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How Corporate Giveaways to Applebee’s, Sears, and Other Companies Suck the Lifeblood from Your Community

They promise jobs, but leave dilapidated schools and crumbling roads in their wake.
 
 
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You would barely know it from reading the mainstream press, but corporate subsidies given by state and local governments are big business — and getting bigger every day. Since the onset of the Great Recession, these giveaways have gotten completely out of control as locations desperate for investment throw more and more money at any project that promises to “create jobs.” That’s a false promise. What they mainly do is drain government coffers in a game of job creation musical chairs.

A growing trend

These subsidies come at a huge cost: about $70 billion per year,* enough to hire 1.4 million state and local government workers at $50,000 per year, or almost three times the total laid off since the beginning of the recession. On top of that, corporate giveaways screw up the economy in 3 ways:

  • They’re inefficient, directing investments into the wrong locations or the wrong industries, and thereby slow the country’s economic growth.
  • They boost inequality, since these subsidies flow from the average taxpayer to the rich.
  • They often support projects that poison the environment.

One sign that subsidies are out of control is that so many of the biggest incentive packages of the century have come in recent years. As Good Jobs First recently reported in its “Megadeals” report, “The number of such deals [above $75 million in subsidies] and their costs are rising: since 2008, the average frequency of megadeals per year has doubled (compared to the previous decade) and their aggregate annual cost has roughly doubled as well, averaging around $5 billion.” Clearly the trend is growing.

The same conclusion jumps out at you even more when you compare our top 25 subsidies (calculated from “Megadeals”) with the top 25 in the European Union. While European governments compete for investment just like U.S. states do, EU rules limit what they can do. This prevents races to the bottom in the form of investment bidding wars. Thus, EU governments provide much smaller subsidies than U.S. state and local governments do, even for the same company.

Accountability and transparency

The EU’s rules say that if one country, say, France, wants to give a subsidy, it has to notify the European Commission – providing great transparency – and receive Commission verification that it’s following the rules. The U.S., on the other hand, has a mixed record on subsidy transparency —some states are very good, while others have minimal reporting (local subsidies are virtually unreported on). In the EU, there are also limits on the size of the subsidies. Rich regions like London or Paris cannot give any location subsidy; the poorest areas of the EU, which are located mainly in the former Communist countries, can give at most 50 percent of the cost of the investment, a figure that is frequently topped in the U.S. Other limits make it next to impossible for really large projects (think automobile assembly plants or silicon wafer fabrication facilities) to receive even 20 percent of the investment.

Let’s take a company called Global Foundries as an example. In 2006, it announced that it would build a chip plant in Malta, New York, a small town near Albany, where it received at least $1.1 billion in subsidies (present value), or 35 percent of the cost of the investment. Global Foundries also has built three facilities in Dresden, in the former East Germany, the first of which was subject to looser pre-2002 rules. It received the largest subsidy in the European Union since 2000, €545 million (about $736 million at €1=$1.35), or 22.67 percent of the investment. But look at what has happened under the new rules: The two newer plants, in 2007 and 2011, both received less than 12 percent in subsidies. The newest one only received about $285 million in subsidies, still big enough to be the sixth largest package in the EU since 2000.

Same company, very different outcomes: The rules make the difference.

Where would these packages fit in the U.S. top 25 list? Number six in the European Union would not make the top 25 list in the U.S. since 2000. Oh, and number one in the European Union would only be number ten on the U.S. list.

To put it another way, in 2010-2012, just three years, forty-two projects in the U.S. received at least $100 million in subsidies. In the European Union, only four did. In fact, the European Union only has 24 $100+ million packages in the entire 2001-2012 period!

Why doesn’t the U.S. have such rules? The main reason is that the Constitution gives the states a lot of fiscal autonomy. The only serious attempt to limit state subsidies as violations of the Constitution’s Commerce Clause, Cuno v. Daimler-Chrysler, was shot down by the Supreme Court in 2006.

How to stop this train wreck

What should be done? First of all, we need more transparency. According to Good Jobs First, online disclosure of individual recipients has spread from 23 states as recently as 2007 to 46 plus the District of Columbia today. But often this is incomplete or only covers a few programs, and local subsidies have very little disclosure at all. We need to aim at EU levels of transparency.

Second, the money from corporate giveaways should be redirected to education and infrastructure, policies that benefit businesses generally as well as the entire population. When California got rid of tax increment financing last year, it was able to recapture a billion dollars a year for education.  Instead, since the start of the recession, state after state has made sharp cuts to these very areas, in addition to substantial tuition hikes at many state universities. This is doubly short-sighted: it weakens the very factors that make a state or locality attractive to investment in the first place, and the state/local economic development subsidies largely cancel each other out with little net effect on the overall location of investment in the country.

Third, we need to outlaw job piracy, where one state gives subsidies to move an existing operation. This happens all the time on the Kansas/Missouri border, where the two states give away tens of millions of dollars to move companies like Applebee’s five or ten miles within the Kansas City metropolitan area. This is the most obviously destructive kind of subsidy, since no new jobs are created while governments give up part of their tax base in the process. Moreover, job piracy makes job blackmail possible, where a company like Sears threatens to move to another state unless it gets millions of dollars in subsidies. In Sears’ case, we are talking hundreds of millions in subsidies, twice!

Finally, it’s time to abolish subsidies to retail except in neighborhoods meeting very strict definitions of economic distress. A major study by St. Louis’ regional planning agency found that local governments gave $2 billion in subsidies to retail from 1990 to 2007. However, despite all the supposedly “new” jobs created with every new or refurbished mall, the area only had 5400 more retail jobs in 2007 than in 1990. Not only did they disappear during the recession, the 5400 extra jobs could be fully accounted for by the growth of personal income in the metropolitan area over the 17-year period. You could not ask for a better demonstration that it’s just musical chairs.

From the point of view of the country as a whole, then, these giveaways are simply a waste of money. State and local governments spend billions every year to shift the location of jobs, but their efforts cancel each other out, creating a game of musical chairs. However, changing the way the economic development game is played will require tremendous effort at the local, state, and federal government level.

*Louise Story’s excellent series in the New York Times gives an estimate of $80 billion a year. As I discuss at Middle Class Political Economist, 5/8 of this consists of sales tax breaks which few economists would consider to be subsidies (see also David Cay Johnston’s summary here). For now, I think $70 billion remains the best number, but I intend to revisit that by reanalyzing her programs database in the near future.

 

Thomas is Professor of Political Science, University of Missouri-St. Louis. Author of Competing for Capital: Europe and North America in a Global Era (Georgetown University Press, 2000) and Investment Incentives and the Global Competition for Capital (Palgrave, 2011).