can flourish. As the economy grows, some larger enterprises may emerge or immigrate, in balance with the rest of the local economy.

    The cost of tax breaks etc. pales before the bust risk. Politicians should not be placing bets on attracting particular large players. Take care of the governmental basics that establish the rule of law, and let the natural economy do the rest.

Comments are closed

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