Every city of any size, and every state, has a government agency charged with “economic development.” Economic development is almost always a euphemism for luring new employers to the city or state.
A productive discussion about what a genuine effort to improve the local economy should and should not entail is considerably overdue. Such a re-examination remains unlikely, but here and there, investigations of current practices do remind us that not everything we call an “incentive” deserves the name.
Which brings us to Wisconsin, Scott Walker and Foxcomm. A report from the Brookings Institution recently described that embarrassing boondoggle:
In 2017, the state of Wisconsin agreed to provide $4 billion in state and local tax incentives to the electronics manufacturing giant Foxconn. In return, the Taiwan-based company promised to build a new manufacturing plant in the state for flat-screen television displays and the subsequent creation of 13,000 new jobs.
It didn’t happen. Those 13,000 jobs never materialized, and plans for the manufacturing plant have been consistently scaled back. Even if the project had gone through as planned, there is no way the Foxconn subsidy would have made money for the state, or provided earnings benefits for residents that exceed its costs. It now appears that few of Foxconn’s promises will be fulfilled, even though local governments have gone into debt over the project.
The Foxcomm “deal” was widely panned at the time, but as Brookings reports, criticisms of that effort were mostly based on the enormous size of the incentives being offered, not on the underlying concept. But since 1990, even the average size of these business incentives has tripled, threatening public services and the social safety net.
Even when the incentive being offered is comparatively modest, however, research doesn’t confirm the underlying assumptions of the approach. At least 75% of the time, the incentives don’t really affect the relocation decision one way or the other.
They’re all cost and no benefit. Furthermore, even when incentives do tip a location decision, they do not pay for themselves. They may create new jobs, but frequently they also bring in new workers from outside the city or state, which raises costs to public services that offset at least 90% of any increased revenue…On average, only 10-30% of new jobs go to state residents who are not already employed.
Are there incentives that would work? Brookings says there are, and offers the following checklist:
Do the incentives target the right businesses?
Will the business provide multiplier effects? When the business buys from local suppliers, it helps increase jobs at those companies. Workers employed at the business, too, will buy from local retailers, increasing those jobs.
Is the business “traded”—i.e., selling its goods and services outside of the state or community? Incentives to non-tradeable firms will just displace jobs at other local non-tradable firms.
Is the real job multiplier accurately calculated? Multipliers can be overstated if they ignore the increased local costs that accompany business growth.
Is the business locally owned? Locally owned firms spend more of their revenue locally, benefiting the hometown economy.
Do the incentives target the right areas?
Incentives should target economically distressed local areas, with more available labor that is not employed. That way, the share of new jobs that go to local residents can be two to three times as great, compared to already-booming areas.
Do the incentives target high-tech businesses in an area with an above-average high-tech base? High-tech businesses have additional multiplier effects because they support and spawn other local firms whose workers and ideas flow from one to another. But this only works when the area has a sufficiently large “cluster” of tech firms to build from.
Are they the right type of incentives?
Are they structured so cash incentives occur upfront? Upfront incentives are more cost-effective in affecting business location decisions, because they are more relevant to business decisionmakers who focus on the short term.
Do they include enticements/requirements to hire locally? For example, customized training programs can encourage firms to hire the local unemployed.
Do they include a healthy share of customized businesses services, or is it all cash giveaways? Business services such as job training, business advice to smaller businesses, and new transportation infrastructure can have job creation effects per dollar that are five to 10 times greater than tax or cash incentives.
Do the incentives avoid robbing Peter to pay Paul? If governments pay for incentives by decreasing public spending on education, training, or infrastructure, the negative economic development effects of those budget cuts may exceed any benefits from the incentives.
Finally, is there a decent model to accurately assess the impact of the incentive?
There are practical ways to evaluate incentives. We can compare assisted with unassisted firms, or assisted areas with unassisted areas. There are good estimates of how many location decisions will be swayed by a cash incentive package of a particular size, and how many jobs per dollar will be created by a high-quality customized job training program. State and local government researchers can combine these evaluation approaches with models of local labor markets and fiscal impact to see whether a specific incentive package’s benefits are likely to exceed its costs.
