Understanding Economic Subsidies & Incentives for Corporate Relocations

The taxpayers of America are unknowing victims of corporate extortion, effectively subsidizing big companies at the rate of billions of dollars each year for corporate relocations. The subsidies are often in the form of tax benefits, but may even be cash payments to companies threatening to move from their existing location – or to companies willing to move if the bribe is sufficient.

Consider moves from California and Texas alone. According to an April 2014 editorial in the Dallas Morning News, more than 250 companies have relocated from California to Texas in recent years. Corporate and Texas officials claim that the moves are motivated by Texas’ almost nonexistent regulatory environment, low wage costs, and lack of a state personal income tax. Not surprisingly, officials rarely mention what the news refers to as “a handsome dowry”, including outright cash payments, subsidization of relocation costs, and years of property tax abatements.

It is not just Texas and California where a battle for incentives occur, and the companies with their hands out include the largest, most profitable corporations in the world. Since the 1970s, there have been more than 240 mega-deals across the continental United States, each with subsidies of $75 million or more. According to the Walmart Subsidy Watch, Walmart – the largest company in America, with earnings in excess of $16.5 billion in 2014 – has benefited from more than $1.2 billion in “tax breaks, free land, infrastructure assistance, low-cost financing, and outright grants from state and local governments.”

In an era of state and local government budget shortfalls, requiring cut-backs in education and infrastructure spending, academic studies report that state and local governments offer more than $50 billion annually in incentives either trying to keep businesses or to lure them from other U.S. locations. According to University of Iowa Professors Alan Peters and Peter Fisher, after decades of policy experimentation and hundreds of scholarly studies, there is little evidence that incentives work.

Thomas Peterson of the Goldwater Institute is more blunt, saying, “They just don’t work…You have average citizens and taxpayers subsidizing wealthy corporations.” Some critics note that relocations are a zero-sum game since, according to CityLab, few new jobs are created, but are simply moved from one locale to another.

Examples of the Incentives Competition

The following examples are representative of the mega-deals documented by the Good Jobs First organization:

  • AMD Microchip Factory in New York. New York State provided $1.2 billion in grants and tax reductions for a new microchip factory and 1,200 jobs. Cost per job created was $1 million.
  • Nike Operations in Oregon. In 2012, Nike got the State of Oregon to guarantee the company would enjoy single sales factor breaks (only taxed on Oregon sales) for 30 years with an estimated worth of $2 billion if the company agreed to keep its operations in Oregon. The number of new or retained jobs according to public information was 500; cost per job was $4.04 million.
  • Nissan Automobile Assembly Plant in Mississippi. Nissan received $1.25 billion in subsidies for creation of 4,000 jobs; cost per job was $300,000.
  • Toyota Auto Assembly Plant Expansion in Kentucky. The company received $146.5 million in subsidies for 750 new jobs; cost per job was $195,333.
  • Prudential Financial Headquarters Relocation to New Jersey. Company received $210.8 million in subsidies in 2012; number of jobs involved is not publicly available.
  • Cheniere Energy Sabine Pass Natural Gas Liquefaction Plan in Louisiana. Company received $1.69 billion in incentives in return for 225 new jobs; cost per job was $7.5 million.

Subsidies do not just exist when companies move across state lines – there is similar competition between cities, counties, and regions within a state. In 2011, two companies – Panasonic and Pearson Educational – received $184.5 million in incentives even though they moved within the State of New Jersey.

Astute businessmen naturally exploit such conditions whenever they can, assisted by armies of site location specialists, industry groups, and industrial realtors whose expertise is to wring maximum incentives from all possible taxing authorities that might be affected by a move.

image: http://cdn.moneycrashers.com/wp-content/uploads/2014/12/corporate-incentives.jpg

corporate incentives

Types of Government Incentives

Incentives to relocating companies or, conversely, companies who threaten to relocate as collected by the Good Jobs First organization include the following:

  • Corporate Income Tax Credits. Since tax credits are laws passed by state legislatures, they are available to any company that meets the specified criteria. At the same time, legislators can narrowly define the criteria to a single industry, a particular region, specific types of hires such as residents within a defined area or disadvantaged workers, or any other condition. State legislatures have been complicit in creating tax credits for specific companies locating within the state for decades.
  • Sales Tax Exemptions and Reductions. Negotiated between a company and public officials, these agreements reduce payments to the state, county, and city governments that would have been otherwise due.
  • Payroll Rebates. Companies receive state payroll tax rebates as well as direct subsidies for payroll expenses, training costs, employee relocation expenses, and tax credits for new jobs created or hiring special classes of workers such as the disabled or veterans.
  • Property Tax Abatements, Exemptions, and Reductions. Abatements are not credits, but work similarly and are negotiated separately. For example, a company might receive a local property tax abatement of 50% for five years. In the succeeding five-year period, the company would be liable for only one-half of the its property tax bills.
  • Upfront Cash Grants. Many state, county, and city governments maintain discretionary cash funds that can be expended for any purpose with little or no public oversight or disclosure. According to corporate real estate strategy magazine Site Selection, at least 20 states maintain discretionary funds between $7 to $10 million under the state governor’s control; according to The Monkey Cage, the Texas Enterprise Fund has a pocketbook of a whopping $240 million and has given away more than $400 million in the last decade.
  • Discounted Utility Deals. In 2007, New York gave Alcoa a 30-year discounted electricity deal for a new aluminum plant. Total subsidies were estimated at $5.6 billion for Alcoa’s investment of $600 million.
  • Single Sales Factor Tax Deals. Corporations who operate in multiple states apportion their taxes based upon the state’s percentage of the company’s total real property, sales, or payroll. Allowing a company to use the “single sales factor,” explained by the Institute on Taxation and Economic Policy, effectively allows management to choose the lowest factor possible to calculate corporate tax liability, thereby allowing it to reduce its taxes substantially.

