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First-ever binding end to a border war: Missouri-Kansas UPDATED

First-ever binding end to a border war: Missouri-Kansas UPDATED

(Dan here late….August 2 post) Kansas Governor Laura Kelly has just signed an executive order that prohibits state subsidies being used to move existing Missouri firms in four Missouri counties to three Kansas counties, which together make up the Kansas City metropolitan area. Unlike previous voluntary no-raiding deals, such as NY-NJ-CT, Council of Great Lakes Governors, and even Australia’s Interstate Investment Cooperation Agreement, this is not a voluntary agreement, but one with the force of law, a first in the country’s history.

The binding nature of the agreement comes from the fact that both states have legally bound themselves. In June (h/t New York Times), the Missouri legislature passed and the Governor signed into law restrictions on using state subsidy funds (such as Missouri Works) from being used to attract companies operating in three counties in Kansas in the Kansas City metro area. The law stipulated, however, that this would not go into effect unless Kansas passed similar binding regulations on its state subsidies (Promoting Employment Across Kansas, or PEAK) being used to attract firms on the Missouri side of the metro area. Today’s action by Kansas’ Kelly meets the stipulations of the Missouri law.

Kansas and Missouri have thus joined the European Union as the only areas with legally binding no-raiding rules, anywhere in the world. Of course, the EU’s provisions, based in the Guidelines for Regional Aid, cover the entire territory, whereas the Kansas-Missouri ban only applies in the Kansas City metropolitan area. However, since that’s where almost all the job piracy between the two states takes place, the two states’ action is truly historic.

The two states made a previous attempt at a binding agreement in 2014-16: Missouri passed a similar law to this year’s in 2014, but Kansas’ last-minute law just before a 2016 deadline in the Missouri law precipitated a stalemate, and no new deal was made until this year.

It should be remembered that an agreement of this type has been advocated for by a number of companies in the region, notably Hallmark and the Hall Family Foundation. Their work uncovered the hundreds of millions of dollars that had gone into the border war and led to pressure being put on both state governments to end the madness.

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New article in Shelterforce highlights EU state aid rules

New article in Shelterforce highlights EU state aid rules

Greg LeRoy and I have written an article at Shelterforce explaining the basics of the European Union’s rules governing subsidies, or “state aid” in EU-speak. As the article is ungated, and regular readers will remember much of the detail, I will not quote it here. Suffice it to say that the continuing reverberations of Amazon’s HQ2 project have opened space to shine a brighter light on economic development subsidies.

In addition, Tim Bartik of the Upjohn Institute has a series of thoughtful tweets commenting on our article. His one reservation with the EU approach appears to be that even with the scaling down of the maximum subsidy allowed for large projects, the amount allowable might still be too high. If I’m not reading too much into his comments, it seems he would favor an absolute dollar cap on subsidies for the largest projects. He also admits in his counterfactual analysis of Foxconn in Wisconsin that the Racine/Kenosha area wouldn’t be eligible for the highest level of incentives under the EU rules, so his scenario of a $1.7 billion subsidy being possible isn’t fully accurate. In fact, it looks to me that Kenosha and Racine counties are just slightly below the national average for income per capita, and certainly not less than 75% of the average, the key figure that would make an EU region able to have even a 25% regional aid maximum.* The next highest aid maximum allowed in the European Union is 15%, and 34% of that (the scaling factor for investment over 100 million euros) is just 5.1%. Thus, a $10 billion Foxconn project would be eligible at most for a tad over $510 million in subsidies, not $1.7 billion.

I’d love to hear your take on our article.

* More technically, a per capita GDP below 75% of the EU average is required for designation as a “107(3)(a) area,” named for the treaty paragraph it is listed in. See Regional Aid Guidelines for 2014-2020, paragraph 150. 25% is the lowest aid maximum in a 107(3)(a) area, while 15% is the highest aid maximum in a 107(3)(c) area, available to regions between 75% and 100% of the EU average, plus a few exceptional situations such as very low population density.

