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$80 Billion in Subsidies: To What End?

Neal Peirce / Dec 13 2012

For Release Sunday, December 16, 2012
© 2012 Washington Post Writers Group

Neal PeirceIt should be called for what it is: corporate grand larceny, aimed at your tax dollars, your public services and mine.

Each year, as the New York Times reports in a major expose series, corporations are tapping America’s state and local governments for at least $80 billion in cash grants, free buildings, income tax credits and exemptions, property tax abatements and more.

And what are the companies providing in return? Promises, promises. They assure some city, county or state that with a payout from the public treasury they’ll move their office or plant into the “lucky” jurisdiction. Or alternatively, they won’t desert a facility that’s already there. The companies assure local officials that the payoffs will cement a long-term, special relationship.

For governors and mayors desperate to create jobs, it’s tough to say no. But as the Times notes in its coverage by Louise Story, they’re easily “outmatched” by powerful, billion-dollar global corporations. They have almost no way to fact-check what the corporations tell them about their long-term fiscal viability. They can’t be sure the company won’t skip town if it can capture an even better subsidy from another state or city.

Plus, there’s the immediate politics. The essence of the corporate message to governors and mayors – often relayed by consultants who themselves get a percentage of the payoff – is direct and frightening: “Approve our terms or we’ll go elsewhere. Your state or city won’t get the jobs we’re offering.” The message, subliminally: “Just explain that to your voters.”

The Times reports that General Motors and other automakers have been especially unconscionable players, playing up to one town after another for large subsidies, then pulling out when market conditions shift a few years later.

Stark evidence is offered by the Ann Arbor-based Center for Automotive Research, which reports $13.9 billion in incentives to auto firms since 1985, with General Motors the top recipient. The center found that automakers have closed at least 267 U.S. plants since 1979, with half of the facilities still empty.

The big winners of the subsidy game encompass manufacturers, oil and coal conglomerates, technology and entertainment firms, banks and big-box retailers. General Motors alone has received $1.7 billion in local incentives in the past five years. Caterpillar has garnered more than $196 million in local aid nationwide since 2007. Twitter recently got exempted from $22 million in payroll taxes to agree to stay put in San Francisco – even though it had received some $1.1 billion in fresh private investments.

The Times series is a landmark in U.S. investigative journalism, built on reporter Louise Story’s 10 months of research, in which she interviewed hundreds of sources nationwide. But her work also builds on, and in part draws its data from, Good Jobs First – the gutsy Washington-based nonprofit founded by Greg LeRoy, which has been blowing the whistle on corporate rip-offs for years.

LeRoy’s 2005 book, The Great American Jobs Scam, told the big story of state and local governments forking over massive tax breaks and outright subsidies to private corporations they want to attract, or figure they have to pay off to stay put. Now Good Jobs First staffer Phil Mattera has developed an on-line, open-access “SubsidyTracker,” which includes some 250,000 entries of subsidy deals going back more than a decade. The Times has mounted its own sophisticated database.

Its findings offer some real shockers. Texas state and local governments, for example, are shown to be shelling out at least $19.1 billion a year in incentive programs, a sum equal to $759 – not $7.59 but $759.00 per Texas resident.

Gov. Rick Perry unabashedly leads the campaign to bring jobs into Texas, hunting for corporate catches in such cities as Chicago, New York and San Francisco. And he makes no secret, the Times reports, of Texas’ lush corporate subsidies.

Texas’ job captures have been striking. But its wages are among the nation’s lowest. And work conditions in some of its tax-induced factories are abhorrent. A Texas tax consultant named G. Brint Ryan, connected at the highest levels of Texas state government, apparently makes extraordinary commissions on location and tax deals for major corporations.

There’s a sad reality in America’s rising tide of public wealth diverted into corporate pockets. No new net wealth is created – one city or state’s gain is another’s loss. Taxpayers are being fleeced. Unconscionable income transfer – from poor and middle-class Americans to the stock portfolio class – is being accelerated. State and local budgets, including education funds critical for the nation’s human capital future, are being cut short.