Finding the right answer depends on asking the right questions–not on constantly sweetening the pot.
22 thoughts on “All Cost, No Benefit”
But campaign contributions do depend on constantly sweetening the pot.
Keynesian economics hit the wall in the 1970s. Trump is taking Milton Friedman economics down with him. What is next? How to we solve massive economic inequality, unprecedented deficits and debt and regulate global capitalism. This is what we Boomers have left the Millennials to deal with: saving the economy and liberal democracy.
Not just campaign contributions, Rick, there are straight-up kickbacks from many of these deals. Our mayor just got arrested by the FBI for accepting a kickback which directly went into his checking account.
I didn’t read anything about Tax Incremental Financing (TIFs) zones from Brookings. This is the biggest problem for local taxpayers and public agencies who get screwed out of resources. I could write a book about how these are misused by our “economic developers” who enjoy access to other people’s money to play “Let’s Make a Deal.”
I’ve witnessed local politicians from both parties just accept that they must offer “incentives” as the market dictates we must play or lose the deal. A local economist has already dismissed these “incentives” as having no benefit to local taxpayers or the community.
We also spend millions a year on “business incubators” which cannot seem to develop locally grown companies within. Our local incubator with Ball State has been around for a decade and hasn’t produced one single company of any significance yet it’s “tax-exempt.”
Why do the Oligarchs deserve socialism while the working class must squander under unfettered capitalism?
And worse, the working class is funding this socialism for the Oligarchs and receiving nothing in return. When TIFs are used it actually increases the tax bills for the working class.
And both parties sign off on these deals while claiming socialism is a destructive economic model and the USA will never be a socialist country. LOL
These “incentives” to the Oligarchs are no different than the bailouts we also pay for under this bastardized capitalist market system, or socialism for the Oligarchy.
Large corporations laugh all the way to the bank when they sign on the dotted line to relocate to an area, even if there are penalties for failure to provide the job numbers promised. Just remember United Airlines. Facing a penalty? File for reorganization under Chapter 11 and it goes away.
If local tax dollars must be spent, spent them on small loans for new businesses.
Many of these tax incentives go to out-of-state developers to gentrify older neighborhoods; forcing people and businesses out of their homes and business sites. Many of the residents are low-income, seniors and disabled; there is no assistance for them and some do become homeless. The city of Indianapolis finds furnished living spaces for registered sex offenders in motels location around the city but no help for those whose hard work and taxes built and supported the areas which they are evicted from. They could pay rent in some areas but the first and last month rent and often security deposits are amounts they cannot provide. If they cease paying rent in residences they are currently living in their credit rating would drop; disqualifying them to rent elsewhere. There is also the cost and physical inability to move their belongings. But…those tax incentives lure developers with no thought of where those incentives originally came from; the very people they are evicting.
This is merely one form of rent seeking.
Are you suggesting that our elected officials would support the relocation of a business to a state or city, knowing that it will cost taxpayers and not provide a tangible benefit, solely for a photo opportunity? Shocking!
I think we now live in a corporate oligarchy. This system does not promote the growth of small, local businesses. I have decided to grow into the practice of voluntary simplicity. And yes, that means I don’t consume much( I don’t own a TV). It also means that I believe that stuff does not matter as much as the welfare of my neighbors and fellow citizens.
The story of Focus on the Family’s move from California to Colorado Springs, Colorado is germane to this blog today. In the 1970s, COS experienced an economic crisis after greedy builders overbuilt from a “boom-lette and saw their revenues plummet when the inevitable crash came.
Enter a very sweet person, originally from Indiana, who was VERY religious and tuned into the FOF TV programs and the astonishing books on child rearing by James Dobson. That person also worked for the COS Economic Development office. I worked for that office after my principal engineering job ended. My boss was chiefly responsible for bringing FOF to COS. The incentives included free land: the property is located on a rise just east of I-25, north of town, and has a spectacular view of the front range of the Rocky Mountains. The incentives included free utilities. The incentives included few or no property taxes. The city even absorbed some of the construction costs that included cutting a new road to the buildings on the campus.
