The Washington Post
Should we ban states and cities from offering big tax breaks for jobs?
By Emily Badger
September 15 at 6:30 PM
Tesla announced earlier this month that it's planning to build a $5 billion
lithium battery factory just
outside of Reno, which sounds good for Nevada and bad for losing bidders
California, Texas, Arizona and New Mexico. So how did Nevada beat out so many
competitors?
The state offered the electric-car maker up to $1.3 billion in tax breaks and
subsidies in exchange for the highly coveted "gigafactory," which lawmakers hope
could bring 20,000 jobs and $100 billion in economic impact to the state over
the next 20 years. Governor Brian Sandoval declared that the deal had changed
the state's trajectory. Nevada legislators unanimously approved it. "This is
arguably the biggest thing that has happened in Nevada," one of them said, "since at least the
Hoover Dam."
Yet in an alternate universe — one where states don't go to economic war over
tech companies, corporate headquarters or auto plants — it seems logical that
Tesla would still have to build its battery factory somewhere (maybe
even Nevada). And if everyone weren't bidding for the facility, setting off an
arm's race of tax abatements and public subsidies, no one would have to pay
them.
This is the dream of critics who've decried Twitter's
tax breaks in San Francisco, or Boeing's
demands in Seattle, or IBM's
dealings in New York: What if we simply banned states and local governments
from poaching jobs from each other, or giving tax dollars to private
corporations, or enabling what Greg LeRoy at Good
Jobs First calls "job blackmail"? Wouldn't every state and municipality be
better off if none of them had to pen costly deals to lure companies that might
come anyway, or to quiet
existing employers who threaten to leave?
By LeRoy's count, the practice has
only escalated since the recession, as the political prize of "creating
jobs" has grown even more valuable (never mind if they were "created" first
elsewhere). Two years ago, the New York Times' Louise Story ran a scathing
investigation of companies that have "increasingly exploited" fear of job losses
in local communities, wresting, by her count, about $80
billion in incentives each year from them. Some of the worst-hit communities
shelled out big-time to lure auto plants, only to have those same auto plants
shutter during the recession.
Economists have repeatedly concluded that the incentive
game is zero-sum:
Most jobs and economic development created by incentives in one state or
community are simply lost in another. It's also exceedingly difficult to pin
down data on whether a public investment to lure a company is ultimately worth
it. While there's often big fanfare around the announcement of such deals,
there's seldom much attention on assessing their promises in hindsight.
"Even if a jurisdiction says, 'Well we have to do it because the other folks
are doing it,' no, actually, you donft," says Mark Funkhouser, a former mayor of
Kansas City who is now the director of the Governing
Institute. "Go ahead and let them take the poison. It doesnft increase job
growth."
Unilateral disarmament is a tough political proposition. As a systemic
solution, Funkhouser advocates instead some
kind of national law, what he loosely envisions as a domestic equivalent of
the Foreign Corrupt Practices Act, which bans bribes of foreign officials to
obtain business. At the very least, he says, we should hold accountable
officials and chief executives who promise jobs and economic gain — for
which a community has paid dearly — that never materialize.
"When somebody misrepresents what will happen in government finance to the
tune of tens or hundreds of millions of dollars, thatfs a fraud," he says. "When
I look at what
happened to Robert McDonnell for a whole lot less than I what see happening
across the U.S., itfs amazing."
Neighboring states or communities sometimes reach their own economic
development truces. Kansas and Missouri are now trying to disarm
a bitter border war in the Kansas City metropolitan area, where companies
have regularly extracted public concessions to move only a few miles. But the
problem with any deal between neighbors is that there are always other
neighbors, on the other side of the state, or elsewhere in the region, or —
in the case of R&D jobs clustered on both coasts — on the other side of the
country.
The only actor who could really resolve this is the federal government. But,
says LeRoy, "Therefs been no federal leadership on this at all, ever."
And, as Nevada's unanimous vote indicates, there's not much political will
from politicians to dismantle this system. After all, they get to announce job
deals today, but they may not still be sitting in office when it comes time to
evaluate them. Funkhouser wasn't originally a politician. He was the city
auditor in Kansas City, where what he saw in the deals he evaluated drove him to
run for office.
