Leigh McIlvaine (@Leigh M.) of Good Jobs First alerted me to this article on what Tesla Motors wants in incentives to land its $5 billion Gigafactory: $500 million. This massive 6500 worker facility will produce the next generation of batteries in order to introduce a less expensive line of cars in 2017, the Tesla Model 3. This would be a more affordable vehicle than the widely praised Model S, which starts at $69,900.
I'm not joking about the praise: Consumer Reports, my go-to source for product testing due to the fact that it does not accept ads and thus has complete independence, gave the Model S its best-ever score of 99 out of 100 when it tested the car earlier this year. It also leads the magazine's subscriber survey of customer satisfaction, with 99% of owners saying they would buy the car again. This is a vehicle, and a company, that is generating some serious excitement.
It's no surprise that the Gigafactory is generating serious excitement, too. 6500 jobs, a $5 billion investment, and cutting-edge technology is a heady mix for an economic development official. San Antonio, where Toyota makes pickup trucks, jumped into the auction quickly, offering "almost $800 million in incentives." Although Tesla has broken ground at a location near Reno, Nevada, last week CEO Elon Musk announced plans to break ground at one or two other sites as well. The company clearly considers speed to be of the essence.
It's unclear exactly what the company wants financially, and Tesla did not respond to my request for an interview to seek clarification of some important points. To be specific, does it want that $500 million in cash, in the form of property tax breaks over some number of years, land and infrastructure, or what? Most importantly, is Tesla's goal speed plus $500 million, or speed plus the highest bid? The company has sent mixed signals on this question.
As Forbes wrote, "Last week, Musk said that Tesla wanted to make sure a package was right for the winning state, as well as for Tesla." In the article's very next sentence, however, Tesla VP for communications and marketing, Simon Sproule, said, "Any publicly traded company has a fiduciary responsibility to get the best deal for its investment." Musk's comment seems to imply that $500 million is all the company wants. By contrast, fiduciary responsibility has often been used to justify a company going after the maximum incentives possible. Forbes quotes the business editor of the San Antonio Express-News that it was hard to tell if Tesla is conducting "a search (or) a shakedown."
Sproule disputed the shakedown thesis, despite invoking "fiduciary responsibility." How should we think about this project?
On the one hand, we could take Musk's comments as meaning that the company wants $500 million, no more, no less. Given that he expressed it as a percentage of the investment, my intuition is that we should assume that means $500 million in cash or cash equivalents like free land (my guess is that San Antonio's "$800 million" was mainly tax breaks, which would have a lower present value). If that's true, Sproule's contention that the incentive is not really so expensive is actually true in a comparative sense. A 10% aid intensity (subsidy/investment) would be the second-lowest for a large automotive facility in the modern history of megadeals. It would even probably be legal in the European Union under its Regional Aid Guidelines, if it were located in one of the EU's poorer regions. Moreover, the cost per job would be $76,923, substantially below the $100,000-$150,000 level common for most U.S. automobile assembly plants.
Of course, cost alone doesn't make a deal a good one. In particular, if Tesla wants its incentives up front, there is a substantial risk that the project won't ultimately produce 6500 jobs, or that changes in the market could even lead to the Gigafactory closing. New Mexico lawmakers have certainly recognized the importance of this vis-a-vis Tesla. In my email to Tesla, I asked what taxpayer protections, like clawbacks, the company is prepared to accept. Alas, no response, but I will update if I do hear back from Tesla.
On the other hand, if $500 million really is just meant as the minimum acceptable opening bid, all bets are off for saying how (comparatively) good a deal it might be.
Once again, we are confronting the issue of information asymmetry: government officials have less information about what the company really wants than the company has about the various governments, and of course its own intentions. This is a major source of bargaining power for companies shopping around for an investment location. If Musk really means that Tesla will voluntarily limit the incentives it requires, that would be a refreshing change from the typical bidding wars we have seen in so many industries. Or, it could just be business as usual, with the highest bid (adjusted for cost structure at the different locations) winning. We just don't know, but the decision is expected by the end of the year.
