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December 02, 2012 10:00 AM When corporations act like protection rackets … and taxpayers are left holding the bag

By Kathleen Geier

As if my earlier post about the curse of the state lotteries were not depressing enough, here comes yet another depressing report from the laboratories of democracy. In part one of a series, the New York Times reports not on the lotteries, but on a different grotesque and failed state fiscal policy. This time, it concerns those multi-million, sometimes even multi-billion dollar tax breaks that many state and local governments give to big businesses to prevent them from relocating elsewhere, taking their jobs with them. In my hometown of Chicago, perhaps the biggest offender along these lines has been the Chicago Mercantile Exchange, but pretty much every city and state has its own horror stories, some of which reporter Louise Story details in the Times article.

There are numerous problems with these schemes, which often seem to amount to little more than a giant extortion racket. Here are some of the troubling issues Story’s article documents:

— Companies may promise to stay put if they get their tax breaks, but there is no way to hold them to their word. There are numerous instances where firms helped themselves to generous amounts of taxpayer money and yet still ended up relocating to another state — or another country. There was nothing the localities involved could do to get their money back.

— It’s very difficult to determine the true costs of these tax breaks. According to the Times, these types of subsidies add up to $80 billion per year. However:

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.

— State and local governments lack the resources to fact-check what the corporations are telling them. Financially strapped governments can’t afford to research whether it truly would be financially feasible for these companies to relocate, or whether they really require tax breaks that are as large as the ones they demand.

— Especially in this era of austerity, subsidizing these corporations is enormously expensive. It drains resources away from vitally needed public services and redistributes wealth to the rich. The Times quote a statistic that, interestingly, comes from the conservative group the Manhattan Institute for Policy Research, which “found that the amount New York spends on film credits every year equals the cost of hiring 5,000 public-school teachers.”

Part of the issue here is that state and local governments are facing a huge collective action problem. If they all banded together and refused to pay the extortion money these corporate bloodsuckers demand, all the governments would be better off and the public good would be served. But these firms opportunistically play states and localities off against each other, so that they compete against one another for the privilege of being screwed over by these gonifs, rather than working together to defeat them.

Hopefully, future articles in the Times series will look at potential public policy solutions to this terrible problem. Again, in my hometown in Chicago, Occupy and some of the unions have engaged in actions against the Chicago Mercantile Exchange designed to shine a spotlight on this problem, so that’s a start. One of the reasons I was so impressed by this year’s Chicago teachers’ strike is that the teachers’ union repeatedly made the connection between our decimated public sector and upward wealth redistribution in the form of ginormous tax breaks to bad actors like the Merc. Perhaps the budget crises that are affecting so many states and local governments in this austerity era will force them, at long last, to re-examine these kinds of lavish corporate subsidies. It certainly has the makings of a winning political issue for any progressive group or leader with the courage to take it and run with it.

Update: I should note that sometimes, citizen activism against these kinds of corporate abuses does work. Earlier this year, the Merc agreed to forgo $15 million in taxpayer funds from the city of Chicago. They backed down largely due to pressure from Stand Up! Chicago and other activist groups. The Merc was reportedly going to use the taxpayer money for a golden toilet, and activists had a lot of fun with this. Among other things, they attempted to deliver a beribboned golden toilet to Merc chairman Terrence Duffy. A video of this stunt can be found here.

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee

Comments

  • Patrick Star on December 02, 2012 12:53 PM:

    Sounds very similar to sports teams demanding public money to finance state-of-the-art stadiums, which become hopelessly obsolete (in the team owner's minds) within a few short years, followed by threats to move again, etc., etc. These corporations and billionaires just cannot be trusted, bottom line.

  • jjm on December 02, 2012 12:53 PM:

    So right! Chris Hayes' show this morning addressed some of this issue. Dannel Malloy, governor of Connecticut, was saying that it results from competition among the states to keep businesses there.

    But clearly there has to be some kind of give back to states that have offered tax breaks and the company moves or ships jobs overseas anyway.

  • c u n d gulag on December 02, 2012 12:56 PM:

    "Hopefully, future articles in the Times series will look at potential public policy solutions to this terrible problem."

    May I recommend, "The French Dis-connection."

    WE seperate the heads of these malafactors of great wealth from their bodies, via dull, slow, rusty, guillotines - to prolong their agony, and provide us with the joyous spectacle of them begging for a quicker and more merciful end - which is when we can provide them with a good old American 2nd Amendment solution, right in the back of their not-quite severed feckin' heads.

    It'll be fun for the whole family!