He found virtually no use of incentives in lower-income, minority parts of
town where incentives might legitimately be needed to correct market failures
(creating affordable housing, for instance, where there is none). Where
incentives were used to create retail hubs or high-end apartments, Funkhouser
watched an escalating suite of incentives costing the city more and more: tax
increment financing (or TIFs), then super-TIFs, then super-TIFs paired with
city-backed loans.
"You can have economic development," he says. "But there has to be a clear
public purpose, there has to be a clear market failure, and there has to be
consequences for fraud."
LeRoy also adds that he's not out to outlaw all economic development.
"Wefre not against incentives per se. The trouble is we donft use
the word 'incentives' very accurately," LeRoy says. "An incentive is [for]
something that should happen but isnft happening, that wonft happen unless
taxpayers get involved: bringing a grocery store to a food desert, helping an
ex-con get a job, cleaning up a brownfield. If you spend public money to do
those things, those are worthy incentives, not subsidies, windfalls or
giveaways."
LeRoy doesn't realistically expect any federal law any time soon. But he
suggests a more modest alternative. In the mid 1980s, the federal government
threatened to withhold
a share of federal highway funds from any state that didn't enforce a legal
drinking age of 21. We should do
the same today around economic development incentives, LeRoy says: withhold
10 percent of some coveted federal funding stream — maybe Community Development
Block Grants — from states that actively poach jobs from each other.
He calls it the "small carrot model," although others would probably see his
plan as wielding a sharp stick.
So what would happen in this new world without interstate (or inter-city)
economic warfare?
"We had a world in which this didnft exist," Funkhouser says. That world
lasted up through about the 1970s, by his metric. "We invested in the Interstate
Highway System. We spent money on stuff that actually does create jobs:
investment in infrastructure and investment in education. You need to have
tools, excellent port facilities, excellent highways, and you need a highly
skilled workforce. We have taken that money and shifted it away from the real
generators of economic wealth and wefve given it to people to line their
pockets.
"If a state said, 'No, instead of $3 billion for Boeing, wefre going to
invest it in schools, and wefre going to invest it in highways,' they would
win," he says. "Nevada did not win on Tesla."
The economist is probably ready at this point to raise a few complications.
LeRoy and Funkhouser's vision suffers from some definitional challenges: How do
you separate a clear public purpose from a dubious one? Where do you draw the
line around acceptable incentives to ensure that the food desert still gets it
grocery store? If we're going to punish for "fraud" chief executives who promise
jobs they never deliver, what role does that leave for an economy that tanks
beyond his control?
There's also a massive measurement problem baked into the entire economic
development industry: How do you actually assess whether incentives work? The
answer — at least when we bother to ask for it — depends on so many assumptions.
Would the company have come to town anyway? How do you quantify lost tax revenue
it never paid? Should we assume that each job created yielded two more? Or
three?
And the biggest challenge to designing any effective prohibition may be this:
If we banned jurisdictions from offering tax breaks to lure companies, they'd
probably find other ways to do it. First and foremost, states have widely
varying corporate tax rates, which they also tout to lure business.
"Itfs difficult to divorce incentives from taxes," says Daniel Wilson, a
research advisor in the Economic Research Department at the Federal Reserve Bank
of San Francisco, where he has analyzed incentives. "This is completely
unrealistic, but the only way in my opinion that this kind of harmonization
could work is if Congress passed a law that all 50 states have to have
harmonized tax systems. And Congress could define how far they want to go with
harmonization."
But that's a radical idea that would upend a fundamental premise of how the
country is structured: The states are supposed to be different. And, to some
degree, you should be able to decide as a would-be resident if you want to live
in a high-tax, high-amenity state, or a low-tax, low-amenity one.
Wilson's own research reinforces the criticism, from a national perspective,
that all these local incentives are zero-sum. But it's hard to see, then, what
to do about them. "It's a very intractable problem," he says.
Funkhouser acknowledges that he's not the best person to work out
implementation for a national law. But he suspects the tide is turning, and that
other people will begin to take this up, too.
"It reminds me of when tobacco companies said smoking didnft cause cancer,"
he says. "You can get away with that for two or three decades. But eventually
the dead bodies pile up. People now know thatfs [expletive]. This is very
similar to me. A whole lot of people are spending a whole lot of money to
convince you this is a good idea."
Emily Badger is a reporter for Wonkblog
covering urban policy. She was previously a staff writer at The Atlantic Cities.