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Amazon defeated in New York UPDATED

Amazon defeated in New York UPDATED

In the biggest ever defeat for a subsidized project in history, Amazon announcedFebruary 14th that it was canceling its planned half of HQ2 for New York City, which was to receive subsidies worth at least $3.133 billion. After facing months of public opposition, the company provided a Valentine’s Day present in the form of capitulation. Amazon showed that, like Electrolux, its efforts to extract maximum subsidies from 238 cities constituted corporate rent-seeking on a grand scale. Not only did Amazon conduct an exploitative public auction for the supposedly single HQ2 facility, it furthered the impression that it was engaging in rent-seeking by its refusal to discuss alternatives with New York officials, by its absolute insistence on opposing a union for its workers, and by its sudden though not unexpected cancellation announcement. Activists scorched the firm, too, for the fact that for the second year running, Amazon will pay 0 in federal income tax despite earning $11.2 billion in profits in 2018 and $5.6 billion in 2017.

This is not to be confused with Foxconn, which is looking more and more like an economic development failure. There, it appears that the company will not be able to provide the investment and benefits it promised in Wisconsin. With Amazon, what we have is a case of the company being unwilling to continue the political battle to obtain its $3+ billion in incentives. While Amazon is by far the largest project ever defeated, such defeats are not unprecedented. I participated in two successful campaigns in the late 1990s and early 2000s against abusive tax increment financing (TIF) projects in the St. Louis suburbs of Olivette and O’Fallon, but these were on the order of $40 or $50 million, not $3 billion. Alas, I was also on the losing side of an exceptionally bitter battle against a TIF-funded mall in Hazelwood, Missouri, which still hurts to think about. The residents lost their homes to eminent domain, the city administration was high-handed and manipulative, and the new mall contributed substantially to the death of at least two nearby malls, part of the $2 billion retail subsidy merry-go-round during 1990-2007 documented by the East-West Gateway Council of Governments.

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Amazon defeated in New York; more to come

Amazon defeated in New York; more to come

In the biggest ever defeat for a subsidized project in history, Amazon announcedyesterday that it was canceling its planned half of HQ2 for New York City, which was to receive subsidies worth at least $3.133 billion. After facing months of public opposition, the company provided a Valentine’s Day present in the form of capitulation. Amazon showed that, like Electrolux, its efforts to extract maximum subsidies from 238 cities constituted corporate rent-seeking on a grand scale.

Moreover, as Richard Florida reports at Citylab, the victory has also energized reformers around the country searching for a solution to the problem of corporate bidding wars. I myself have received inquiries from multiple elected officials’ offices about the European Union’s systematic control of investment incentives.

I’m playing at a chess tournament in Texas right now, so I will have more to say about this when I next have time to post.

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Electrolux closing Memphis plant; Economic development malpractice leaves Tennesse holding the bag

Electrolux closing Memphis plant; Economic development malpractice leaves Tennesse holding the bag

On January 31, Electrolux announced (h/t Alan Freeman, ipolitics.ca) that it would be closing its new (2012) factory in Memphis, Tennessee, by the end of 2020. This facility, you may recall, was a subsidized relocation from L’Assomption, Quebec (a Montreal suburb) that had an aid intensity of at least 99%! Yes, Tennessee state and local governments gave Electrolux a free factory ($188.3 million at present value in subsidies) while allowing it to get rid of its union, cut 60 jobs, and save over $4 per hour in wages on the jobs they kept.

As if all that weren’t bad enough, the state of Tennessee agreed not to put clawback provisions into the contract with Electrolux, although the state was already requiring such clauses in contracts with major companies like Volkswagen in Chattanooga. That piece of economic development malpractice has now come back to bite the governments involved where it hurts. Not only does the contract specifically prevent the state from getting its money back, state and local governments guaranteed loans connected with the project, the payments for which will last until 2036. According to the Commercial Appeal’s article, state government is on the hook for $48.5 million in loans, while Memphis and Shelby County governments must pay off a further $28.0 million.

While Electrolux committed to employing 1,240 people in order to receive the subsidies, its peak employment appears to have been the 1,100 who were employed in 2017. Now, just two years later, the company employs only 530 in Memphis, a figure that has been stable for about a year, supplemented only by overtime and temporary workers, both of which have now disappeared.

