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The Great American Job Scam

Corporations get huge tax breaks from local and state governments, even when they rarely deliver the jobs and tax revenues that they promise.
 
 
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We increasingly live in a Wal-Mart America, where the hours are long, wages low, and benefits non-existent. Where have all the good jobs gone? The debate over jobs has for the most part been obscured by partisan rhetoric, corporate spin and media hype. Screaming headlines about outsourcing jostle those of corporate fraud. But in the end we're none the wiser about how to create a better future for ourselves and our children.

Greg LeRoy's new book, " The Great American Job Scam: Corporate Tax Dodging and the Myth of Job Creation," offers at least part of the answer in exposing a system that subsidizes corporate greed at the expense of the taxpayer. Today, states, counties, and cities cannibalize their own communities in the name of "attracting business," which entails competing with one another to waste vast amounts of precious taxpayer dollars in the form of corporate subsidies. As LeRoy demonstrates in his book, these subsidies are not just "unfair" but also entirely useless. Companies routinely pocket the money -- all $50 billion of it each year -- without delivering either the promised jobs or tax revenues.

LeRoy spoke to AlterNet from his office in Washington DC.

Lakshmi: So what is the "great American job scam"?

Greg LeRoy: It's an intentionally rigged system that enables companies to get huge tax breaks and other taxpayer subsidies by promising good jobs and higher tax revenues -- and then allowing them to fail to deliver and suffer no meaningful consequences.

And this is a system that costs the American tax payers $50 billion a year?

Right, that's the estimated total spending by states and cities.

One of the points you make in the book is that it is very hard to get this data, right? There is no disclosure, with these corporate deals being negotiated behind closed doors. So the very heart of your argument -- that corporations don't deliver on the increased tax revenues, increased jobs, etc that they promise in return for these tax breaks -- is obscured by this lack of disclosure.

People who develop these estimates at the state level are dealing with broad aggregate numbers. It would tell you nothing about any specific company, whether it did or did not create jobs, did or did not generate tax revenue. In most states, we are completely in the dark.

Having said that, 12 states now have some form of annual company-specific disclosure. We're very excited because just recently Illinois, just began reporting data. There are four states now that disclose some of their data on the web and we think Illinois is the best.

Whose interest does this secrecy serve? It obviously serves the interest of the corporations, but it's surprising that state governments have not pushed for more disclosure.

It obviously serves lots of peoples' self-interest to hide what's going on: the companies who get the big tax breaks and don't want people to look carefully at the outcomes; the politicians who often frankly know this is bad public policy and don't want to own up to it. Often the effects of these tax breaks play out over many years. So you have one governor hand off budget potholes to the next governor and so on. So there's lots of buck-passing going on. There's lots of self-interest in these things being hidden.

One of the most striking things in your book is this ridiculously lopsided power relationship between public officials and corporations. The politicians are almost like members of a harem vying for the king's attention, or in this case, a company's favor.

A lot of the scams that you describe -- as in extorting these huge subsidies without delivering any kind of return -- comes from the fact that different states are competing with each other to land a corporate deal. Have we always had this war among the states, almost a kind of mutual and assured destruction?

That's really the nub issue. It's the power dynamic both among states and companies and among suburbs and companies -- because this harem/king dynamic, as you put it, plays out at the regional level as well as at the multi-state level.

No, it was not always like this, and I tried to sketch the major kind of milestones along the way where I think the dams really broke. There's the birth of a site location consulting industry we got with Fantus, and its growth in the '50s and '60s is part of the story. The secretive consulting industry hides in the shadows and specializes in playing states and cities against each other on behalf of the companies it represents. By the '70s, we had done this thousands of times.

Then there's the rise of the whole business climatology industry as exemplified by the studies -- especially in the '70s and early '80s by the Grant Thornton Firm for the state manufacturers associations -- which offered this highly politicized interpretation of jobs and tax data. These studies basically said to the North and to the Midwest: "You've got to be more like the South. We will judge you based on how willing you are to give up your tax base and help us suppress wages."

Another big watershed moment was the arrival of the Japanese transplants -- the auto assembly plants that started arriving early- and mid-'80s. Despite the fact that the Japanese automakers had to set up these plants because they were fighting off protectionist legislation in the U.S. Congress, they still got eight- and nine-figure subsidy packages by playing states against each other -- and all with the assistance, frankly, of the American site location consulting industry.

So I think all those are big watershed moments that kept upping the ante. So today the average state has 30 different ways it gives away money in the name of jobs. It does a very bad job of accounting for outcomes and monitoring cost effectiveness. And the debate in most state legislatures is not about fixing this problem or reducing subsidies but over enacting even more handouts.

