I'm going to state up front that until Congress legislates them out of existence the incentives that governments now routinely dangle in front of businesses in an effort to locate their operations in their state/county/municipality those inducements are a necessary evil. I'm not going to sit here and say that my local/state reps are wrong for playing the incentive game because if they didn't play then we wouldn't be in the game at all. Still, I don't like the rules of the game at all and that's why when I saw this article from David Cay Johnston come across my feed reader I was most interested in reading it.
Johnston is reading a book called Investment Incentives and the Global Competition for Capital, a book that looks at what governments around the world are giving away in incentives, and he believes that the authors' estimate of $70 billion/year in giveaways by state and local governments in America is on the low side. Oh, and the Canadians and Europeans are doing a much better job minimizing the costs of these projects. From the article:
"Estimating aggregate state and local subsidies in America is a difficult proposition because of the lack of transparency at all subnational levels of government," Thomas writes.
Thomas estimates American state and local government giveaways to business have grown to $70 billion per year. I am confident that his estimate is on the low side, for reasons that will become apparent.
While competition to give money to companies is a worldwide problem, the problem is much worse in the United States, Thomas shows. He estimates that American state and local subsidies to relocate existing businesses are six times the location subsidies in the 15 original EU members.
And here's Johnston's take on what's going on here in America:
But what takes the breath away is the increasing size of the welfare given big businesses as governments compete to shower gifts on companies with capital to invest, even when it means hardly any new jobs.
Back in 1967 I got onto the front page of my local weekly with my first exposé, which dealt with tens of thousands of dollars going to a building contractor that had bid low and charged high for a new county courthouse. Thomas showed that today's state and local welfare for businesses requires mechanized shovels to scoop up the cash, compared with spoons for the giveaway I wrote about 44 years ago.
Many investment incentives cover 30 to 45 percent of a factory's cost, Thomas showed. He said that the biggest recent American incentive had a net present cost of $734.3 million. That paid a fifth of the cost of a ThyssenKrupp steel mill that opened this year near Mobile, Ala. It turns out stainless and high carbon steel.
He gives our fair state of North Carolina a little attention in his pillorying of server farm deals which he points out generate very few jobs:
Then there are the North Carolina subsidy deals for Dell and Google, whose motto is "Don't be evil." Tar Heel state officials will not say what the total cost is, nor will the companies. They claim that letting loose the electricity discount figures would involve proprietary secrets.
Oh, please. Anyone in the server farm business can just look at the dimensions of the building and come up with a rough calculation of how much power it will use. Are North Carolinians dumber than Forrest Gump, or will they demand a full accounting?
It is curious how the government collects and discloses finely detailed data on how much tax money goes to the disabled, the poor, and the elderly, and to educate the young, but when it comes to welfare for big business, it just cannot seem to find the resources to gather and analyze the costs.
Strange, too, that many of these obscured, but gigantic gifts come through the good offices of politicians who pose as champions of the taxpayer and enemies of welfare, or at least of welfare for those who actually need it.
Here's the coup de grace for those of us who thought that perhaps Dell closed the 4-year old Winston-Salem plant because of a decline in the popularity of desktops:
Thomas tells how Dell moved a factory from Ireland to Poland in 2009 and then months later closed a four-year-old factory built in large part with North Carolina tax dollars. The Irish taxpayers gave €53.5 million to Dell, while North Carolina gave as much as $242 million. But when the Poles offered €54 million more, it was enough to get Dell to move about 1,900 jobs to Lodz.
There's no mention of the claw back provisions that led to the city getting back a bunch of dollars (not all of them mind you), but it's still informative to see how we might be getting played.
Last point: I think the reason that NC appears so often in the article is that our state is being quite aggressive in pursuing businesses in an effort to replace the hundreds of thousands of manufacturing jobs its traditional manufacturing base has bled over the last 20 years. And as I said at the beginning I think this is a necessary evil in the current environment, but that doesn't make it a smart way to govern in the long haul.
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When people talk about government involvement in business not being good, this is a much worse problem than raising taxes or across the board regulation. Certainly not worse for the company getting the incentive, but for our economic system as a whole. The distortions caused by targeted intervention are far larger than broad based actions like raising taxes. Look at distortions caused by the mortgage interest deduction – you’d have to mess with tax rates considerably to generate a similar distortion.
That said, given the system, I would want my state & local gov’t to play the incentive game. Don’t hate the player, hate the game. I would still like to see the system changed, but the rules today are what they are, and acting noble doesn’t produce jobs by itself.
