As companies seek tax deals, governments pay high price
Incentives grow in popularity, but benefits to states still unclear
12/01/2012 10:18 PM
12/01/2012 10:20 PM
In the end, the money that towns across America gave General Motors did not matter.
When the automaker released a list of factories it was closing during bankruptcy three years ago, communities that had considered themselves GM’s business partners were among the targets.
For years, mayors and governors anxious about local jobs had agreed to GM’s demands for cash rewards, free buildings, worker training and lucrative tax breaks. As late as 2007, the company was telling local officials that these sorts of incentives would “further GM’s strong relationship” with them and be a “win/win situation,” according to town council notes from one Michigan community.
Yet at least 50 properties on the 2009 liquidation list were in towns and states that had awarded incentives adding up to billions in taxpayer dollars, according to data compiled by The New York Times.
Some officials, desperate to keep GM, offered more. Ohio was proposing a $56 million deal to save its Moraine plant, and Wisconsin, fighting for its Janesville factory, offered $153 million.
But their overtures were to no avail. GM walked away and, thanks to a federal bailout, is once again profitable. The towns have not been so fortunate, having spent scarce funds in exchange for thousands of jobs that no longer exist.
One township, Ypsilanti, Mich., is suing over the automaker’s departure.
“You can’t just make these promises and throw them around like they’re spare change in the drawer,” said Doug Winters, the township’s attorney.
Yet across the country, companies have been doing just that. And the giveaways are adding up to a gigantic bill for taxpayers.
A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.
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. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.
“How can you even talk about rationalizing what you’re doing when you don’t even know what you’re doing?” said Timothy J. Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.
Exploiting fear for breaks
The Times analyzed more than 150,000 awards and created a database of incentive spending, which is searchable on the newspaper’s website. The survey was supplemented by interviews with more than 100 officials in government and business organizations as well as corporate executives and consultants.
A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them. Many of the officials said they feared that companies would move jobs overseas if they did not get subsidies in the United States.
Over the years, corporations have increasingly exploited that fear, creating a high-stakes bazaar where they pit local officials against one another to get the most lucrative packages. States compete with other states, cities compete with surrounding suburbs, and even small towns have entered the race with the goal of defeating their neighbors.
While some jobs have certainly migrated overseas, many companies receiving incentives were not considering leaving the country, according to interviews and incentive data.
Despite their scale, state and local incentives have barely been part of the national debate on the economic crisis. The budget negotiations under way in Washington have not addressed whether the incentives are worth the cost, even though 20 percent of state and local budgets come from federal spending. Lawmakers in Washington are battling over possible increases in personal taxes, while both parties have said that lower federal taxes on corporations are needed for the country to compete globally.
The Times analysis shows that Texas awards more incentives, over $19 billion a year, than any other state. Alaska, West Virginia and Nebraska give up the most per resident.
For many communities, the payouts add up to a substantial chunk of their overall spending, the analysis found. Oklahoma and West Virginia give up amounts equal to about one-third of their budgets, and Maine allocates nearly a fifth.
Far and away the most incentive money is spent on manufacturing, about $25.5 billion a year, followed by agriculture. The oil, gas and mining industries come in third, and the film business fourth. Technology is not far behind, as companies like Twitter and Facebook increasingly seek tax breaks and many localities bet on the industry’s long-term viability.
Questioned about incentives, officials at dozens of large corporations said they owed it to shareholders to maximize profits. Many emphasized that they employ thousands of Americans who pay taxes and spend money in the local economy.
‘I don’t see it as giving up anything’
For government officials like Bobby Hitt of South Carolina, the incentives are a good investment that will raise tax revenues in the long run.
“I don’t see it as giving up anything,” said Hitt, who worked at BMW in the 1990s and helped it win $130 million from South Carolina.
Today, Hitt is the state’s secretary of commerce. South Carolina recently took on a $218 million debt to assist Boeing’s expansion there and offered the company tax breaks for 10 years.