Dobson promised jobs, jobs, jobs. Sure. The vast majority of the local jobs were minimum wage jobs that required opening envelopes from contributors. While Dobson railed against single mothers, calling them whores for dating, he provided not a single dime for child care for the single mothers he hired at minimum wage. I don’t know how much of the annual $300 million profits FOF reaped found their way back to the city. Oh. The high-paying jobs went to FOF originals from California that were relocated to COS – also part of the incentive package.
This “arrangement” provided a springboard for other religion-based organizations to lobby to come to Colorado Springs for the next 25-30 years such that the cynics now label COS as the Vatican of the Religious Right. Last I heard, there were over 1,000 “headquarters” for this or that church in COS. While Denver county, just an hour up I-25 from COS is a booming, high-tech area voted 82% Blue in 2016, El Paso County voted around 65% Red. You get the idea.
The model for luring businesses – including churches (who pay no Federal taxes) – is clearly for political purposes (Thanks, Todd) and may or may not provide promised ROI from those for-profit organizations – including churches.
Great blog on the great “turkey” of our times. Brookings’ folks have done a super analysis. Have forwarded it to our state reps; everyone should.
Thank you for this post.
I agree that a productive discussion about economic development is overdue. Part of this is a general trend towards socializing risks and privatizing the rewards.
I think that several of the suggestions made by Brookings were spot-on… but others feel “out of touch”.
Locally owned: Unless it’s a small town, most businesses that are large enough to have much of an impact are unlikely to be “locally owned” – whatever that actually means.
Cash upfront: Although cash upfront may be more relevant to decision makers who focus on short term, the municipality should try to focus on the longer-term success. Reasonable future tax incentives can avoid some of the risk of putting large amounts of cash upfront – and then having the deal fall through. Clawbacks tied to meeting specific goals weren’t mentioned either.
Local unemployed: Depending on the type of business and the labor situation this isn’t really a thing much of the time. Unless the business is tied to a specific area (logistics or retail, for example) then the overriding factor for a business is the availability of skilled labor. No amount of incentive will induce a company to hire from where the labor pool doesn’t match the job requirements.
Look, employers need workers who are dependable, self-motivated and with the skill set already closely aligned with the job. Employers will virtually always provide some job-specific training. However, folks who are chronically unemployed are usually that way for a reason. Those reasons include: Substance abuse; transportation issues; Problems with basic life skills (such as getting up and going to work on time); Child care; Criminal history; etc. – let alone the issue of actual education and job skills. Most jobs – even those paying $12-15 an hour – require significant base-level proficiency with technology, working in a team, etc. Employers would much rather hire someone with a recent demonstrable history of doing similar work than take a chance on someone who has a history of not working – for whatever reason.
It really is a shame! But, the corruption is so ensconced in our society, society itself is on the verge of collapse. We can all throw out various examples of obvious corruption, but look at the layers, look at the magnitude, look at the organization that politicians and business leaders have developed in their symbiosis of malfeasance.
Did someone say, “the people’s work?” Or how about, “the public trust?” These throw around phrases are useless, they mean nothing. Politicians wallets are open for business any time anywhere. As long as the opportunity is available, they are lined up at the trough. Look at how far the GOP has fallen in just a couple of short years. The opportunity arose with the current POTUS, and their real selves have been revealed. There is no principle, because they have no principles. It also shows, the level of dishonesty that is always lurking under the surface.
The average citizen taxpayer is a commodity to politicians and business leaders. Either they take your money, or they take and sell your information for profit. There never has been, nor will there ever be, full disclosure. When you die, they drag you out with a meat hook and look for the next commodity in line, which are probably your children or grandchildren. Orwellian? Probably much worse!
Look at how local governments tax people off of their property! They have no qualms about putting the elderly out on the street, then taking the property they might have worked a lifetime to own. The same with the disabled, It’s disgusting!
So, how do you fix it? Considering they’ve been trying to fix racial inequity for over a century, and can’t even pass an equal rights amendment, I think the deed is done, and the Republic is on a rapid decline. When you look at some of the greatest powers in human history, it always starts the same concerning their demise. Corruption, religious influence on government, moral decay, and loss of empathy (social disunity). Militarily, the great powers were always able to repel attacks and overthrow attempts from the outside, but social decay created a path for their fall.
