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NYT: $80 Billion in State and Local Subsidies Annually (Updated)

by Kenneth Thomas

NYT: $80 Billion in State and Local Subsidies Annually (Updated)

In today’s New York Times, Louise Story begins a series, “The United States of Subsidies,” ten months in the making, with a story focusing on General Motors closures, the border war for investments between Kansas and Missouri in the Kansas City metropolitan area, and a new estimate of state and local incentives to business, $80 billion a year. Backing this up, and no doubt contributing to the long lead time, is a database of 150,000 state and local subsidy deals going back at least 20 years. Given its appearance in the country’s newspaper of record, the series is sure to elevate the issue of state and local subsidies to a prominence it has never known before.

Since my 2011 estimate was $70 billion per year in total subsidies to business, and $46.8 billion in location incentives, the Times figure represents a substantial increase if accurate. Ever since David Cay Johnston reviewed my book when it first came out, he has argued that my $70 billion figure was probably an underestimate, and the new report would seem to back him up. Nevertheless, I will certainly be spending some time analyzing the database to see just what is in it. According to the story, $18 billion per year is accounted for by corporate income tax breaks, a whopping $52 billion by “sales tax relief,” and the other $10 billion unspecified but most likely property tax breaks. I have some questions about these numbers, however.\

First, it seems to me that property tax breaks likely exceed $10 billion a year. When California axed tax increment financing earlier this year, it was generating $8 billion in tax increment all by itself. Although California cities were by far the biggest user of TIF, municipalities in almost every other state still use it, as well as myriads of property tax abatements offered at the local level. Story is well aware of this. She writes:

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards.

Thousands of local governments give subsidies, and these are overwhelmingly related to property tax. In my most recent estimate, there were several states in Missouriwhich local subsidies exceeded state subsidies, including Missouri and Michigan, so my default assumption was that they were equal if I did not have adequate information on local incentives, as is usually the case due to the huge number of governments involved.

On the other hand, there is some chance that the $52 billion in sales tax subsidies could be an overestimate; it all depends on what The Times includes in this category. My own thinking about sales tax has changed since I first created the subsidy estimates in my 2000 book, Competing for Capital. My estimate for Minnesota, for example, included many hundreds of millions per year in sales tax exemptions for business services. Now, I tend to think of these tax breaks as methods to avoid tax cascading (paying the sales tax on a good more than once, by taxing the full value of every intermediate good) and not a subsidy at all. They have been removed from my estimate of total subsidies in my more recent work, which did not prevent my estimate for 2005 (published in 2011) from being $20 billion higher than that for 1995 (published in 2000). I do still count some sales tax breaks as subsidies, particularly those on plant and equipment, which apply to the initial investment rather than ongoing operations.

While this may seem like a sterile academic argument, in fact it makes a big difference whether incentives are $50 billion a year or $80 billion a year, approximately 600,000 public sector jobs paying $50,000 annually. The larger the true figure, the more pressing is the case for subsidy reform. The inauguration of this new series of articles, plus the database, will help us put a better number on the value, a critical first step toward galvanizing public opinion to force politicians to rein in subsidies.

I will be commenting more on this series over the course of this week.

UPDATE: Text corrected to reflect that although I had specific data for local incentives in Michigan, the total of local incentives was somewhat lower than that of state incentives. In addition, it is clearly true that TIF in California exceeded state subsidies, so obviously so did the total of local subsidies. However, I did not know this at the time I made the estimate.

cross posted with Middle Class Political Economist

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McMahon’s WWE has taken $36.7 million in Connecticut subsidies

 by Kenneth Thomas

McMahon’s WWE has taken $36.7 million in Connecticut subsidies

U.S. Senate candidate Linda McMahon’s World Wrestling Entertainment (WWE) has received $36.7 million in Connecticut film tax credits in 20 separate deals since 2006, reports CTPost.com (thanks to Karin Richmond on the LinkedIn Public Incentives Forum). As in many states, what historically began as tax credits for motion pictures are now available for TV and online media as well, and it is in these two latter categories that the WWE received its subsidies. Also as is typical of other states, the Connecticut program has no job creation requirements, but is calculated simply as a percentage of “qualified expenditures,” with the rate being 30% in Connecticut. In fact, in WWE’s case, the company had laid off about 60 workers in 2009, yet continued to receive the credits.
 
Moreover, according to the Sacramento Bee blog, “Cageside Seats,” WWE has so little state tax liability that it sells the vast majority of its tax credits via a broker, including 93% of the tax credits it earned in 2007-9. While selling tax credits is perfectly legal (in David Cay Johnston’s memorable phrase), it also increases the subsidies that states give, because they wind up giving subsidies to companies that did nothing to qualify for them under any subsidy program.


Nor is WWE alone in its sale of Connecticut tax credits. According to a 2010 article at the CT Post, “of the 80 productions that received credits, only nine applied them to state taxes.” The rest, presumably, sold their credits via brokers. The article also states that the national tax credit market had reached $500 million annually in 2010, from $50 million per year in 2005.
 
Robert Tannenwald of the Center for Budget and Policy Priorities (CBPP) has analyzed state film subsidies and concluded they provide very little bang for the buck. This should not be surprising. Unlike most subsidies, film/TV/digital media subsidies do not go to an investment, but to operating costs. There is nothing left after the crew packs up. Tannenwald points out that even the early adopters of film subsidies (New Mexico and Louisiana), which appeared to have built up some in-state film capacity, are now finding it difficult to maintain their position as the number of states offering such incentives skyrocketed to over 40 by 2010. The increased competition has led states to bid up their reimbursement percentages, to over 40% in Alaska and Michigan. Moreover, it’s hard to have job creation requirements for jobs that are inherently temporary.
 
Tannenwald estimates that the 43 states that gave film tax credits in fiscal 2010 spent $1.5 billion. This is enough to hire back 30,000 state workers laid off since the recession began, at an average of $50,000 per year in salary and benefits.
 
Although not members of the Forbes 400, Linda and Vince McMahon follow their example in collecting millions in subsidies from government. This is particularly hypocritical since as a Senate candidate McMahon has tried to portray herself as an opponent of “corporate welfare.”
 
Besides having little bang for the buck, film subsidy programs have been rocked by scandal in both Iowa and Louisiana, where the film commissioner was convicted of bribery to accept inflated expense submissions. The Iowa Film Office director was convicted of felonious misconduct, but acquitted on eight other felony charges. A number of credit claimants in Iowa were convicted of felonies as well in other trials.
 
As I have argued before, investment incentives generally constitute a race to the bottom. However, film and related media subsidies have shown us a high-speed race to the bottom for amazingly little economic benefit. While a few states have cut back on the subsidies due to the recession (and Iowa suspended its program for three years due to the scandal), only federal controls can truly address this problem. My research in Canada (paywalled) found the provinces there similarly unable to control their film subsidy wars. At this point, only only transparency in program costs, plus information on the low benefits and frequent scandals, is the only way to generate political pressure for reform.

http://middleclasspoliticaleconomist.blogspot.com/2012/10/mcmahons-wwe-has-taken-367-million-in.html

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