Hitt, like most political officials, has a short-term mandate. It will take years to see whether the state’s bet on Boeing bears fruit.
In Michigan, Gov. Rick Snyder, a Republican in his first term, has been working to eliminate most business tax credits but is bound by past awards. The state gave General Motors $779 million in credits in 2009, just a month after the company received a $50 billion federal bailout and decided to close seven plants in Michigan.
GM can use the credits to offset its state tax bill for up to 20 years.
“You don’t know who will take a credit or when,” said Doug Smith, a senior official at the state’s economic development agency. “We may give a credit to GM, and they might not take it for three years or 10 years or more.”
One corporate executive, Donald J. Hall Jr. of Hallmark, thinks business subsidies are hurting his hometown, Kansas City, Mo., by diverting money from public education.
“It’s really not creating new jobs,” Hall said. “It’s motivated by politicians who want to claim they have brought new jobs into their state.”
For Hall and others in Kansas City, the futility of free-flowing incentives has been underscored by a border war between Kansas and Missouri.
Soon after Kansas recruited AMC Entertainment with a $36 million award last year, the state cut its education budget by $104 million. AMC was moving only a few miles, across the border from Missouri. Workers saw little change other than in commuting times and office decor. A few months later, Missouri lured Applebee’s headquarters from Kansas.
“I just shake my head every time it happens, it just gives me a sick feeling in the pit of my stomach,” said Sean O’Byrne, the vice president of the Downtown Council of Kansas City. “It sounds like I’m talking myself out of a job, but there ought to be a law against what I’m doing.”
Outgunned by companies
For local governments, incentives have become the cost of doing business with almost every business. The Times found that the awards go to companies big and small, those gushing in profits and those sinking in losses, American companies and foreign companies, and every industry imaginable.
Workers are a vital ingredient in any business, yet companies and government officials increasingly view the creation of jobs as an expense that should be subsidized by taxpayers, private consultants and local officials said.
Even big retailers and hotels, whose business depends on being in specific locations, bargain for incentives as if they can move anywhere. The same can be said for many movie productions, which almost never come to town without local subsidies.
When Oliver Stone made the 2010 sequel to “Wall Street,” in his mind there was only one place to shoot it: New York City. Nonetheless, the film, a scathing look at bankers’ greed, received $10 million in tax credits, according to 20th Century Fox.
Nationwide, billions of dollars in incentives are being awarded as state governments face steep deficits. Last year alone, states cut public services and raised taxes by a collective $156 billion, according to the Center on Budget and Policy Priorities, a liberal-leaning advocacy group.
Incentives come in many forms: cash grants and loans; sales tax breaks; income tax credits and exemptions; free services; and property tax abatements. The income tax breaks add up to $18 billion and sales tax relief around $52 billion of the overall $80 billion in incentives.
Collecting data on property tax abatements is the most difficult because only a handful of states track the amounts given by cities and counties. Among them is New York, where businesses save an estimated $1.1 billion a year in property taxes.
In some places, local officials have little choice but to answer the demands of corporations.
“They dictate their terms, and we’re not really in a position to question their deal terms,” Sarah Eckhardt, a commissioner in Travis County, Texas, said of companies she has dealt with recently, including Apple and Hewlett-Packard. “We don’t have the sophistication or the resources to negotiate with a company that has the wherewithal the size of a country. We are just no match in negotiating with that.”
Local officials can find themselves across the table from conglomerates like Shell Oil and Caterpillar, the world’s largest maker of construction equipment.
Shell has been offered a tax credit worth as much as $1.6 billion over 25 years from Pennsylvania, which competed with West Virginia and Ohio for an energy production facility. Royal Dutch Shell, the parent company, made $31 billion in profits in 2011 — about $3.5 million every hour. The company’s chief executive made $13.1 million last year, according to Equilar, an executive compensation firm. Pennsylvania predicts that the plant will create thousands of long-term jobs, but it did not require them in exchange for the tax credit.