The few that are informed, have a front row seat to history, and it probably is not going to be pleasant.
My guess is that somewhere is the equivalent of the Brookings article about somewhere where the deal was done right….need a model….
I believe that the concept of wealth redistribution applies to corporations as well as individuals and the days of unregulated capitalism greatly favor huge and growing. The middle class are those who have a good idea, grow it, and sell it ultimately to huge corporations. Workers supporting families are a dying breed.
Is there any path to a stable society that accommodates our huge and not yet stopped growing multitudes living on an earth that can’t afford the resources we demand?
I’m the optimistic type so I believe so but what’s in question is are we collectively smart enough to find and implement it?
Liberals believe so, authoritarians believe that what we must give up is equality. In other words we are back where we started centuries ago.
The sad truth is that in most cases, granting incentives is a way for taxpayers to pay for campaign ads for sitting governors and other poles. And since they aren’t paying for the ads themselves they are willing to settle for pennies on the dollar. The companies know this and are more than happy to play one location against another. I worked in getting my company incentives for many years. The one consistent step was the ribbon cutting or the public announcement. Take a look in your paper next time someone gets a significant incentives grant and look at the smiling politicians. That is what your tax dollars are being spent for. I have seen incentives granted retroactively even though a decision to relocate had already been made and negotiations being sped up just to insure the announcement before an election. During those years I know my company never made a relocation or expansion decision based on the value of tax incentives. At most, they could impact a decision at the margins. Mostly they were just icing on the cake, “free money” as I used always tell my bosses. $$$’s directly to the bottom line (and great for my PDR’s).
Many years ago, I read a magazine article about the, “War between the States”. The article was not about our Civil War 1861-65. The article was about the Economic War between the states concerning Corporate Welfare. Big corporations and some cases multi-national corporations, promising jobs and future prosperity. The price was a variety of tax deductions, tax abatements, TIFs and other incentives to lure mega-corporations.
The article went into great detail concerning how much it cost the states vs the benefit derived in new jobs created. Even with the best case scenarios the states, (read tax payers) lost out. The cost to the states was greater than the payrolls for the new jobs.
The article went on to suggest that Federal Legislation was needed to prevent the states from using tax deductions, abatements, etc., as an economic incentive to re-locate. The article also went on to conclude that businesses that did not receive favored tax treatment were placed at an unfair and in a discriminatory situation, that is the tax burden did not fall on every company equally.
It was not too long ago Amazon was dangling new locations to a variety of states and cities. Amazon through some creative tax legislation by the Oligarchs and for the Oligarchs pays NO Federal Income Taxes. NYC was originally selected as a “Winner”. However, the people and some brave politicians stood up and said No.
One answer is turning government incentives toward coop and majority employee-owned businesses (a type of ESOP).
By exposing the “jobs as far as the eye can see” lies of Big Oil in South Carolina, we not only convinced Obama to cancel offshore drilling, but also elected a Democratic congressman (Joe Cunningham) in Charleston. Our economic report demonstrated that the economic future of the region lies in tourism, not oil, and that drilling could put that at risk. While most of the state held a pro-oil position at first, we’ve won over most of the population, almost all mayors, the SC legislature, Republicans in the congressional delegation, and the Governor. Luck played a role. To lead our effort, we found a retired Gulf of Mexico oil rig boss named Peg Howell. She is brilliant and tireless and represented us in all aspects of the movement, including testifying before Congress.
Trump, of course, is attempting to overturn our efforts and, if he wins a second term, will almost surely succeed. My favorite baseball hat displays the motto, “DRILL MAR-A- LAGO.”
Vernon and Todd,
I think absolutely churches should be paying taxes. The Catholic Church is the largest property owner in the United States and pays 0 taxes. Of course, we can see FedEx has paid 0 taxes, a lot of that are the hidden loopholes that were installed by politicians to support their favorite benefactors of electoral financial contributions.
