Is that a good economic development deal? A checklist
In my last post, I discussed one of the most important sets of questions regarding any proposed economic development subsidy: How much does it cost? Is that too much? The answer, assuming that we are not going to overhaul our broken subsidy system overnight, was that we see if we’re paying too much by looking at what other states and cities have paid for similar projects.
This presumes, of course, that we know how much the incentive package costs in the first place. There are, unfortunately, far too many cases where total incentives were far higher than what was originally announced to the press. Two noteworthy examples are Nissan in Mississippi and Electrolux in Tennessee. It may take sustained political effort just to keep politicians and economic development officials from trying to pass off this kind of balderdash.
Once we know the cost, we need to ask questions about the benefits of the project and the administration of the project by the relevant government(s). Without further ado, let’s jump right in:
1) Is this a new project, or is the subsidy simply being given to move an existing facility from one location to another? If this is a relocation subsidy, just say no. It does the country no good to give subsidies to create no new jobs. Many times, such moves take place within a single metropolitan area (Kansas City, for example). One state’s temporary gain creates an incentive for later retaliation. The Job Creation Shell Game has many more examples of these outrages, and points out that states already know how to write legislative language to prevent within-state relocations from being subsidized.
However, just because a project doesn’t directly move an existing facility, that doesn’t mean the jobs created will all be net new jobs for the national economy; indeed, they may displace existing jobs in the same state or same city. The automobile industry in the U.S. and Canada has shown this dynamic for decades, and the St. Louis retail study mentioned below provides another well-documented example.
2) Is this a retail project? This, too, is an automatic disqualifier. As Greg LeRoy of Good Jobs First like to say, retail is not economic development; it’s what happens after you have economic development. Egregious cases like the wealthy St. Louis suburb of Des Peres (median household income of $90,000 in 1990), which in 1997 gave a $29 million subsidy to a local mall to attract a Nordstrom’s, are legendary. But in the most comprehensive regional study of its kind, the East-West Gateway Council of Governments, the regional planning organization for metropolitan St. Louis, documented that from 1990 to 2007, local governments gave $2 billion in subsidies to retail. In that time period, retail employment grew by only 5400, which can probably be fully explained by income growth in the metropolitan area. In any event, these jobs vanished with the Great Recession.
Possible exception: Good Jobs First lists one possible exception: “Except in the rare instance where there is a true dearth (a low-income neighborhood without a grocery store, for instance), retail should be built without taxpayer aid.” Amen to that.
3) How many jobs will be created? This is obviously the most common justification for incentives that government officials give. Once we know how many jobs are supposed to be created, we can calculate cost per job, an important comparison metric. It also gives us a clear benchmark to see if the proposed investor is living up to its commitments. But beware: Job numbers can be manipulated. Not only is indirect displacement possible, but the rosy numbers the company, consultants, and government throw around can be misleading. Only be concerned with what the company will be held responsible for, which almost(?) always means direct jobs. Consultants will bandy about model-based predictions of “indirect” and “induced” jobs, but if a company’s subsidy won’t be cancelled or cut for failure to meet those predictions, don’t get distracted by them.
4) What are the pay and benefits for this job? The higher the better, obviously, and one more reason that retail should almost never be subsidized, since its job quality is usually substandard. Worker training is another positive characteristic an economic development can provide.
5) Does the project require the use of eminent domain? This is usually a disguised subsidy, since the possibility of a court deciding the value of a person’s property gives the buyer more leverage in negotiating with property owners. Not to mention that the trauma of forced relocations is a highly disturbing one.
6) Does the area that will host the project have objective evidence of economic deprivation, such as high unemployment or low per-capita income? If not, the subsidy probably isn’t needed, and just raises the subsidies that genuinely deprived areas will have to pay to land investments.
7) What is the track record of the company involved? Is it known for bad labor, environmental, or other practices? Demerits for problems here.
7a) Is the company’s identity hidden by a site location consultant? It’s worth saying “no” to this pernicious practice. Information asymmetries are bad enough already in the site location process without having taxpayers being deprived any way to evaluate the company involved.