Boeing is America's Most Wanted Corporation in two senses. First, now that the Machinists' union in Washington state has refused the company's contract demands, it is shopping production (h/t Pacific Northwest Inlander) of the 777x aircraft nationwide and lots of states are making offers for it. Second, it is emblematic of everything the 1% is doing to destroy the middle class: despite being highly profitable, it pays virtually no taxes; it accepts billions of dollars in government subsidies; it is trying to eliminate pensions and cut salaries for its highly skilled workforce; and it is trying to move production away from its unionized workforce, something it has already accomplished in part.
The first part of the story is nauseating enough. With Boeing already threatening to leave its home in Washington state if it didn't get what it wanted from both the state and the union, Democratic governor Jay Inslee called a special session of the state legislature that took three days to approve subsidies for Boeing. The incentive package is the largest ever in U.S. history for a single company, according to Greg LeRoy of Good Jobs First, an astounding $8.7 billion over 16 years (2025-2040). By my own back-of-the-envelope calculations, this looks to be the largest-ever U.S. subsidy on a present value basis as well as in nominal terms.
By the way, this represents a huge jump from Boeing's current tax break package for the 787 Dreamliner, passed in 2003, which was $160 million a year for 20 years ($2.0 billion in present value, by my calculations). Under the new package, this would more than triple to $543 million annually.
Also of note, the World Trade Organization ruled that the 2003 subsidies are illegal under WTO rules, a finding that was upheld by the WTO's Appellate Body in April 2012. While the U.S. government has eliminated some of the illegal subsidies provided by NASA and the Defense Department, the state and local subsidies found to be in violation of the WTO's Agreement on Subsidies and Countervailing Measures have not been eliminated. As noted in the last source, the European Union was seeking permission from the WTO to apply $12 billion worth of sanctions on U.S. exports. The EU will certainly file a new complaint against whatever state and local subsidies Boeing ultimately receives for the 777x, and on the basis of the last case there is every reason to think the EU would again prevail.
But just days after the legislature approved the subsidy, the union rejected the proposed contract by a 2-1 margin. Though the company described it as a "contract extension," there were major changes involved, including replacing the defined benefit pension with a 401(k) (continuing an economy-wide trend contributing to the coming middle-class retirement crisis), increased health care costs for employees, a lower wage structure for new hires, and smaller raises than in the current contract, all in exchange for a one-time bonus of $10,000 for current workers.
After the contract offer rejection, Boeing announced that it would entertain offers from 15 states that might be interested, including Washington state. The proposals were due in less than a month, with the company imposing a December 10 deadline on prospective suitors. As Good Jobs First reported in its January 2013 publication, The Job-Creation Shell Game, we see a two-sided use of the corporate mobility conferred by a location decision to (as I like to describe it) extract economic rents (superprofits) from governments: Job blackmail directed at Washington state and the Machinists' union; combined with an offer to the other 14 states to engage in job piracy by subsidizing the firm's potential relocation. This is an exercise in raw corporate power.
And to what end? We have already seen the details on how Boeing wants to terminate true pensions, reduce other worker benefits, and create a two-tier employment structure. As Greg LeRoy highlights in a recent post, Citizens for Tax Justice has shown that over the decade 2003-2012, Boeing made $35 billion in pre-tax U.S. profits, yet paid negative tax to Washington state of $96 million and a whopping $1.8 billion in federal income tax refunds over that same period! To put the new deal in perspective, LeRoy points out that should it eventually be approved, the $543 million annual subsidy would be "more than twice what the state provides to the University of Washington." So not only are the labor provisions a direct assault on middle class living standards and retirement security, the opportunity cost of the deal will no doubt further imperil public education in Washington at all levels, undermining one of the very factors that gives the state a trained workforce that is attractive to employers in the first place.
Boeing has already shown its willingness to move work away from Washington state, when it built a 787 Dreamliner assembly line in South Carolina despite the billions in subsidies it received from Washington. However, the South Carolina site has been plagued with production problems, which some see as strengthening the bargaining position of the Machinists in Washington.