Winners & Losers

Winners

The group of entities or people who benefit from the current race to provide financial incentives to companies threatening to move or selecting a new location include:

  • Company Management and Shareholders. Incentives reduce corporate expenses since they are borne by others. The benefits include the visible incentives as well as those not immediately apparent, such as healthcare costs for low-paid employees who do not have health insurance and rely on public assistance.
  • Government Officials. The benefits of private, unaccountable funds to reward political cronies or political contributors is enormous, though rarely defined or quantified. Anecdotal evidence of governmental abuse, as reported by The Dallas Morning News, is widespread.
  • Corporate Relocation Industry. Fees and commissions flood the coffers of relocation specialists whose expertise is how best to manipulate the system, encouraging incentives that make little economic sense.

image: http://cdn.moneycrashers.com/wp-content/uploads/2014/12/company-moving.jpg

company moving

Losers

Entities who bear the brunt of the wasteful competition include:

  • Taxpayers. By transferring tax dollars into corporate relocation incentives and/or foregoing tax dollars that would be otherwise paid, education and infrastructure spending suffers. For example, Texas, recognized as one of the more aggressive states in relocation activities, now ranks 49th in spending per pupil in the 50 states and Washington D.C. Since the 2010-2011 school year, spending has been cut by more than $5.4 billion, according to The Dallas Morning News. Infrastructure spending by states and local governments, the primary source of payments, is at its lowest point as a percentage of gross domestic product since 1992, according to The Washington Post.
  • Small Business. Corporate incentives are provided primarily to the large national and international companies with large payrolls and political influence. Effectively, the widespread use of incentives tilt the playing field in favor of large companies versus their smaller competitors.
  • Residents. Each relocation puts stress upon existing infrastructure, with more people using the same roads, going to the same schools, and sharing the same common facilities. Without the tax dollars from the incoming facility, existing residents must either pay for the additional infrastructure and maintenance through additional taxes, or otherwise suffer a decline in the quality of life. Communities suffer from “urban sprawl,” since most new facilities are located away from downtown areas where populations are the greatest and the cost-per-citizen for city services is lowest due to density. Furthermore, community resources – many in short or restricted supply – must be shared with the newcomers who often negotiate prices below costs, shifting costs to small businesses and residents.

In 2011, Texas Gov. Rick Perry claimed that the Texas Enterprise Fund was responsible for creating 54,600 jobs between 2003 and 2010. However, an analysis of state-mandated compliance reports by Texans For Public Justice, a government watchdog group, found only 22,300 jobs were created, with just 26% of companies meeting their 2010 job commitments, as reported by Site Selection.

A 2006 study by the Mackinac Center of the Michigan Economic Growth Authority found that in a study of 127 deals whose employment consequences could be analyzed, only 10 had met their projects. Other findings by Mackinac Center concluded that one temporary job had been created for each $123,000 in tax credits offered.

Why Incentives Exist

Despite ample and historic evidence that incentives do not work as intended, government officials have been unwilling or unable to change their approach to economic growth. In times of slow growth, cities and states are desperate to retain or attract jobs, and companies are eager to exploit their bargaining power to extract the maximum value possible. Companies play one location against another so that governments are forced to participate in an escalating giveaway program or bidding war. The Corporate Relocation Dilemma demonstrates that position of most government entities: As long as one city, county, or state is willing to pay incentives to move or stay, all must participate.

According to Kenneth Thomas, associate professor of political science at the University of Missouri at St. Louis, “They’d be better off if they all didn’t do it, but as individual entities they’d be better off if they made the offer and it was accepted. Everybody responds, so they’re all worse off.”

Final Word

Some critics of corporate relocation incentives have suggested that the Federal Government step in to the fray much as The European Commission approves relocations among member countries and caps subsidy levels. However, with the American tradition and desire for minimal government, that approach is not likely to be accepted in the United States.

In some regions such as the San Francisco Bay Area, Denver, and Dayton, Ohio, local governments have been able to negotiate anti-piracy agreements that work within the regions. However, state governments are unlikely to reach such agreements without significant pressure from their electorates, most of whom are unaware of the corporate subsidies. Until state and local government leaders recognize that corporate relocation incentives divert tax dollars that would be better used to bolster education, infrastructure, and other quality of life measures, the shell game will continue.

What do you think? Are you in favor of your state’s using tax dollars to attract corporate relocations?

NO COMMENTS

LEAVE A REPLY