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Foxconn update

UPDATE: Foxconn now says that it will indeed still build a factory, citing a conversation between CEO Terry Gou and Trump (h/t commenter Joel at Angry Bear). This is certainly clear as mud. As others have pointed out, several promised investments from Foxconn have failed to materialize at anywhere near the scale promised, including in BrazilPennsylvania, Indonesia, Vietnam, and India. So I am going to remain skeptical on what was a terrible deal in the first place.

 

Original AB post Foxconn is flailng in Wisonsin. Post on Wisconsin and Foxconn in 2017 Foxconn cashes in.

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Foxconn is flailing in Wisconsin (Insert your joke here.)

Foxconn is flailing in Wisconsin (Insert your joke here.)

 In what may end up as the biggest economic development failure in U.S. history, Foxconn announced Wednesday that its $10 billion Wisconsin factory will not be a factory. Instead, the company says, it will still create 13,000 jobs, but these will be research jobs rather than manufacturing ones. I’ll believe it when I see it.

Accompanied by an almost $4.8 billion subsidy package as estimated by Good Jobs First (follow the link to the spreadsheet), the project was heavily criticized even before it was announced in 2017 (my take here and here). The massive subsidy helped normalize the idea of multi-billion investment incentives and gave Amazon a handy benchmark for its own effort to break the bank.

As I analyzed a year and a half ago, it didn’t make sense to manufacture electronics in the United States when everything was cheaper in China, unless you were worried about access to the U.S. market. The illegitimate Trump regime had already created an unpredictable and protectionist trade climate, and this was long before the trade war with China really took off. If Foxconn felt it had to locate in the United States, the country was in a strong bargaining position, but by playing the states off against each other, it was still possible for a foreign company to score huge subsidies.

What happens next? As noted, Foxconn still says it will build a huge facility and hire 13,000 workers. But in 2018, it failed to meet its job creation target and forfeited what would have been a $9.5 million subsidy. I predict we will see more such failures from Foxconn until it finally pulls the plug. Indeed, on January 31, Good Jobs First called for the immediate cancellation of the deal, with the company financially responsible for expenses made by the state and by Racine County in connection with the project. This would be a fair resolution of the situation, appropriately leaving egg on the faces of the deal’s promoters, the recently defeated Governor Scott Walker and the head of the illegitimate Trump regime.

As you see, I have managed to steer clear of the obvious puns. Instead, I invite you to insert your joke here.

Cross-posted at Middle Class Political Economist

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New article on tax increment financing in Missouri shows impact of KS/MO border war

New article on tax increment financing in Missouri shows impact of KS/MO border war

After several years of work, my colleague Susan G. Mason (Boise State University) and I have published a new article on TIF in Missouri, specifically in the St. Louis and Kansas City metropolitan areas. “Exploring Patterns of Tax Increment Financing Use and Structural Explanations in Missouri’s Major Metropolitan Regions” appeared in the July 2018 edition of the HUD journal Cityscape, downloadable for free here. We omitted the two cities from our earlier statistical analysis (in the paywalled Economic Development Quarterly, May 2010) because they are much larger than any other Missouri city and use TIF far more than any of them, making them statistical outliers.

In our earlier article, “Tax Increment Financing in Missouri: An Analysis of Determinants, Competitive Dynamics, Equity and Path Dependence,” we found that early adopters of TIF tended to be heavier users of TIF far past the first TIF adopted, that TIF as used in Missouri exacerbated inter-jurisdictional inequity (cities with higher poverty rates were less likely to use it than cities with lower poverty rates), and we found strong evidence for competitive dynamics in the use of TIF: Cities that were adjacent to a TIF-using city were two and a half times as likely as average to use TIF themselves, and implement more TIF projects.

The new article is an exploratory study, as it is impossible to generalize from two cases. But one thing we established clearly, based on complete data from 1988 to 2013 for St. Louis, and from 1988 to 2012 for Kansas City, is that Kansas City’s tax increment financing projects are marked by much higher aid intensity (the EU term that equals subsidy/investment) than those of St. Louis. Indeed, even excluding 2009 in St. Louis, which was marked by several multi-billion projects with low aid intensity (and at least in the case of Northside Regeneration, had substantial state funding not reflected in Exhibit 4 of the article), the overall average aid intensity, ex-2009, is 17%.

