Government Incentives: Boom or Bust?

Source: http://www.flickr.com/photos/jumpyjodes/115391579/

The Oregon state legislature recently held a special session to discuss methods to appease Nike Inc., a powerful corporate citizen that is expanding its operations in the U.S. but has threatened to move out of Oregon. Nike would like to continue its expansion at its current Beaverton headquarters in Oregon, but first wants assurance that its state tax burden will not increase. Oregon’s existing corporate tax structure provides incentives to companies that commit to investing $150 million in the state over five years and create 500 jobs. Nike plans to surpass this threshold, raising the possibility that due to its size, its corporate tax structure could be altered to its disadvantage. If this happens, Nike will entertain offers from other states that are courting the company with more attractive incentives. As Chuck Shetetoff of the Oregon Center of Public Policy explains, Nike has put an “economic gun” to the Oregon governor’s head and said “you either guarantee the law won’t change or we’ll go elsewhere.”

Source: http://www.flickr.com/photos/jumpyjodes/115391579/
Nike headquarters in Oregon. Source: http://www.flickr.com/photos/jumpyjodes/115391579/

This scenario has become all too familiar in the American corporate world. Granting corporate incentives has evolved into a standard operating procedure for state and local governments across the country, with governments collectively giving incentives worth more than $80 billion annually. The beneficiaries come from a myriad of different industries, from technology and entertainment companies to banks and big-box retail chains.

A recent examination conducted by the New York Times found the state of Texas to be at the forefront of massive spending by states on incentive programs to attract businesses to operate within its borders. Incentive spending was minimal in Texas until 2000, when Governor Rick Perry took office and instituted a different approach towards economic development efforts. The numbers have become staggering in the decade or so since. Today, Texas gives out $19 billion in incentives every year, which is more than any other state (Michigan comes in a distant second with $6.65 billion spent annually). The Texas incentive program translates to roughly $759 per capita, and 51 cents per dollar of the Texas state budget. The top grants to companies, to name only a few, include big names such as Amazon ($277 million), Samsung ($232 million), and Anadarko Petroleum ($175 million). The incentive programs come in many different forms, including cash grants, sales tax refunds, exemptions or other sales tax discounts, and property tax abatements. In support of the program, Texas argues that it leads the nation in job creation, with half of all U.S. private sector jobs created over the last decade being located within its borders.

Who benefits more from these incentives: the businesses or the people of Texas? The situation gets blurry behind the scenes, as a fundamental trade-off is at stake. States can continue to provide incentives to businesses with the hope of deriving benefits like job creation in the long run, but this can be done only at the expense of spending flexibility on basic services such as education in the short run. Big business activity has indeed created prosperity in some forms; however, some troubling statistics exist. A New York Times examination revealed that Texas has the third-highest proportion of hourly jobs paying at or below minimum wage. Furthermore, thousands of Texans surprisingly remain unemployed, with Texas having the 11th-highest poverty rate among states. With these hard truths now on the public’s radar, it will be interesting to monitor future state spending. Texas recently cut billions of dollars in public education, an area where Texas already ranked 39th before spending cuts took place, in an effort to balance its budget. A commission was created by the Texas Legislature to take a close examination of the state’s economic development efforts, and will be issuing a report with findings and recommendations in January 2013.

The tax structure, regulatory climate, and legal environment in Texas are all very positive for businesses. However, while companies have gained, some school systems have lost. While simultaneously distributing billions of dollars in incentives to businesses, Texas was forced to cut public education spending by $5.4 billion in 2011. In the Manor school district, located in the outskirts of Austin, spending shrank by $540 per student this year. These cuts came even as student enrollment has tripled at the school since 2000, and 80 percent of Manor students are classified as low-income. Businesses depend on an educated workforce for their success – so shouldn’t education spending be prioritized over any incentive spending?

Numerous stories exemplify the lack of transparency in measuring the effectiveness of state economic development programs. Pennsylvania has offered Shell a tax credit worth $1.6 billion over 25 years for an energy production facility, predicting that the plant that they intend to contract will create thousands of long-term jobs. However, the state did not require a formal agreement to create the jobs in exchange for the tax credit. Caterpillar opened a new plant in Georgia earlier in 2012 after being offered $44 million in incentives. The company has been experiencing soaring profits, but recently froze workers’ pay for six years at several locations, arguing that it needed to remain competitive within the industry. As New York Times reporter Louise Story found in her extensive research, local officials typically have scant information about the track record of corporations, and are not in a strong position to question their deal terms.

Many indirect effects of economic development programs counteract the motivation for giving incentives in the first place. As shown the Pennsylvania Shell case, some states do not hold businesses legally accountable for why they are being granted incentives in the first place – to improve economic stability for American families and contribute to bolstering the economy as a whole. Furthermore, in the Caterpillar case, unpredictable events may follow after committing to expensive economic development plans. This could mean frozen payments, or in even worse scenarios, could involve an entire corporation going bankrupt, like what happened to GM in 2009. GM’s bankruptcy caused enormous sums of money to simply go to waste that had initially been spent to lure the company to places like Moraine, Ohio and Janesville, Wisconsin. And perhaps most importantly, as shown in Texas, states may be forced to dramatically cut spending on basic services such as education as budgets suffer – undoubtedly an indirect result of expensive commitments to economic development programs.

As companies seek tax concessions and other incentives, state and local governments must ensure that they are paying businesses an appropriate price for the benefits they expect to derive. The presence of big businesses in states can certainly be a big plus, but states must closely examine the tradeoffs and ensure that the businesses are held accountable after the deal is struck. When closely monitored and carefully organized, economic development plans certainly may be beneficial in the long run.