    I want a front-row seat.
    I've seen Gallagher concerts on TV, so I'll be sure to bring some rain gear - don't want to stain my clothes.

  • beejeez on December 02, 2012 1:00 PM:

    Back when I was covering development issues for newspapers, property tax giveaways definitely helped attract businesses to the towns I covered. But it was always understood that the prospects of the business at some point ever joining the local tax rolls was at best a 50-50 bet, whatever the business's promises. And when the business announced it would pull up stakes after basking over several years or even a decade of tax-free living, either the communities would find a way to extend another tax deferment or gnash their teeth when the business moved on.

    Now, whether this happenstance was part of the business's plan all along is debatable; businesses can be very good at fooling themselves as well as being very good at cagey manipulation. But it occurred to me that it would really benefit communities and states to make regional agreements to discourage tax-break-shopping, or at least to cooperatively insist that tax-break agreements play fair with the facts.

  • martin on December 02, 2012 1:06 PM:

    Here in AL we are one of the states corporations threaten and do flee to. All we can offer them is to be the cheapest whore on the block. We've not only cut their taxes in some situations, we've actually paid their taxes for them. And, of course, we promise to keep the workers union free, docile and subservient. We may not be able to afford to educate that workforce, but the if corporations can create jobs that need lots of uneducated drones, we're the place.

  • Roger Keeling on December 02, 2012 1:57 PM:

    This has long been a problem, and has at times caused me to dream of some kind of interstate compact setting ALL state taxes to a consistent base level with little room for special giveaways. Not bloody likely, of course, and perhaps an idea that would generate lots of unanticipated (negative) consequences. Still, one yearns for some kind of better way to respond to corporate greedsters demanding unique tax breaks.

    Oh, and a gold star to you, Kathleen, for using the Yiddish word "gonifs." I'd never before seen it, had to run to Google to figure it out. A nice word, as it looks and sounds just about like the creeps it describes.

  • evodevo on December 02, 2012 2:01 PM:

    One solution: the corps would have to pay federal tax on all local/state rebates/tax breaks/whatever. That would put an end to the extortionary machinations once and for all. Oh, and if they move outside of the country, they pay a fine to the Feds.
    Works for me !

  • Evan Benjamin on December 02, 2012 2:05 PM:

    I have one small quibble. The film production and post production credits in NY help small studios and freelance editors like myself. And they only last for the duration of the project to be done in NY. There's no giant corporation twisting arms to get this in perpetuity.

  • golack on December 02, 2012 2:32 PM:

    Maybe time for a national VAT? If valued added in US, we tax it; if value added outside US, we tax it when it comes back in. Online retailers skipping out on sales taxes--they'll have the VAT to pay.

    OK, compact amongst states to replace state sales taxes with VAT. Still leaves property taxes. States would have to help communities--basically match part of property taxes collected based on formula of total amount collected and effective tax rate. IF those communities give large property tax breaks to corporations, they'll lose on the state matching funds.

    There has to be a strong disincentive for giving large tax breaks.

  • Rick B on December 02, 2012 4:24 PM:

    If the federal government would just pass a tax increase on corporations and companies that equaled whatever tax breaks state and local governments gave them then the playing ground would become level.

    Employers would locate in the most economically effective locations and state and local governments could not be pressured into giving up local tax money to buy jobs for the workers. Local businesses would not have to compete with a gigantic subsidized competitor.

    I've been especially unhappy about those state and local giveaways since I read in David Cay Johnson's book "Free Lunch" that Wal-Mart's profit each year almost exactly matched the sum of all the state and local tax breaks they have extorted from local governments.

  • bluewave on December 02, 2012 4:36 PM:

    I've never understood why state governments giving out these "beggar thy neighbor" tax breaks to corporations is not just a tariff, albeit a negative one, and therefore prohibited under the federal constitution. I think some taxpayer in Ohio tried to advance an argument along these lines, however, but the Supremes decided he had no standing.

  • fignaz on December 02, 2012 6:26 PM:

    The Chicago Mercantile Exchange was one of the jewels in Joe Kennedy Sr.'s financial crown, wasn't it? If so, does the family still own it?

  • paul on December 02, 2012 9:34 PM:

    It would be easy enough, of course, to make arrangements where tax breaks only vested after whatever period was agreed. Companies could pay into an escrow fund, and borrow against their expected windfall at relatively low rates as long as the market believed they were going to stick by their word. Or they could post a bond.

    But you're not going to see this happening much because the elected officials are also playing with other people's money. (And have a certain tendency to find employment with companies that enjoy tax breaks once their public service is over.)