Personally, I tend to believe that the Machinists do have a strong negotiating position. It is hard to imagine other states coming up with some 20,000 highly skilled workers to take on the job. While I think it is possible that part of the production could be moved away from Washington state, for instance the wing assembly only, I think the company will have to leave most of the work in Washington. Moreover, Boeing only gets the $8.7 billion in tax breaks if it produces the entire project there. Missouri, by contrast, has only offered $1.7 billion in subsidies to attract the facility, which I consider to be unlikely to be successful because Boeing workers in St. Louis are also Machinist union members. But really, there is no way to tell for sure whether the company's desire to weaken the union will overwhelm what looks like a compelling case for staying in Washington.
We do know, however, that Boeing is displaying everything that is wrong with corporate America today. As I wrote recently, there needs to be a federal law against states providing subsidies to move existing jobs out of another state. Banning job piracy would also weaken companies' ability to engage in job blackmail by reducing the economic viability of actually relocating to another state. With Boeing's auction sure to set a new standard in the annals of job blackmail, the sooner we can get action on relocation subsidies, the better.
How Corporate Giveaways to Applebee’s, Sears, and Other Companies Suck the Lifeblood from Your Community
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.
Everyone "knows" that the corporate income tax is a mess. Ask any company. They pay too much in corporate income tax, face rates higher than in any other OECD country, and are just following the law when they use tax havens to keep profits eternally deferred from taxation and to perform general sleight-of-hand.
Don't believe a word of it. While some economists believe we shouldn't tax corporations at all, the corporate income tax (CIT) is a necessary backstop to the personal income tax (PIT). With no CIT or a rate lower than the PIT, individuals have an incentive to incorporate their economic activities so they aren't taxed on them, or are taxed less. Needless to say, this is something an average wage or salary worker would not have the ability to do. This is another area where we have one tax law for the 1%, and different rules for the rest of us.
So what should we do? The answers are simple, which is not to say that achieving them will be simple. Corporate interests hold a lot of political sway right now, and overcoming them will be anything but easy.
1. End the usefulness of tax havens for secrecy by instituting "publish what you pay." Currently, companies can hide all sorts of transactions because they are only required to publish "consolidated" accounts of their global operations. Thus, Starbucks reports losses on its British tax statements while telling investors how profitable it is in Britain. Apple can get away with leaving its subsidiaries in Luxembourg, the Netherlands, and the British Virgin Islands off its annual report because it classifies them as not "significant." By forcing companies to un-consolidate their reports, we would know where their employees were, where their their sales (both source and destination of products and services) were, where they declared their profits and paid their taxes, etc. Part of the beauty of "publish what you pay" is that it doesn't require the cooperation of the tax havens to obtain the information.
2. End the usefulness of tax havens for avoidance by enacting unitary taxation. Upheld by the U.S. Supreme Court in 1983, unitary taxation treats multinational corporations the same way many states already tax the income of multistate corporations: considering all of a company's subsidiaries as a single entity, and using a formula to determine what portion of its global profits are taxable in your jurisdiction. The most common factors to put in the formula are sales, employment, and assets. Like "publish what you pay," this has the advantage of not requiring the cooperation of the tax havens, which have largely shown themselves to be minimally cooperative at best with global efforts to combat tax evasion and tax avoidance.
A big roadblock is the Organization for Economic Cooperation and Development (OECD), which promotes allegedly "arm's length" transfer prices that companies long ago learned to run rings around. Via the Tax Justice Network, Bloomberg reports that this allows U.S. and European companies to save over $100 billion a year on their taxes. As an indication of how uncertain lost tax estimates are, note on the one hand that this is significantly less than the $189 billion TJN estimates is lost to illegal tax evasion, but at the same time Bloomberg reports that the European Union says it loses EUR 1 trillion ($1.3 trillion) annually to tax avoidance and evasion, far in excess of these other two estimates. We're talking big money here. The OECD has begun a project called Base Erosion and Profit Shifting (BEPS), but there is widespread doubt about how much progress will come out of this. Bloomberg notes a major revolving door where OECD tax officials leave to work for tax avoidance consultants, and documents how many OECD conferences on tax are underwritten by the very enablers of tax avoidance in the accounting and legal professions. Unitary taxation would make the BEPS project unnecessary, but the OECD has long opposed unitary taxation.
