By David Segal in RIFuture.org
The New York Times
published an expose this week on Texas’s regime of business
incentives, but for anybody who
pays passing attention to so-called municipal and state economic development
schemes, there wasn’t much news: Our states and localities are cannibalizing
one another as they concoct targeted tax breaks which they use to lure
corporations from their neighbors.
Meanwhile, a bevy of middlemen wet their
beaks by helping corporations pit sucker states off of one another and
brokering deals to sell the tax credits that comprise much of the ensuing
largess. Here’s the rub:
Granting corporate
incentives has become standard operating procedure for state and local governments
across the country. The Times investigation found that the governments
collectively give incentives worth at least $80 billion a year.
It’s the most basic of
game theory dilemmas, and in a less corrupt political dynamic, one that could
be solved by the intervention of sensible federal government actors, or perhaps
even through the initiation of an interstate compact that had states agree to
stop poaching from one another. (It would still be open season on those states
who failed to join said compact, incentivizing their joining the protected
bloc.)
Rhode Island is rare in that it, at least, has a provision in place that
bans its cities from using subsidies to swipe existing businesses from one
another — though it’s never enforced. I’d heard (and seem to remember having
once found) that Puerto Rico has miraculous language on the books that requires
its lawmakers ot consider the impacts of its subsidies on the jurisdictions
from which they’re stealing businesses — but perhaps that’s apocryphal.
Good Jobs First has
done yeoman’s work to expose the machinations of the “Site Location
Consultancy” industry, spearheaded by the maniacal-sounding Fantus companies.
(Fantus Factory Locating Service and Fantus Area Research.)
Prior to seeing
them on paper, I’d always envisioned the spelling as the more
malevolent-looking “Phantus” which comports with the shadowy, yet profound,
nature of their work.) Felix Fantus got to work in the 1950s, and as GJF describes it:
For the next four
decades, Fantus dominated the site location consulting industry, playing a
central role in the relocation of thousands of workplaces, most of them
factories moving out of the Northeast and Midwest to the South. By its own
count, it helped engineer more than 4,000 relocations by the time Yaseen
retired in 1977, and 2,000 more in the next decade….
Fantus survives today
as a Chicago-based consulting affiliate of the Big Four accounting firm
Deloitte & Touche.
A couple of case
studies:
Boeing is a master of
this manipulative art, flipping the usual government-to-contractor relationship
in 2003 as the company put out a 2003 RFP for states to respond to, to see who
would offer up the most lucrative package of tax incentives for a manufacturing plant for the 787.
Washington State residents
bested a couple dozen other states, offering to pay the hometown company $3
billion not to forsake them. (Well, it’s not quite fair to say that they were
still deserving of the ‘hometown’ moniker at that point — corporate HQ had
moved to Chicago a few years earlier, drawn by a mere $50 million in public
funds.)
Tragedy became farce in 2009, when South Carolina offered Boeing around
$1 billion to open a Dreamliner plant there. Evidence of just how sad is this state
of affairs: The WTO is the only body that’s threatened to provide any sort
of meaningful check on
this sordid dynamic, ruling that several billions of such subsidies to Boeing
were problematic — but that European subsidies to Airbus were even more
severely infringing.
Perhaps the most
transparently absurd manifestation of war-between-the-states phenomenon is the case of the film tax credit, driven by the
movie industry’s exploitation of star-struck state legislators who seem to
believe that the likes of Boise and Des Moines stand to become the next
Hollywood.
The film tax credits spurred the most precipitous race to the bottom
I’ve witnessed in my time in politics. It came to a head in 2009, when
Wisconsin had just spent $100,000 dollars to support Johnny Depp’s personal grooming
expenses and Connecticut was fixing to subsidize episodes of Jerry Springer’s
talk show — lots of broken chairs to pay for.
The capstone of this farce was
California’s institution of tax credits to entice productions back to
Hollywood. As my friend and former Massachusetts state rep Steve Damico and I
wrote at the time:
This sprint to the
bottom has just reached its predictable, pathetic conclusion: Burned
particularly by the loss of the television show Ugly Betty, California’s recent
budget includes a half-billion in tax credits of its own, under the guise of
“stimulus,” as a bribe to keep Hollywood from off-shoring to Manhattan,
Indianapolis, and Santa Fe, which are offering bribes of their own. The floor
has been lowered across the land, achieving a new equilibrium where public
subsidies accrue to industry moguls to make movies that would be made anyway.
At least 42 states now provide incentives, with some exceeding 40% of
production costs.
Even in the seemingly
impossible universe in which a particular state seems to benefit from
instituting such credits, it’s easy to see that once one abstracts to the
regional or national level, all that we’re doing is paying people to move jobs
to-and-fro, creating no new social value, and reducing net public benefit.
It’s worth
deconstructing the particular form these subsidies tend to take. The
terminology “tax credit” is construed to obfuscate the particulars of the
mechanism at hand: Most people think it means that there’s a reduction in
taxation on expenditures in service of the given project.
Far from it, and far
worse, here’s how it works: A movie films in State X, and spends $20 million
therein. If State X offers a 50% transferable tax credit for film expenditures
within its borders, it forks over $10 million thereof.
In the case of a state
like Rhode Island — or any state that isn’t the production company’s home base
— the production company will have a accrued negligible state tax liability, so
it will sell these credits to an entity that has a more substantial tax burden
— usually a sizable corporation — at a rate of, perhaps, 80 cents on the
dollar. A broker will take a cut of perhaps a nickel on the dollar. So the
entity that the state was striving to subsidize gets only 75% of the funds the
state is expending.
In the case study
above the intended recipient of the benefit is an entity that’s achieving
little social good (not hard to argue that much Hollywood schlock is, in fact,
a social detriment) but even if it’s a worthy project that’s meant to achieve
the benefit — say, renewable energy installations — tax credits of this form
are always a raw deal for the public, unless a substantial percentage of the
credits go unclaimed: A full 25% or so of the subsidy is misfiring, going to
middlemen and corporations with significant tax burdens. If you want to fund
something efficiently, just fork over cash. (This, of course, could never be
made to happen, since then the public would understand that all we’re really
doing is forking over cash to millionaires.)
It’s no surprise that
tax credit brokers often make for generous campaign contributors. Such a figure
is at the center of a still-growing scandal in Rhode Island which has been the subject of a fair
amount of national reporting: Curt Schilling’s failed video game company 38
Studios, which received a $75 million loan guarantee and various tax credits in
exchange for its locating in Rhode Island.
The loan guarantee program was sold
to us as that rare economic development proposal that seemed mostly sensible: A
way to incubate and grow businesses indigenous to Rhode Island in the midst of
the downturn, with credit very tight. Yet within a few months, state leaders
had designated 60% of the fund for use by the (Republican, anti-tax,
anti-welfare) former Red Sox pitcher. The company’s since gone bust, leaving
the public on the hook for on the order of $115 million at last check.
It’s a mess, wrought
by the usual mix of corrupt cash, a rotten philosophical paradigm, insane,
inverted conceptions of capitalism (“States competing against one another is
just the free market at work!”) and, especially in the case of the film
credits, narcissism.
In Rhode Island, all of the female reps of a certain age
were giddy to get to do a photo op with Richard Gere in 2009, when he came to
Woonsocket to film a movie called Hachi, which never saw substantial domestic
release. (Nothing gendered here — no doubt most of my male colleagues would
have been just as delighted to schmooze with a female lead, had one of
equivalent standing every made her way to the state.)