I suppose we all overlook, and under appreciate the amount of money the churches, who mettle in politics, do not pay. I suppose they will say, there charities balance it all out, but then why do they receive taxpayer dollars to support their charities? This entire system needs to be revamped. This form of government, this “Experiment” is starting to earn a failing grade. There is way too much self-dealing for this to be successful.
Scripture says in Genesis, the inclination of man and the thoughts of his heart were bad all the time.
And modern day, we can see firsthand how the inclination of bad comes to the surface. It doesn’t take much for those who feel the desire to prey upon their fellow citizens for personal gain, it just needed an okay! The churches jumped on board, claiming to look for protection from the evil liberals. When, in essence, they brought it entirely upon themselves. The hypocrisy of conjoining politics and religion has never gone well anywhere in history. Only the extremely wealthy, powerful, or ruthless, survive.
This cannot be repaired by a vote, it can’t be repaired by wishful thinking or good intentions, the evil, and I don’t use that term loosely, is too entrenched. When the head is rotten, there is no good in the body. There are no bloodless coup’s, even with this GOP coup taking place right now, it’s costing lives in the middle east, in the Ukraine, United States, (assault weapons) and the further decline of our social safety net. People are dying, they are dying by thousands! The right wing nationalistic fascists are ready to wage war on their fellow citizens, I don’t think anyone else as the appetite for that. There will be a bloodletting, when (?) Who knows. But the republics decline is in full view for everyone to see.
No more can the Republic claim that it fights for right, and that it’s word is it bond, when you pick fights with your allies, and aggrandize your enemies, there can be no trust.
Another local benefit to development, developers and those seeking tax incentives is the sale to developers of abandoned homes and businesses at tax sales. Developers buy blocs of these abandoned dwellings but, due to the unchanging screwball tax law, they are only buying the tax lien, NOT the property. Must wait an additional year to take ownership of property during which time they continue to deteriorate with no one responsible for protecting or maintenance. Too often, especially with out of state developers, these buildings stand ignored for years, the neighborhood and infrastructure continues to deteriorate, they become havens for criminal activity and eventually the buyers write them off as tax losses. The entire system appears to me to be a game with resident tax payers always on the losing side.
JoAnn @ 3:54 pm the other issue with abandoned or vacant houses is the so-called squatters rights, where people just move in and take over the vacant or abandoned house.
My daughter who was in real estate says that it is a major legal effort to toss the squatter’s out once they are in. During that time they can vandalize or gut the house the house, leaving it as you say a haven for criminal activity, and just destroying the neighborhood.
You would think in this day and age, the idea of squatter’s rights would be some legal relic of the 19th century, that would no longer be applicable.
I’ve seen the results in Indiana of the Mitch Daniels/Mike Pence style of Economic development, and it’s not pretty. At a National Political Conference of UAW Representatives in Washington, D.C. around Jan.,2011 or 2012, I happened to sit at a table with UAW members from LaGrange, IL, who worked at what had been, along with a factory in London, Ontario, the final assembly plant for G.M.’s Electromotive Division diesel-electric locomotives. G.M. had been the largest manufacturer of Diesel-electric locomotives in the U.S. and Canada, until selling off the Electromotive division to a private equity firm in 2005, which continued its labor contracts with workers in LaGrange, IL and London, ON, until the investors sold the whole business to Progress Rail, a largely non-union business and wholly-owned subsidiary of Caterpillar Corp. Long story short, upon their acquisition, Caterpillar shut down the LaGrange, IL works and the London, Ontario plant, with wages averaging $19/ hr. in LaGrange, and, with a lower cost national healthcare system, probably higher in Ontario, and refitted a shuttered plant in Muncie, Indiana to do that Diesel-electric locomotive assembly there, where I was told average wages were $12/hr. (at that time, and current reviews of work there mention insecure jobs, lots of pressure, and little chance for raises). I don’t know what incentives were offered to move that work to Indiana, but it’s an example of a too-typical process of economic development where the most business-friendly environment of low wages, anti-union legislation, and tax incentives (remember this was right around the time that the “Right-to-work” bill was introduced in Indiana, to be passed the following year) are combined to attract employers in a race to the bottom that profits exec.s and shareholders. Workers, taxpayers, and our communities end up paying the high price of greed!
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