Caterpillar has received more than $196 million in local aid nationwide since 2007, though it has chastised states, particularly its home base, Illinois, for not being business-friendly. This year, Caterpillar announced a new plant in Georgia, which offered $44 million in incentives. Local counties chipped in free land and other aid, including $15 million in tax breaks and $8.2 million in road, water and sewer repairs.
The company, whose profits are soaring, recently froze workers’ pay for six years at several locations, arguing that it needed to remain competitive. A spokesman for the company, Jim Dugan, said it employed more than 50,000 people and invested billions of dollars nationwide.
Little background information
Local officials typically have scant information about the track record of corporations, like whether they lived up to job assurances elsewhere. And some officials acknowledged that they did not know to what extent incentives were a deciding factor for companies.
“I don’t know that there’s a way to know other than talking to the businesses, and the businesses telling us that that was a factor in creating jobs,” said Ken Striplin, the city manager of Santa Clarita, Calif., which gives tax breaks in a designated enterprise zone. “There’s no box that says ‘I would have created this job without the enterprise zone.’"
California is one of the few states that have been cutting back on incentives. But that does not mean its cities are following suit. When Twitter threatened to leave San Francisco last year, officials scrambled to assuage the company.
Twitter was not short on money — it soon received a $300 million investment from a Saudi prince and $800 million from a private consortium. The two received Twitter equity, but San Francisco got a different sort of deal.
The city exempted Twitter from what could total $22 million in payroll taxes, and the company agreed to stay put. The city estimates that Twitter’s workforce could grow to 2,600 employees, although the company made no such promise.
A Twitter spokeswoman said the company was “very happy to have been able to stay in San Francisco.” City officials did not respond to inquiries.
Like many places, San Francisco has been cutting its budget. Public parks have lost about $12 million in recent years, though workers at Twitter will not lack for greenery. The company’s plush new office has a rooftop garden with great views and amenities. Enjoying the perks, one employee sent out a tweet: “Tanned on Twitter’s new roof deck this morning as some dude served me smoothie shots. This is real life?”
A zero-sum game
It was the company every state had to have. In 1985, General Motors was looking for a spot to manufacture its Saturn, a new compact car that would compete with Japanese imports and create thousands of American jobs.
Incentives were not in wide use, and several states had only recently changed their constitutions to allow them.
In fact, when GM announced the search, its chairman, Roger Smith, said the perks would not be a predominant factor.
“Tax breaks can’t make a silk purse out of a sow’s ear,” Smith told The Detroit Free Press. He said GM planned to avoid states that had large debts or lackluster schools.
Undeterred, some 30 states stepped forward in what became a full-out competition. One official, Bill Clinton, then the governor of Arkansas, traveled to Detroit offering income tax credits and sales tax exemptions worth nearly $200 million.
Smith essentially kept his word and chose Tennessee, which had put together a relatively small package. Reid Rundell, a retired GM executive, said in a recent interview that it had come down to geography. “The primary factor was distribution for incoming parts, as well as outgoing vehicles,” Rundell said.
But the gates had been opened. In 1992, South Carolina lured BMW with a $130 million package; the next year, Alabama got Mercedes-Benz at a price tag that topped $300 million.
“What the auto incentives did back then was really raise the profile of economic incentives both within companies, in government and in the public’s eye,” said Mark Sweeney, who worked for the South Carolina Commerce Department in the 1990s and now advises companies on obtaining government grants.
By 1993, governors were regaling one another at a national conference with stories of deals beyond the auto industry, including a recent bidding war for United Airlines that drew more than 90 cities. The airline had set up negotiations in a hotel, and its representatives ran floor to floor comparing bids, said Jim Edgar, then the governor of Illinois.
Edgar said he had called for a truce, concerned that the practice was unfair to companies that did not receive incentives. But many states would not sign on, he said, particularly those in the South, where businesses were moving.
“If you’ve got some states doing it, it’s hard for the others not to do it,” Edgar said. “It’s like unilaterally disarming.”
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