As for the electricity subsidies, often the marginal cost of producing electricity is far lower than what Duke or whomever charges us – especially if it’s coming from something like hydro power where the marginal cost may be close to zero. So the state/region may be giving the company free power, but the cost is an opportunity cost, not a cash-out-of-pocket cost. If you consider that no one else was going to buy that electricity, the decision gets easier.
The author is also missing why capital is being deployed overseas at a faster rate than in the US. Consider the costs of making something = Factory + Labor + Shipping. It’s the labor+shipping part being lower that makes moving factories really attractive. There are also the smaller countries that lower their corporate tax rate to lure foreign companies to funnel & shelter their income there. Some in the US would want to do that, but we will always have more domestic corporate income than foreign income – we can’t attract enough dollars from new businesses to make up for the lost tax dollars from existing businesses.
The other troubling point that the author does not mention, that is more prevalent in land development deals than corporate deals, is gov’t money getting funneled to a company and then kicked back to the politician. I haven’t heard of it happening here, but if you think they’re better at policing that in Eastern Europe than here, I have some land to sell.
There are really two key issues: how should gov’ts act today, given the rules; and what can be done to change the rules to lessen these deals. The second is for politicians, activists and lobbyists. For the first, we can look at the Dell deal and see if we would have been better off without it. It’s a complicated question and requires more research than a blog comment. I was thinking that there is one element of a lot of these incentives have in common – out of town companies with no ties to the states or communities. Dell is notoriously cutthroat in their business dealings, so seeing them dash when a sweeter deal came along shouldn’t be a surprise. Would it have been better to improve conditions for local companies who will have high barriers to moving any jobs they might create? Having a major local employer move their headquarters would be far more damaging than losing an incentive seeking out-of-town firm. Sure, it doesn’t give ‘growth’ or create new jobs, and will smack worse of cronyism, but there is a strong argument for improving conditions for existing employers instead of giving sweetheart deals to new ones. It’s complicated…
Jim, those are all really good points and youre right that its complicated. Im with you on the hate the game, not the player and I just wish that incentives were regulated out of existence. From the perspective of the traditional manufacturing in NC thats gone overseas its easy to point to NAFTA as the culprit, but I also think that the increased efficiency of shipping and the evolution of communications has played a massive role as you point out in your comment. Indeed its very complicated, but we desperately need to figure out a way to get the tide rising for everyone re. jobs.
Incentives will never be done away with completely. They are close siblings to industry specific subsidies (ethanol) and other more indirect subsidies (who benefits the most from our massive military presence in the mid-east.)
There are good and bad incentive programs. Think if the incentives to Dell were $50 or $50Billion. Obviously if it’s just $50 it’s a no-brainer to do it, and if it’s $50Billion there’s no chance. The problem is that most incentives are somewhere between. That’s where smart & savvy local leaders make a difference. You also need to realize that the corporations are going to try to get as much as they can get.
We can tweak tax programs to help too. Consider something that sells for $100, with $50 in labor content. In the US, the tax rate on labor can be in the 40% neighborhood (28% marginal, 6% your contribution to SS/Medicare, and 6% your employer’s contribution). If that good is 100% imported, then there is no tax paid on the labor that went into it. That seems to me to be a tax disadvantage for locally produced goods.
All true. The point about 40% tax on labor reminds me that I think we need to get serious about tax reform; personally Im a proponent of simplifying the tax structure and doing away with many of the incentives in the tax code. Im not an expert, but I find the current system to be inherently inefficient. On the other hand if the code were simplified wed have to find something for a good chunk of our accountants and lawyers to do with their days! A couple of years ago I did some work in Europe and was fascinated by the whole VAT thing. Still dont really understand it very well, but on the surface it seems to make a lot more sense than our system. Again, a very complex issue and I dont know enough to really write about it intelligently, but my instinct is that we need to make systemic changes (tax, labor, import/export law, etc.) before well see significant improvement in our job situation. Unfortunately there are so many people/institutions in positions of influence who benefit from the status quo that I think it will be close to impossible for anyone to enact any true reform. For that reason I worry greatly about our future.
Tax reform is helpful, but sometimes when I hear that I hear code for opposition to increasing tax rates and tax revenues. We need more tax revenue. There is not enough available to cut to balance the budget, let alone start paying down debt. From my view, I would only trade tax reform for some increase in rates. My idea is to add two brackets: one > $1M, one > $5M, and tax them at 39 and 42% respectively (or something like that). The argument that people making > $250k are ‘not rich’ has a lot of traction. They have things that most Americans don’t, but their lifestyle is almost as different than those > $1M in income as it is relative to those making $50k/yr.