Along the way though there's also been a huge ideological transformation of American culture, beginning with the Reagan era. And according to this rightwing, pro-corporate worldview, attracting business is an unadulterated good. As in anything you do bring a corporation into your city, district, state, or your country, is an absolute good. How much has the broader political transformation been a part of making this kind of corporate extortion easier and more legitimate?

I think you are exactly right. The broader rise of conservatism goes hand-in-glove with this give-away subsidy problem. Frankly, I've seen very little scholarship looking at the sort of political economy of job subsidies. It's a woefully understudied subject. Anecdotally, I've heard people many times suggest that the way governors allocate their economic development dollars amounts to political engineering.

They use these dollars to cut ribbons with mayors and county executives of their own party; use the programs for partisan benefit; grow new jobs in areas that are more favorable to them politically. I've never seen that studied systematically -- so there are a couple of great dissertations waiting for somebody to write here.

Right at the outset, in the introduction, you write: "At the core of this scandal are corrupted definitions of 'competition' that obscure cause and effect." What do you mean by that?

The corporations have transformed the definition of competing for economic development -- so it's now defined as which state or which suburb will give away the most money to a company.

But here's the reality: because state and local taxes are such a small, small cost factor to the average company -- less than 1 percent for the average company after they deduct them on their federal income taxes -- these taxes don't determine where companies expand or locate. If a company were to pay attention to 0.8 percent of its cost structure and ignore the other 99.2 percent, that company would not be around very long.

So what's really going on in this rigged system is that companies are getting paid to do exactly what they would have otherwise done. All the while that governments are posing as competitors, it's really a false competition, a rigged competition.

Let me clarify that. So what you're saying that a company's decision on where to locate its operations actually has nothing to do with these tax subsidies. And therefore, if they decided to set up shop in Location A, they would have done it anyway, irrespective of whether they received handouts or not.

Exactly right. It's why believe that we need a different form of competition that doesn't have to do with how much of your tax base you'll give away. It should be about how good your public systems are -- public systems that are available to all employers. That is, how good is your infrastructure? How good is your workforce development system? How good are your public schools? How good is your quality of life, your cultural amenities and your open spaces? It's not just about being "fair." Quite frankly, that's the way a lot of employers, including the best employers, determine where they want to invest.

So it's a really twisted dance that local officials often have to dance. In one breath, they're talking about all these giveaways which allow companies to dodge paying their fair share for these public goods that I just talked about. On the other hand, they have to brag about how good their public goods are because they know that's what really matters to a lot of good employers.

And most of these companies are basically being rewarded for doing what they are supposed to do anyway, which is, do business.

Exactly right. And they are getting rewarded in ways that don't really affect their bottom line -- actually, I'd argue, in ways that could hurt their bottom line because it's going to undermine the quality of life, the quality of the skills base, and the quality of the infrastructure.

One of the most interesting connections you make in the book is between this kind of economic competition and sprawl. So when local governments give huge incentives to retail stores like Wal-Mart, they're actually creating unsustainable development.

Yes, absolutely. It's not just the terrible things Wal-Mart does to wages and competition or the trade deficit. It's about cities being treated like they are disposable; and open space being treated like its disposable; and malls being treated like they are disposable.

Because many states allow job subsidies to go to retail companies like Wal-Mart, etc., we've got suburbs that are cutting each other's throats. They're robbing each other of shoppers in order to collect the incremental payment on sales tax. So we have this gross over-building of retail space in this country, far more than any of our major trading partners, far more than we had twenty, thirty years ago. Wal-Mart, as the biggest retail player, is the poster child for that trend.

It's terrible public policy because it moves lots of economic activity away from places that need it, that are already developed, and that have the infrastructure. It's an extremely inefficient and, as you put it, unsustainable, both ecologically and from a tax point of view. We can't keep thinning out and expecting the taxpayer to support ever more miles of roads, ever more miles of sewer and water lines, ever more under-utilized public schools.

It just doesn't work, and at some point things snap. So you see a number of big cities -- Detroit is a pretty good example, or Philadelphia -- struggling with their tax base. These regions are so gutted that they're really struggling.

When it comes to jobs, a lot of the conversation in the media is centered around outsourcing. You don't focus on that very much at all. Why is that?

We have one: the case of Sykes Enterprise, the call center company that is included in Chapter One. That story has not been pieced together elsewhere, and we think it's one of the breaking news hooks of the book.