8) What taxpayer protections are built in? Does the city or state have strong requirements on job quality and other best practices, and will it enforce them through clawbacks of the subsidies (requiring repayment) if necessary? This should be second nature to states, but in the past few years, Tennessee has negotiated at least three megadeals (Electrolux, Wacker Chemie, and Hemlock Semiconductor) that specifically excluded clawbacks from the agreement, even though clawbacks are on the books in Tennessee.
9) Would the investment go forward even without the subsidy? If so, obviously you don’t want to give the subsidy. In practice, of course, you’ll never really know. Did I mention information asymmetries?
10) Does the project connect to the public transportation grid? Alternatively, is it contributing to urban sprawl?
11) What is the opportunity cost to government? The total amount of state and local subsidies is more than enough to hire every public-sector worker laid off since the beginning of the Great Recession. Could the money going to the subsidy be better spent on education, health, or infrastructure?
To summarize: Just say no to subsidized relocations, subsidies to retail, anonymous investors, and subsidies in rich locations. Calculate the cost per job and aid intensity of the proposed project and compare them with those of similar projects. Then comes the more difficult task of estimating the benefits of the project (jobs, training, wages, etc.), where it is necessary to carefully examine claims made by proponents, which will always err on the side of overpromising. Dig into the proposed investor’s track record. Companies rarely change their spots, with British Petroleum being a egregious example. And always ask if the money could get more economic development bang for the buck if spent on things like infrastructure, education, and health.
By the way, if you’ve got disagreements or suggestions, I’d love to hear them.
UPDATE: Phil Mattera of Good Jobs First let me know that I missed points 6, 9, and 10 in my original post. I can only plead temporary insanity.
Cross-posted at Middle Class Political Economist.
In many cases the answer to you title question would be “no.” As a township planner of a Planning Commission, we have been faced with many issues surrounding a Planned Unit Development (PUD). It is all about what the new business is bringing to the community and what it will cost the community in the end.
Most recently a company in Brighton, MI wished to expand their manufacturing site and were seeking tax abatement from the city. Typically this is better done at a state level rather than a community level. Here are a couple of experiments in Michigan:
“Economist Michael Hicks, a business school professor at Ball State, calculated the rate of return on the corporate tax credits. He found that for every $1 million in tax credits awarded, there were 95 lost manufacturing jobs in the counties where the companies were located—a result that is “strongly statistically significant.” There was no gain in personal income in these counties. Perhaps more jobs would have been lost without the credits, but what is undeniably clear is that the businesses that got the government loot were not magnets for other employers.
Many of these handout programs were started in 1995 by former Republican Governor John Engler, who we criticized at the time in “A Governor’s Gimmick.” They have since been expanded 18 times under current Governor Jennifer Granholm. Two of the most celebrated initiatives were the Michigan 21st Century Jobs Fund and the Broadband Development Authority. Ms. Granholm’s vision was that these grants and credits would create 500,000 jobs and $440 billion in new investment by 2010.
Liberals cheered this “progressive” alternative to tax cutting. But the jobs lured to Michigan were so few that the programs were killed in 2007. The broadband program’s legacy was $14.5 million of bad loans eaten by taxpayers. Then State Senate Majority Leader Ken Sikkema, an original supporter of the telecom program, called it “one of the biggest flops in state government.”
An even bigger flop might be the Michigan Film Office. The program provides movie producers a 42% tax credit for rolling the cameras in Michigan. But because the credits are “refundable,” they are mostly cash subsidies to the film industry to make movies. The Michigan Senate Fiscal Agency recently found that “if a film production company spent $10.0 million in Michigan, the State will gain less than $700,000 in income and sales tax revenues but will pay out about $4 million to the production company.” So in a state with the highest unemployment rate in the nation at 15%, taxpayers last year gave out $48 million in subsidies to Hollywood millionaires.”
