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By: Mark Glennon*

 

October 5, 2013

 

State governments’ love-hate view of relocation incentives ends up with love winning, and there’s no clear way to change that.

 

Two Illinois legislative leaders put this question directly to a group of prominent investment professionals at a lunch meeting I sat in on a couple years ago: “How can we stop these demands for tax breaks from companies threatening to leave the state?”  Dead silence. Not one had an answer or even a thought. The legislators were Democrats, the investors were mostly financial conservatives, but none liked what was happening. Nor did taxpayers. That was when Sears was negotiating a package to stay in Illinois, but nothing has changed since. Today, it’s ADM asking for incentives to keep its 100-person headquarters in Illinois. Nobody wants to pay them, but ADM may well get what it wants.

 

Let’s face up to the two reasons why incentives remain common despite their seeming unpopularity. First, they are a large part of the fabric and rationale of how state and local taxes are levied on companies across America. They are levied variably and subjectively based on perceptions about a company’s prospects for keeping or bringing jobs, investments, tax revenue and prestige. The massive numbers prove it. Over $80 billion of these incentives are dished out each year by state and local governments, according to an extensive study done last year by the New York Times. That’s a big chunk of total state and local tax revenue collected each year, which is about $794 billion. Some states give away as much as a third of their tax revenue on incentives, according the NYT study. Some 5,000 other companies have received more than $1 million in recent years. In short, rightly or wrongly, taxes are regularly reduced around the country on companies that can bring something to the table that the public and politicians like.

 

And those incentives are becoming ever larger each year making them an ever bigger part of how taxes are actually levied. This chart shows how all forms of incentives have grown consistently:

https://i2.wp.com/blogs.reuters.com/muniland/files/2013/10/Long_10-4-13.jpg?resize=538%2C265

Incentives are an old controversy in Illinois. The $20 million request from ADM is chump change compared to some earlier packages. In 1985, Governor Jim Thompson gave a $276.1 million package for a Chrysler-Mitsubishi auto plant in Bloomington-Normal — over $580 million in today’s dollars.

 

With incentives so common corporations have every right to seek the friendliest location and best tax deal they can. In ADM’s case, the EDGE tax credits they  want would be applied on paychecks of their employees. So, let’s not waste time trying to shame them out of asking for incentives widely granted. This is not “corporate welfare.”

 

The second reason incentives are here to stay is that no state will unilaterally disarm. “Let’s have all the states get together and stop this nonsense because we’ll all be better off.” That’s the endless refrain. Incentives are indeed a zero sum game or worse for the country as a whole. But this wishful thinking is old. We’ve heard it regularly at least since that controversial Mitsubishi deal almost thirty years ago. An effective multistate pact to end incentives never happens and never will because the states winning the game won’t agree. Locally, Indiana, Wisconsin, Iowa, and Michigan have budget surpluses. Wisconsin and Iowa are considering cutting their income taxes. They have us on the ropes with no reason to level the playing field.

 

“Just don’t pay them. They probably won’t move anyway.” That’s another widespread thought, and no doubt sometimes correct. I doubt ADM really thinks $20 million is material to its location assessment. However, incentive packages are often big — at least 48 companies have received more than $100 million in state grants since 2007, which is surely enough influence location choice. More importantly, politicians clearly think their incentives work and are cost effective. In principle, there’s indeed a sensible case to be made for lower taxes on companies that truly grow jobs and the long run tax base. (Whether politicians make those calculations correctly is a different matter — and part of why incentives are a problem.)  Finally, the frequency of incentives across the nation shows lawmakers are confident incentives will be politically popular at the end of the day, short term controversy notwithstanding. With union campaign contributions being what they are, none wants to be tagged with “losing” a major employer, and they live for those ribbon cutting ceremonies at new manufacturing plants.

 

ADM may or may not get its $20 million, but incentives for corporate relocation and retention aren’t going away.

 

*Mark Glennon is founder of WirePoints

 

 

 

 

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