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Updated Saturday, December 15, 2012 at 10:01 PM

States fare poorly with corporate welfare

By Jon Talton
Special to The Seattle Times

It would be hard to find an economist who thinks states and cities should use tax and other targeted incentives to keep or lure corporate investment.

These goodies are costly, kicking back taxes to wealthy companies leaving less money to spend on public services and investments.

They’re unfair, picking a few winners to the exclusion of most businesses. Also, they tend to benefit wealthier investors at a time of rising inequality. They usually lack transparency.

They’re inefficient. They steer capital to projects that often wouldn’t be the best investment without the subsidies. Among the consequences is lower growth than might result in a more dynamic economy. One study found that companies receiving incentives expanded more slowly than others and jobs actually contracted.

And yet America is addicted to them. A recent New York Times investigation found that states and localities give $80 billion a year in incentives, ranging from tax breaks to free land. Washington ranked eighth nationally, at $2.35 billion per year, or about 15 cents per dollar of the state budget.

In an era of globalization, falling wages and hollowing out of American industries, states, cities and towns are terrified of losing more of their economic crown jewels. Or they want to add some. The result: Corporations can play them off against each other, selling expansions and relocations to the highest bidder.

This drama is playing out now in Oregon, where Gov. John Kitzhaber last week called for a special session of the Legislature to essentially guarantee Nike’s tax preferences. In November, voters approved a law ending some corporate-tax rebates.

As is usual in these situations, Nike is dangling an expansion promising 12,000 direct and indirect jobs over the next seven years and $2 billion a year in economic benefits. According to The Oregonian newspaper, Nike executives told Kitzhaber that they wanted to stay in Oregon but were being ”heavily courted” by other states.

Oregon suffered severe job losses from the Great Recession, so we know how this will turn out.

Yet The New York Times project raised important questions about whether the promises made by companies, especially the number of jobs to be created, are actually realized. Also, consultants that many governments rely on for help in analyzing these deals also work for the companies and stand to make big fees if the subsidies are approved.

Richard Florida and Charlotta Mellander at the Martin Prosperity Institute think tank examined the data to see what states got for their money.

According to Florida, ”there is virtually no association between economic-development incentives and any measure of economic performance.” This included measuring incentives per capita against average wages, college graduates, knowledge workers and the state jobless rate.

The Washington State Budget and Policy Center, a progressive think tank, found that Washington offered hundreds of special tax exemptions, credits and preferential rates. Among them was a high-tech tax credit costing $20 million a year.

One study estimated that the incentive increased total employment in the high-tech sector by less than a single percentage point. The cost: About $50,000 per job created. Microsoft was the biggest recipient of tax credits, rebates or reductions in The New York Times analysis, receiving $305 million from 2004 to 2010.

And yet, what do you do if, say, Boeing puts a cocked 787 to your head?

In 2003, Washington and then Gov. Gary Locke gave the airplane maker $3 billion in tax incentives over 20 years. Even that didn’t prevent Boeing from taking incentives reportedly worth as much as $1 billion from South Carolina to set up a second Dreamliner assembly.

On the other hand, Washington’s 2003 incentives arguably helped land the 737 MAX to be assembled in Renton. Such subsidies as a reduced B&O tax rate and tax credits for research and development and purchase of equipment apply to all airplane work done during the period they are in force, which is at least through 2024. The initial incentives were extended to include various supplier activities, too.

South Carolina faced some of the highest unemployment in the nation when it gave preferences to Boeing. But Boeing had already bought the former Vought plant in North Charleston and was seeking the Palmetto State’s hostile-to-unions climate. Did South Carolina really have to pay so much, particularly when it keeps cutting school funding?

Did Washington, with one of the world’s leading aerospace clusters, need to give $3 billion in corporate welfare to Boeing? Would Boeing really have undertaken the expense to leave an ecosystem with skills, talent and sunken costs in factories?

Policymakers in both states couldn’t take the chance.

Texas, the state that gives away the most in incentives, $19 billion, can claim great success with corporate relocations and expansions. Texas won Samsung and Apple to Austin in highly publicized bidding wars.

Another big winner is Amazon.com, which settled its tax-collection fight with Texas in exchange for being released from most of the back taxes the state was seeking. In exchange, Amazon promises to employ 2,500 at new distribution centers. (It closed one earlier near Dallas during the dispute.)

But considering those jobs pay between $20,000 and $30,000 a year, Texas is giving up tax revenue at the rate of about $100,000 per job.

Meanwhile, Texas cut $5.4 billion from schools in the most recent budget cycle and was already facing some of the lowest education spending in the nation. The state also has a high poverty rate.

But the spiral of subsidies and corporate welfare won’t stop any time soon, not in Texas, not here. Officials would consider that risky unilateral disarmament.

And that’s just the way corporations and relocation consultants like it.

You may reach Jon Talton at jtalton@seattletimes.com


Dean Rutz/The Seattle Times
$3 billion in tax incentives in 2003. That helped secure 737 jet production in Renton.




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