While Gov. Brian Sandoval and his allies celebrate their success in attracting Tesla to Nevada with a deluge of tax abatements, there are policymakers around the nation discussing ways to keeping it from happening to taxpayers again.
“Tax exemptions intended to attract and retain technology companies are emerging as the next battleground in an income inequality debate that has drawn global attention,” Bloomberg News reported in April. The Tesla deal, accompanied by wide scorn in the business community, has fueled sentiment for federal restrictions on the use of economic incentives by state and local government, with chambers of commerce prominent among supporters of such restrictions.
The sheer amount of corporate welfare involved in some recent giveaways—Nevada’s most of all—have prompted calls for federal action to curb state and municipal giveaways and their attendant impact on workers and taxpayers. One possibility is withholding federal community block grant money from governments that use incentives to lure business, which is a relatively new technique.
The Tesla deal came on the heels of “smaller” transactions in other states—$2 billion for Intel for a semiconductor manufacturing facility, for example, or $1.7 billion to the Cerner Corp. for expansion of the health care information technology company.
Such deals happened in markets far larger than Nevada, so their per capita impact was smaller. Until recently, according to the New York Times, Nevada had the lowest taxpayer burden for corporate welfare in the nation—$12 per resident. It’s unknown yet what the recent Nevada glut of various sales tax anticipated revenue (STAR) bonds, tax increment financing (TIF), tax credits, and abatement deals have done to that ranking over the course of a couple of governorships and legislatures.
The cost to states in subsidies have begun to reach sky-high levels, with some states paying nearly half a million dollars for each job. In the Tesla case, if the corporation actually creates the projected 6,500 jobs—the Sandoval deal does not guarantee any number—Nevada will lose $200,000 for each job.
Why a federal law? Subsidies in states and municipalities are such a flood now, local officials are unlikely to restrain themselves voluntarily. The two Kansas Citys—which face each other across the Missouri/Kansas border—keep luring companies back and forth with ever-higher subsidies. Chambers of commerce in both states finally convinced the Missouri General Assembly (state legislature) this year to enact a measure to crack down on the raiding. But Kansas balked at enacting corresponding legislation and, because the legislation is framed as a nonaggression pact, the effort has apparently failed.
In those circumstances, only action from outside can control the excesses. Last year, Mark Funkhouser—former Kansas City, Missouri, mayor and now publisher of Governing magazine—wrote, “We need a national law that prohibits corporations from extracting bribes from state and local governments and bans governments from donating tax dollars to private entities—a sort of domestic equivalent of the Foreign Corrupt Practices Act, which prohibits American companies from bribing foreign governments.”
Funkhouser says the practice of luring companies with subsidies is somewhat new, that until the 1970s, the money now used for incentives was invested in keeping infrastructure and schools up to date. On Sept. 15 he told the Washington Post, “If a state said, ’No, instead of $3 billion for Boeing, we’re going to invest it in schools, and we’re going to invest it in highways,’ they would win. Nevada did not win on Tesla.”
In some states, legislators have taken on oversight duties because of the difficulty of policing incentive agreements. In New York, for instance, Republican Assemblymember Kieran Lalor called attention to secrecy surrounding an IBM deal and furloughs the corporation imposed after getting welfare—“New York has given IBM hundreds of millions in tax benefits. That should come with more transparency. We need facts and figures on the jobs those subsidies supposedly create or retain.”
In Nevada, state legislators spent only two days giving the deal a once-over-lightly, set up no subsequent legislative oversight, voted unanimously for the deal, and were all smiles as the governor signed it. Legislators were anxious to believe wild claims made for the Sandoval deal and carefully avoided calling in independent experts to analyze it. Among the matters that were ignored by the lawmakers is the possibility that Tesla’s presence could cause a multi-million dollar expansion of the Reno-Sparks sewage treatment plant, a direct impact that the Sandoval deal with Tesla does not address—much less fund. The lawmakers are now politically invested in portraying it as successful instead of committed to rigorously policing its provisions.
Moreover, politicians are not economists or scholars. They tend to take for granted that subsidies are a positive factor without doing any homework to find out if it’s true. In fact, serious research shows things that never enter the politicians’ minds—that subsidies to small companies foster more economic growth than subsidies to large corporations, for example, and that subsidies tend to help those segments of the economy that need it the least. Subsidies are rarely if ever used in neighborhoods of the working poor.
And though there is always a lot of political talk about job creation, subsidies don’t do that, either. The Tesla jobs were created in a boardroom in California. The only thing at issue in the competition among states was where they would be located. Not only does research not show subsidies create jobs, but a comparison by scholar Nathan Jensen of Kansas corporations receiving subsidies with those that did not found those not receiving subsidies created slightly more jobs.
The concern of politicians for workers in these deals is normally minor or non-existent. Washington provided $8.7 billion in incentives (the largest state corporate tax subsidy in history) to Boeing, which was threatening to leave the state at a time when the corporation was also (1) demanding concessions from unions, (2) increasing dividends by more than half, and (3) hitting soaring profits of more than 75 percent. When a vote by rank and file union members threatened to undo the deal, a couple of dozen states moved in to offer Boeing better deals, prompting the union to cave in. The other states had torpedoed Boeing workers, reduced the spending power of those workers, and weakened the regional economy. Little wonder that a few weeks later, Seattle voters raised the local minimum wage to $15 an hour.
“Many working people, middle-income people, even upper middle-income people, are being left behind,” said San Francisco Supervisor David Campos at a protest against tax breaks given to Twitter Inc. (value of the needy corporation: in excess of $25 billion) to keep it in that city, breaks that the Service Employees International Union Local 1021 has calculated have cost the city $56 million in lost revenue.
Politicians out of work are naturally terrified by voters out of work, and executives are eager to exploit that fear.