“In Brighton, MI; the company requested: It is the recommendation of staff that the City Council considers a Resolution to approve the application for real property in the amount of $20,000,000 at a 50% tax rate for twelve (12) years and an application for personal property in the amount of $31,000,000 at a 50% tax rate for seven (7) years, based upon documentation from the applicant documenting that the weighted average of the useful life of all the personal property is no less than seven (7) years.” for 100 jobs.
This is a large amount of tax avoidance for a city to turn loose. The city did approve it even after I wrote against it (not that I am anybody).
Interesting post and very true.
Run, you are absolutely right, under the circumstances we see in the United States, the answer usually will be “no.” You are also right in principle that property tax abatements should be decided at the state level rather than the local level because local governments won’t take into account any effects their actions have on other municipalities. There is a risk that the state-level body will be captured by the interests they are supposed to be regulating (I think this has happened in Louisiana, where abatement decisions are state level), but that is nothing new and not a reason to not have state-level abatement decisions.
This is a great post and it reflects what I have experienced over the years in listening to companies. My advice is to avoid companies which are not good neighbors.
I’ve been involved in local planning and development for twenty years. I’ve argued for all that time that incentive programs are a zero sum game with virtually no benefits.
Want to make your community more amenable to economic development? Then do the things that government is designed to do; good schools, parks, and infrastructure development are much more effective inducements. Provide the sort of public goods that make a community an attractive place to live and do business. To that I would add “know thyself” which means understanding that not every community benefits from any sort of development and that companies and industries trolling for incentives have a tendency to turn heads and have communities lose focus.
While my view is primarily from a county level I believe the basic principle, provide effective public goods, can be applied at a state level.
Mark: EXCELLENT POINTS! Companies looking for a handful of specialty goodies just for them are actually looking for some suckers.
Mark and Mike,
Unfortunately, companies have learned that they can make their location decisions into profit-making (more technically, rent-seeking) opportunities. In the long run, I think it will require state control over local giveaways and federal control over state and local giveaways to fix the problem. Unless you put limits on what subsidies can be offered, as the European Union does, we will get atrocious megadeals like Sears’ two retention subsidies from Illinois. But the state was in a hard position, as Sears could have moved if it wanted to and the state had no way to know what Sears really intended. And Ohio was offering Sears $400 million to move.
Kenneth Thomas: Sears is diving into the toilet and has been for some time. What benefit to The People of Illinois were those give-a-ways. Had they TAXED Sears more profoundly, Illinois might well have a better education system or a decent road. I bet nobody would offer Sears much of anything for them to move these days. Their moving down the drain and that’s about as far as they’ll get.
Mr. Thomas: you are absolutely correct that companies play jurisdictions off each other. That plays into a larger problem, how do we break the grip of crony capitalism? The issue of state and local subsidies may have a different face but at some level it isn’t much different than the real and implied subsidies for finance in “too big to fail” policies.
The problem is a root and branch problem, as long as we tolerate crony capitalism, and our campaign finance system would seem to encourage it, the problems of corporate subsidies will not go away. Addressing this at the Federal level may be preferable but I’m afraid that as long as money in politics and organizations like ALEC are pervasive that such solutions may be half hearted, at least in the short run; and don’t minimize the impact of a reactionary SCOTUS on trying to get limits in place.
In the meantime, a sort of “just say no” campaign at the grass roots level may be at least as effective in curbing the mutually assured destruction aspects of subsidies. It’s going to take a couple of states to put limits in their constitutions to create the sort of natural experiment we’ve seen in places like Washington state and Idaho with respect to minimum wage.
You’re absolutely correct in your evaluation of the problem. I don’t disagree with you solutions either but I think this issue is part and parcel of a greater problem of how we understand what government does and what it should do.
Whether it’s privatizing functions like the VA or the Postal Service, or undermining public education through charter schools, or turning government into the handmaiden of corporations through subsidies, it comes down to an understanding of how we treat public goods.
Mike, actually Ohio’s $400 million offer to Sears was just two years ago. It was quite clear even then that Sears had tons of problems.