By contrast, in Kansas City, the average aid intensity of the city’s TIF projects comes to a whopping 36%,* more than twice as much. Everyone we interviewed on the question considered that there is much greater competition for investment with Kansas than with Illinois in the two metro regions. The difference in aid intensities is consistent with this thesis.

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Shock EU Court Decision Strikes Blow Against Investment Arbitration

Shock EU Court Decision Strikes Blow Against Investment Arbitration

With all the dreary news we’ve seen this week, could you stand some good news? The battle against investor-state dispute settlement (ISDS) got a huge boost in March when the Court of Justice of the European Union (CJEU) ruled in Slovak Republic v. Achmea B.V. (“Achmea”) that ISDS is contrary to EU law. The decision was something of a surprise because the preliminary analysis (“opinion,” in EU-speak) of Advocate General* Melchior Wathelet had suggested that the CJEU rule that ISDS is consistent with EU law.

As you may recall from the Trans-Pacific Partnership negotiations, ISDS is private arbitration of investment disputes between governments and foreign investors. Completely untethered from precedent and with no appeal, arbiters decide if a government has “expropriated” an investment, complied with its duties under a bilateral investment treaty (BIT) or “trade agreement” such as NAFTA, while these establishing mechanisms place no requirements on the investor. The imbalance of requirements under ISDS as well as its actual procedures present numerous opportunities for corporate abuse and, as Professor Susan Sell laid out in her guest post here in 2015, there is no shortage of examples of such abuse.

In Achmea, the Dutch insurer Achmea B.V. took the Slovak government to arbitration under the Dutch-Slovak bilateral investment treaty after the government decided to reverse liberalization of its health care system, ultimately deciding to create a single national health insurance program. The arbitrators ruled in favor of Achmea and awarded € 22.1 million to the company Three other cases were filed against the Slovak Republic’s action, including a second case from Achmea B.V. (Achmea II), but their respective tribunals all ruled they did not have jurisdiction. In Achmea, the government sought annulment of the award first from the Higher Regional Court of Frankfurt, which ruled against it, and then from the German Federal Court of Justice, which referred the case to the CJEU for a ruling on the relevant EU law (this is standard procedure in EU law).

A number of EU Member States, as well as the European Commission, filed briefs in this case. According to Reuters, “The Czech Republic, Estonia, Greece, Spain, Italy, Cyprus, Latvia, Hungary, Poland, Romania and the European Commission submitted observations in support of Slovakia’s arguments.Germany, France, the Netherlands, Austria and Finland contended that such clauses were valid.”

The CJEU ruled, contrary to the Advocate General’s opinion, that ISDS tribunals are not part of the EU legal system, not national courts, and yet might be called on to apply EU law. Moreover, since no appeal is possible, there is nothing to ensure that EU law is applied properly by these tribunals. Given that EU law supersedes all national law, ISDS threatens to undermine the autonomy of EU law. Therefore, the Court ruled that ISDS is not compatible with EU law.

In the first instance, this ruling applies to bilateral investment treaties between two EU Member States. These BITs all involve former Communist states that started becoming EU members only in 2004. As Lucia Bizikova noted on the Kluwer Arbitration blog, all these new Member States signed BITs immediately after the fall of Communism, and the requirements placed on them were much more demanding than under EU investment law. As she puts it, Achmea is “finally bringing justice to the most recent members of the EU.” There are at present 196 intra-EU BITs, and ISDS has now been knocked out of all of them.

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Great new Tax Justice Network podcast on how “Bean Counters…Broke Capitalism”

Great new Tax Justice Network podcast on how “Bean Counters…Broke Capitalism”

The June 28 Taxcast is out with a focus on the Big Four accounting firms. Richard Brooks is the author of Bean Counters: The triumph of the accountants and how they broke capitalism (order here in the UK and here in the US) which documents accountants’ involvement in some of the world’s worst financial scandals, not least of which is the promotion of tax havens. The new segment also features U.S. investigative journalist James Henry and Tax Justice Network Chair John Christensen. Additional stories include fraud at the Trump Foundation and why infamous US tax haven Delaware is supporting a financial transparency bill.

You can find the podcast and further reading here. Enjoy!

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