3. In the United States, end the deferral of taxes until profits are repatriated. In other words, require companies to pay tax in the year the money is earned, rather than when it comes back home years later, if ever. Tax deferred is tax reduced, at the very least. To show just how difficult this will be politically, Robert Gilpin of Princeton University recommended this in his book U.S. Power and the Multinational Corporation--all the way back in 1975. (By the way, this book was quite influential on my thinking in graduate school and ever since.) Even now, U.S. multinationals are trying to get a "repatriation holiday" that would allow them to bring back $1 trillion in profits at a nominal tax rate, even though the 2004 repatriation holiday was a dud in terms of investment and job creation.
4. Don't cut the corporate income tax rate. There is a big difference between the headline rate of 35%, which is indeed tops in the OECD, and the effective rate of 12.1%, one of the lowest in the OECD. In fact, there is a significant economics literature showing that large countries can charge higher taxes than smaller ones do without suffering for it, just like the federal government can charge a much higher CIT than state governments can. There is no need for the U.S. to content itself with revenue neutral combinations of rate cuts and base broadening when government will actually put the money to work, something companies have avoided doing ever since the beginning of the recession which, need I remind you, began over five years ago.
While the road to truly fixing corporate income tax will not be easy, we seem to have reached a promising juncture in the battle with government initiatives like the Foreign Accounts Tax Compliance Act (FATCA) and the massive International Consortium of Investigative Journalists (ICIJ) tax haven investigations. Last week (via markthshark at Daily Kos), the U.S., British, and Australian tax agencies reported that they had received an even larger data leak than ICIJ had, and that one was gigantic. We certainly can't count our chickens yet; instead, we need to redouble our efforts to force governments to stamp out tax abuse by corporations and the wealthy.
Austerity Brings Unemployment to New Highs in Spain and France - So Why Do Pols Keep Pushing It in the U.S.?
As if there were not already abundant proof of the failure of austerity in the eurozone, the BBC reports that both Spain and France have hit new unemployment milestones.
In Spain, unemployment has jumped from February's 26.3% to a first-quarter rate of 27.2% (implying an even higher figure for March). In March 2012, it was "only" 24.1% (see source in table below).
In France, there are now 3.2 million unemployed, more than at any time since the country began keeping records in 1996. Complete EU unemployment data for March should be released in early May.
For a fuller picture of the continuing deterioration of the situation in the European Union and the eurozone, the unemployment rates tell a stark story.
Date Eurozone Spain Greece Portugal Ireland UK USA EU-27
3/2012 10.8% 24.1% 21.7% 15.3% 14.5% 8.2% 8.2% 10.2%
2/2013 12.0% 26.3% 26.4% 17.5% 14.2% 7.7% 7.7% 10.9%
Note: Greece and UK figures are for January 2012 and December 2012, rather than March 2012 and February 2013
Sources: Eurostat, 2 May 2012, for March 2012; Eurostat, 2 April 2013, for February 2013; Bureau of Labor Statistics for U.S.
Moreover, it is important to note that despite drastic budget-slashing, in none of the EU countries did debt come under control, even for Ireland and the UK, which have managed some slight growth over the 11-month period. Using this handy BBC interactive tool, we can see that Spain's debt/GDP ratio increased from 69.3% in 2011 to 84.2% in 2012 (Wait, that's under 90%! What's happening?), Greece declined from 170.3% to 156.9%, Portugal increased from 108.3% to 123.6%, Ireland increased from 106.4% to 117.6%, and the U.K. increased from 85.5% to 90%. In fact, just six short years earlier, Ireland had a debt/GDP ratio of just 24.6%. The Celtic Tiger, favorite of conservatives everywhere, has truly crashed and burned.
Given the Spanish and French figures, look for bad news for EU unemployment next week. Despite the continuing austerity fail, Republicans and some Democrats continue to push for deficit cutting here, and will maintain a steady drumbeat. But, like Reinhart and Rogoff, they all deserve the Colbert treatment.