Unfortunately, state-by-state reforms won’t work well. The “good guy” states simply risk losing jobs to the subsidy hawkers. So far, sadly, it’s tough to see a long-term solution short of a federally imposed restraint under the interstate commerce power of the Constitution.

Neal Peirce’s e-mail is

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  1. Julie Meier Wright
    Posted December 15, 2012 at 10:23 pm | Permalink

    Neal – important column based on NYT research. I always said, in my 20 years in economic development, that I did not like the “dealmaking.” I always focused on benchmarking California against other states in such areas as taxes, workers’ comp, regulatory process, and what Red Teams could do to expedite things to provide, among other things, that investment could be completed on time and on budget. There is no substitute for systemic reform to ensure competitiveness — and a great attitude that says that business investment is welcomed.

  2. Neal Peirce
    Posted December 16, 2012 at 8:15 am | Permalink

    Could a simple tax policy change reign in the abuses? Mayor Jim Brainard of Carmel, Indiana, thinks so. Here’s the message he sent me:

    Mr Peirce: It seems the federal tax code could be changed to impose an one hundred percent penalty on the amount of local and state cash incentives,offered to any business entity to stay or locate in a particular jurisdiction. Infrastructure improvements could still be negotiated.

    As a mayor who participates in this process, federal intervention is the only way to stop it. Good column.

  3. Posted December 17, 2012 at 11:24 am | Permalink

    That’s a great idea from Mayor Brainard (clearly he uses the first syllable of his last name a lot). As a professional city planning consultant (and a past President of the American Planning Association and the American Institute of Certified Planners), I am astounded that the private sector has been allowed to extort taxpayer subsidies out of communities by playing them against each other. Sears Roebuck has been doing this for decades here in Illinois. Are we not “one nation, indivisible” any longer?

  4. Posted December 17, 2012 at 4:32 pm | Permalink

    For thirty years I have witnessed the demise of the “but for” question in the negotiation of incentives. Grey LeRoy has a good incentive Tracker, but Louise Story knocked it out of the park with her 3 part series. Provocative and unapologetic, she lays out the dysfunctionality of incentives as mismatched policies. As a Texan, I must point out that her $19 billion number for total Texas incentives is overstated. $10.7 billion is a tax EXEMPTION for manufacturing raw materials and $3 billion is the total for agriculture land exemptions. Most states have the same EXEMPTIONS, but do not report total figures. That said, without a return to a “but for” element in negotiations, or a federal tax policy which forces companies to account for incentives (Sarbanes -Oxley helped) we will continue to re-arrange chairs on the Titanic.

  5. Neal Peirce
    Posted December 18, 2012 at 9:44 am | Permalink

    Comment received from Lee Rice of Richmond, Virginia:

    Your column on business subsidies may contain some truth. However, you failed to mention any good benefits that have resulted from taxpayer subsidies to businesses. Moreover, your story fails to cite the jobs that were created in the process. I know many employees of corporations of all sizes whose jobs are the result of government and private help.

    I am sure that part of your argument is legitimate. However, to be entirely fair, you do not cite the federal subsidies that went bust. Foremost among them is President Obama’s 2009 subsidy of $500 million dollars that went to Solendra, the solar panel that never produced anything. There are many other examples of government money being wasted by politicians who seek votes that will enable them to remain in power. The Solendra subsidy was a payback for a rich tycoon’s support of Mr. Obama’s election. These types of programs are manifest in all elections and others that were created by Mr. Obama as well his Republican predecesssors.

    Your column should have mentioned the millions of jobs that companies create in America. In his Theory of Moral Sentiments and
    his highly acclaimed “Wealth of Nations,” Adam Smith referred to the “invisible hand” that results in the unintended consequeences that result from investments from investors and entrepreneurs. Thus, if I invest my capital in a new business venture to generate wealth, the following can occur:

    –The financial condition of my life and my family’s will improve.
    –Jobs will be created for my employees that will bring benefits to them.
    –Taxes will be paid to all levels of government to pay for services rendered to its citizens.
    –Consumers will benefit from the products and/or services that my enterprise creates.

    To be fair, Mr. Peirce, you should write a column on taxpayer subsidies to governments that went bust and only benefited the elected politicians who proposed them. I am sure you can find lots of examples.