But you're right. We didn't focus a lot on outsourcing. Here's the reason. It goes back to the disclosure problem. Certainly there are lists of companies out there that outsource -- some of them are the biggest IT, engineering and manufacturing companies that we know about. The Fortune 100 so to speak. But because those companies are so huge, the quality of disclosure about economic development subsidies that the companies have gotten is fragmentary. It would be almost as bad as finding a needle in a haystack to try and knit together the story of a particular job that used to be in upstate New York and got a tax break and is now off-shore. Linking those specific stories is virtually impossible in those cases because of the poor quality of disclosure of subsidies.

And there are so many things going on with jobs that aren't moving overseas. We wanted to focus on the fact that taxpayers are subsidizing fast-food joint and poverty-wage big-box retail jobs and other kind of low-end, dead-end service sector jobs -- and all this at a time when some of the best jobs in the country, like manufacturing jobs, are either being automated out of existence, or going offshore or being lost because of bad trade policies.

In manufacturing, for instance, we focus on this one particular kind of tax break called "single sales factor" that a lot of state manufacturers associations have been touting as kind of a panacea. But if you look at the track record of the states that have adopted this huge tax break, they're doing no better than the country as a whole.

The issue affecting manufacturing jobs generally is globalization. There are a certain number of manufacturing jobs that are very unlikely to go offshore because they are tied to markets here -- printing things that are time sensitive, business-sector related things and so on. Other things are very likely to go offshore -- things that are labor intensive, more commoditized, and technologically less complicated. And we need to grapple with those realities. We have to save what we can, acknowledge what we can't save, and try to find good ways to employ people that are affected by those events. But subsidizing Wal-Mart or fast food joints isn't the answer to dislocated manufacturing workers.

Another interesting thing about the Sykes story is that these call center jobs that the politicians paid so much to attract weren't even worth having.

Yes, the call center jobs often do not pay very well, and often suffer lots of erratic ups and downs in terms of layoffs and rehiring. So it's really testimony to what a company can do when it tries to be a big fish in a little pond. These call centers had impressive numbers of jobs. Some of them had five hundred or more people working in them, and in pretty small labor markets in rural areas where they were drawing a lot of people. To me, it makes those stories all the more tragic because the amount of subsidies that the localities gave was, for them a very huge sum in many cases. And I'm sure it left a bitter taste in a lot of people's mouths.

So what is the solution? You list a series of prescriptions at the end of the book. But what is the broader philosophy -- paradigm change, if you will -- that is required here?

One theme we come back to a lot -- especially when I train public officials -- is the idea of your own civic self-esteem or your own civic self-image. If you internalize the demeaning, degrading stereotypes that are peddled by the business climatologists and by the site location consultants -- if you think your community really is worthless -- then you've set yourself up to give away the store for a bad deal.

The idea is not to internalize those demeaning stereotypes. To believe that your community has real assets -- a good school system, a skilled labor force, valuable business linkages that other companies would like to link up to. When you've got some fundamentals that have real value for companies, then you can drive a smarter bargain. Then you can ask for job quality standards, for better wages and healthcare. You can put a clause back in the contracts so that if the company fails to deliver, taxpayers get their money back. And at the state level you can even demand disclosure -- as we now have in twelve states -- so that taxpayers can see every deal, every year, to measure the cost against the benefits.

I like to think that we're close to a tipping point on the disclosure debate. With twelve states now on line and some of them putting their information on the web, we think that disclosure of subsidies is going to become as mainstream as things like the disclosure of toxic emissions which has been federal law for a very long time as well under the Toxic Right to Know Law. We think it's approaching that level of acceptance and legitimacy.

None of the states that have adopted these rules have hurt their business climate. None of them are losing deals or losing businesses as a result of putting some sunshine on the process. I think they are making it easier for local officials to keep the bottom-feeders out of the public trough, so to speak. And I think they are making it easier for public officials to save their money for skills and infrastructure and things that really work.

And that actually creates better paying jobs in the future, right?

Skills and infrastructure have always been proven winners for creating good jobs. But now more than ever, it's an acute issue because of the looming baby boom generation retirements that will begin en masse -- as early as 2008 -- and because of the decrepit condition of many parts of the American infrastructure system, which have suffered because states and cities have had such budget crunches for so many years.

So either we are going to let our infrastructure fall apart and hurt everybody's productivity and we're going to ignore the massive loss of skilled labor resulting when the baby boom hits the exit doors. Or, we're going to massively redirect our money away from company giveaways into things that benefit all employers. It's the only way to cope with this very predictable train wreck.

Lakshmi Chaudhry is the former senior editor of AlterNet.