State and local governments genuflect before the corporate altar.
It was a nice photo-op: the president of the United States, the speaker of the House, the governor of Wisconsin, and the CEO of Foxconn, a Taiwanese manufacturing company, breaking ground on a new plant that could potentially bring some 13,000 jobs to Wisconsin. President Trump used the ceremony last Thursday to celebrate what he hails as an American manufacturing renaissance: “So we’re open for business. Made in the USA. It’s all happening, and it’s happening very, very quickly. We’ve created 3.4 million jobs since the election, including over 300,000 manufacturing jobs.”
But the Foxconn deal is a condemnable example of corporate welfare in its most egregious form.
A look at the numbers is illustrative. All told, Wisconsin could end up delivering $3 billion in tax credits to Foxconn. Even if Foxconn’s arrival results in thousands of new jobs over the next several years, it will open a gaping fiscal hole that will be filled only in 2043, when the state recoups the money spent on these tax breaks.
Here’s the bottom line: If the jobs target of 13,000 is met, Wisconsin taxpayers will pay $219,000 per job. If only 3,000 jobs are created, they will pay $587,000 per job in the form of a $1.7 billion tax credit. And these are conservative estimates, leaving out the additional tens of millions of dollars that will go toward the infrastructure improvements necessary to accommodate Foxconn’s new plant. The ill-conceived incentives are the core of an all-around terrible arrangement. Who wins? The politicians. Who loses? Fiscal sanity and those footing the bill for political pet projects.
Unfortunately, Foxconn is one among many cases of state and local governments making massive concessions to corporations in exchange for benefits that are easily outweighed by the costs. States and cities dole out billions of dollars every year to attract businesses through cash grants, tax breaks, and new infrastructure.
The search for Amazon’s second headquarters (HQ2), for instance, has left around 230 state and local governments genuflecting before the altar of the Seattle-based tech deity, offering tributes amounting, in several cases, to billions of dollars. The offers are truly extravagant. Various proposals include land giveaways (Stonecrest, Ga.), Amazon input in city-planning initiatives (Fresno, Calif.), and municipal funding for employees to expedite Amazon projects (Boston).
States and municipalities want the jobs and prestige that come with hosting these companies; politicians want the votes that accompany the credit for attracting these companies. It’s a simple function of the wrong incentives run amok.
Aaron Renn, a senior fellow at the Manhattan Institute, explains: “Like Amazon HQ2, whenever there is a major facility like [the Foxconn plant] . . . it is really difficult for states to resist playing the game.” According to Renn, the incentive structure is such that decision makers will either face criticism for aggressively pursuing contracts at great cost, or for failing to secure them. Wisconsin governor Scott Walker would have faced criticism regardless of the decision he made, Renn says.
Economic-development agencies of state governments exacerbate the problem. By using certain metrics to measure success — such as jobs created by government programs — these agencies incentivize state officials to pursue low-benefit, high-cost deals at great expense to the state and its taxpayers.
Nathan Jensen, a professor at the University of Texas and the co-author of Incentives to Pander, makes a version of this argument based on research spanning the United States and several other countries. Astonishingly, he says, most studies find that approximately three-fourths of companies benefitting from special incentives make their decisions before securing tax breaks. Most of the time, these packages aim to influence a decision that has already been made.
Asked about Amazon’s country-wide search for a new headquarters, Jensen sticks to his thesis. “I think they already have a pretty good idea of what they’re doing,” he says. The company has a need for highly-educated workers, and will therefore already prefer a city where many already live or to where they would be willing to move. The whole thing is “a bit of theater,” according to Jensen: “I would have been shocked if they didn’t have one to two places” at the top of their list “from the get-go.”
Most of the time, these benefit packages aim to influence a decision that has already been made.
For skeptics of these mega-deals, the Amazon HQ2 search marked a turning point. The blatant and reflexive rush to offer Amazon carve-outs proves just how willing many state and local governments are to trade tax dollars for job creation. New Jersey and Maryland are prepared to lavish Amazon with more than $7 billion in corporate goodies.
The cost of these kind of incentives is astoundingly high — there is little research that points to their success. And competition among states to lure in large companies can yield absurd results. Jensen writes about an ongoing bidding war between Kansas City, Mo., and Kansas City, Kan., that sees firms regularly cross the Missouri River to secure better benefits. In a recent episode, reinsurance firm Swiss Re moved from Kansas to Missouri — a journey of four miles. Last year Kansas state senator Tom Holland complained that state policies amount merely to “rearranging chairs on the patio.”
But there’s hope for reform. Included in the recent tax-reform law is a provision that treats some state incentives — such as infrastructure improvements and cash grants — as taxable corporate income. The next tax-reform push, which Trump says might come in October, should prioritize a measure treating state and local tax credits the same way. By taxing corporate incentives as income, the federal government can limit their abuse. Since these tax credits and benefits rarely influence a firm’s decision to relocate, such a provision would render bad mega-deals unattractive. While creating a new tax might sound like a bad idea, ending these wasteful programs would be worth it.
Meanwhile, state-level economic-development agencies should reevaluate how they measure economic success. Using metrics other than the impact of government-run programs (such as workforce quality, Renn’s preferred metric) would allow state governments to encourage growth without relying on corporate incentives. According to Jensen, Virginia leads in this regard by relying on data from a medley of different state agencies and weighing the benefits of certain measures alongside their costs.
Corporate-tax carve-outs to attract business make little sense for policymakers who want to put their states on sound fiscal footing and encourage growth. They make sense only for politicians looking for empty talking points. The Foxconn and HQ2 fiascoes hint at the broader malaise hidden below the sunny veneer of state and local economic-development policy.
Just maybe, though, the most effective solution is the simplest. New Hampshire is a dark horse candidate to receive HQ2, and its pitch is entirely reasonable: Low tax rates for every business, across the board. That approach removes the incentive to attract businesses through what amounts to legal, nonsensical bribery.