Experts continue to ponder the value of corporate subsidies

In a late October article addressing the frenzy that Amazon created when it opened up the bidding process for its second headquarter location, known as HQ2, Pew Charitable Trusts warned that some of the internet giant’s state “suitors have been burned before.”  The article begins by cautioning New York, pointing to its 2007 deal with Alcoa.  Under its terms, the aluminum producer promised to retain 900 existing jobs in the town of Massena, located in St. Lawrence County, near the Canadian border, for three decades, in exchange for a 30-year discounted electricity deal worth an estimated $5.6 billion. 

But, the Pew piece acknowledged, “[b]y 2014, the jobs were down to 750.”

Also in 2014, Alcoa went back to New York looking for more money, in order to prevent laying off 487 workers. In response, the state handed over another $73 million in subsidies. Pew acknowledged that “[u]nder the latest deal, the company will have to pay a $40 million penalty if the number of jobs slips below 600, and the state subsidies will decrease if the price of aluminum rebounds.” 

Citing a Good Jobs First study, Pew pointed to the Alocoa/New York deal “as the second largest subsidy package [since 1976 that] a company has ever received in the United States.”  The largest, according to Good Jobs First’s October 2017 updated list of Megadeals, is the $8.7 billion arrangement that the state of Washington struck with Boeing in 2013.

The number three spot on the Good Jobs First list? Foxconn, the $4 billion pact that Wisconsin just put to bed with the flat screen maker. As for other notable megadeals, a different subsidy that Washington gave Boeing, in 2003, in the amount of $3.2 billion, came in at number four. A Michigan/General Motors deal for $2.34 billion in 2009, and a Ford/Michigan package for $2.3 billion in 2010, rounded out the number five and six spots, respectively.

In late September, we described the legislation that Gov. Walker had signed that made the Foxconn/Wisconsin partnership possible. And just last week, Reuters confirmed that the state’s Economic Development Corporation board gave its approval, “clear[ing] a final hurdle for the controversial deal.”

The controversy continues

Pew quoted a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Michigan, who bemoaned the politics of these kinds of subsidies. He contrasted the “major political benefits to presiding over a ribbon-cutting ceremony and a press conference to announce you have created or saved all these jobs” with the political problems the deal causes: “the mayor or governor is financing [his or her] political ribbon-cutting opportunity by reducing the tax base of the next mayor or governor.” 

This megadeal controversy is not new, but the Foxconn deal, combined with Amazon’s cheeky HQ2 pursuit, along with so much other recent news suggesting that the subsidies are not what they appear to be at the ribbon cutting ceremonies, all give stakeholders something new to think about.

For instance, Bloomberg has published two articles speaking to the danger of allowing corporate subsidies to spin off the rails.  For example, in one, Economic Development Bidding: A Prisoner's Dilemma, an Arkansas Center for Research in Economics official opined that the despite the “excitement around these megadeals, taxpayers across the country should be wary of the prisoner's dilemma that public officials are playing.”

The prisoner’s dilemma is when two suspects are pitted against each other when being interrogated; if just one confesses, he gets a lighter sentence while the silent detainee gets a harsher one. If neither confesses, they both get lighter sentences, and if both do, they each get harsher sentences. 

Applied to the corporate subsidy context, this framework, Bloomberg argues, suggests that when two states are competing against each other for a corporate prize, say, Wisconsin and Michigan, they face similarly consequential results. Ultimately, the question is whether a jurisdiction should stick to capturing its “natural share of business investment”:

If officials from both states abstain from offering incentives, each state will receive business investment commensurate with the state's natural advantages and avoid the fiscal costs associated with tax breaks and subsides. But if Wisconsin officials offer incentives and Michigan officials refrain, Wisconsin may be able to attract more than their natural share of business investment while Michigan attracts less. The opposite is also true. If Michigan officials offer incentives and Wisconsin officials refrain, Michigan could capture more than their natural share of business investment while Wisconsin captures less.

For this reason, “[t]he incentives arms race has proved costly for states…states increasingly risk overpaying…While it is tempting for states to engage in bidding wars for economic development projects, state officials should resist. Most businesses choose their locations for reasons other than the incentives a state may provide.”

Nevertheless, the “wave of Amazon HQ2 bids [is] unlike anything experts have seen,” according to a different Bloomberg illustration. For instance, one expert said that there is a “level of transparency previously absent from site-selection projects,” even if some cities or states have been less than forthcoming about details. Said another, “[t]he job creation incentives are also probably the most equitable of all those available…the consensus in the economic development community is that job-creation incentives tend to pay off better for government because the incentives cost less than grants or loans up front and are only earned once jobs materialize.”

On the other hand, the Alcoa/New York example should give officials pause, as should the number of other corporate subsidy deals that have backfired this year. For instance, in early November, the Chicago Tribune reported that the state of Illinois was reviewing the $15 million in tax breaks it has given Sears as the flailing retailer “strives to stay afloat.” Indeed, it is no secret that the retailer “has cut thousands of jobs and closed hundreds of stores this year…”

In January, we addressed negotiations between Nevada and Faraday Future, the nascent electric vehicle maker.  But also this fall, Bloomberg revealed that Faraday had backed out of the $216 million tax incentive deal. Last week, Slashgear disparaged the company as floundering as its executives jump ship.

Before that, this spring, the Seattle Times reported that Boeing was cutting jobs again, despite it being such a prominent recipient of Washington’s largesse. In January of this year, we detailed the job losses that the state had already suffered, noting how successful Boeing had been in getting oblivious lawmakers to sign over “heaps of tax breaks.”

For all this, it is not surprising that Amazon’s HQ2 quest has made it into pop culture. A Nov. 6, 2017 Rolling Stone piece recapped an episode of Jon Oliver’s Last Week Tonight, in which he ranted over the ineffectiveness of corporate tax incentives. The comedian joked that giving a corporate subsidy is “like putting a dollar into a vending machine and getting a single yellow Starburst in return…At some point, what you're getting out is not worth what you're putting in.”