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Tuesday, September 4, 2018

New article on tax increment financing in Missouri shows impact of KS/MO border war

After several years of work, my colleague Susan G. Mason (Boise State University) and I have published a new article on TIF in Missouri, specifically in the St. Louis and Kansas City metropolitan areas. "Exploring Patterns of Tax Increment Financing Use and Structural Explanations in Missouri's Major Metropolitan Regions" appeared in the July 2018 edition of the HUD journal Cityscape, downloadable for free here. We omitted the two cities from our earlier statistical analysis (in the paywalled Economic Development Quarterly, May 2010) because they are much larger than any other Missouri city and use TIF far more than any of them, making them statistical outliers.

In our earlier article, “Tax Increment Financing in Missouri: An Analysis of Determinants, Competitive Dynamics, Equity and Path Dependence,” we found that early adopters of TIF tended to be heavier users of TIF far past the first TIF adopted, that TIF as used in Missouri exacerbated inter-jurisdictional inequity (cities with higher poverty rates were less likely to use it than cities with lower poverty rates), and we found strong evidence for competitive dynamics in the use of TIF: Cities that were adjacent to a TIF-using city were two and a half times as likely as average to use TIF themselves, and implement more TIF projects.

The new article is an exploratory study, as it is impossible to generalize from two cases. But one thing we established clearly, based on complete data from 1988 to 2013 for St. Louis, and from 1988 to 2012 for Kansas City, is that Kansas City's tax increment financing projects are marked by much higher aid intensity (the EU term that equals subsidy/investment) than those of St. Louis. Indeed, even excluding 2009 in St. Louis, which was marked by several multi-billion projects with low aid intensity (and at least in the case of Northside Regeneration, had substantial state funding not reflected in Exhibit 4 of the article), the overall average aid intensity, ex-2009, is 17%.

By contrast, in Kansas City, the average aid intensity of the city's TIF projects comes to a whopping 36%,* more than twice as much. Everyone we interviewed on the question considered that there is much greater competition for investment with Kansas than with Illinois in the two metro regions. The difference in aid intensities is consistent with this thesis.

These points take on renewed importance as Missouri's Governor Mike Parson is convening the Governor's Conference on Economic Development in Kansas City this week. As you may recall, Missouri and Kansas came close to a truce in the border war in 2016, but it collapsed when Governor Sam Brownback proposed legislation that did not match what Missouri passed in 2014. Since Missouri has a new governor now and Brownback will be replaced in 2019, there is renewed optimism that a binding halt can be brought to the use of state subsidies in the border war.

The Governor's Conference will include a panel Friday on the border war in which I'll take part. We will discuss the background, data on the cost of the border war, and a potential solution. I will also point out that TIF is impacted by the border war, too. It will be great to try to persuade lawmakers and the governor.

Unfortunately, the cost to attend is prohibitively expensive, but I will report back next week.


* The mandatory typo occurs in Exhibit 3, Kansas City, in the line summarizing 1988-2006. First, the correct amount for total TIF reimbursement is $3,527,420,262, excising the stray "1" in the millions area. The correct aid intensity for that period is 36%, not the 21% listed and probably copied from the previous line.

Sunday, July 1, 2018

Great new Tax Justice Network podcast on how "Bean Counters...Broke Capitalism"

The June 28 Taxcast is out with a focus on the Big Four accounting firms. Richard Brooks is the author of Bean Counters: The triumph of the accountants and how they broke capitalism (order here in the UK and here in the US) which documents accountants' involvement in some of the world's worst financial scandals, not least of which is the promotion of tax havens. The new segment also features U.S. investigative journalist James Henry and Tax Justice Network Chair John Christensen. Additional stories include fraud at the Trump Foundation and why infamous US tax haven Delaware is supporting a financial transparency bill.

You can find the podcast and further reading here. Enjoy!

Thursday, June 28, 2018

Shock EU Court Decision Strikes Blow Against Investment Arbitration

With all the dreary news we've seen this week, could you stand some good news? The battle against investor-state dispute settlement (ISDS) got a huge boost in March when the Court of Justice of the European Union (CJEU) ruled in Slovak Republic v. Achmea B.V. ("Achmea") that ISDS is contrary to EU law. The decision was something of a surprise because the preliminary analysis ("opinion," in EU-speak) of Advocate General* Melchior Wathelet had suggested that the CJEU rule that ISDS is consistent with EU law.

As you may recall from the Trans-Pacific Partnership negotiations, ISDS is private arbitration of investment disputes between governments and foreign investors. Completely untethered from precedent and with no appeal, arbiters decide if a government has "expropriated" an investment, complied with its duties under a bilateral investment treaty (BIT) or "trade agreement" such as NAFTA, while these establishing mechanisms place no requirements on the investor. The imbalance of requirements under ISDS as well as its actual procedures present numerous opportunities for corporate abuse and, as Professor Susan Sell laid out in her guest post here in 2015, there is no shortage of examples of such abuse.

In Achmea, the Dutch insurer Achmea B.V. took the Slovak government to arbitration under the Dutch-Slovak bilateral investment treaty after the government decided to reverse liberalization of its health care system, ultimately deciding to create a single national health insurance program. The arbitrators ruled in favor of Achmea and awarded 22.1 million to the company Three other cases were filed against the Slovak Republic's action, including a second case from Achmea B.V. (Achmea II), but their respective tribunals all ruled they did not have jurisdiction. In Achmea, the government sought annulment of the award first from the Higher Regional Court of Frankfurt, which ruled against it, and then from the German Federal Court of Justice, which referred the case to the CJEU for a ruling on the relevant EU law (this is standard procedure in EU law).


A number of EU Member States, as well as the European Commission, filed briefs in this case. According to Reuters, "The Czech Republic, Estonia, Greece, Spain, Italy, Cyprus, Latvia, Hungary, Poland, Romania and the European Commission submitted observations in support of Slovakia’s arguments.Germany, France, the Netherlands, Austria and Finland contended that such clauses were valid."

The CJEU ruled, contrary to the Advocate General's opinion, that ISDS tribunals are not part of the EU legal system, not national courts, and yet might be called on to apply EU law. Moreover, since no appeal is possible, there is nothing to ensure that EU law is applied properly by these tribunals. Given that EU law supersedes all national law, ISDS threatens to undermine the autonomy of EU law. Therefore, the Court ruled that ISDS is not compatible with EU law.

In the first instance, this ruling applies to bilateral investment treaties between two EU Member States. These BITs all involve former Communist states that started becoming EU members only in 2004. As Lucia Bizikova noted on the Kluwer Arbitration blog, all these new Member States signed BITs immediately after the fall of Communism, and the requirements placed on them were much more demanding than under EU investment law. As she puts it, Achmea is "finally bringing justice to the most recent members of the EU." There are at present 196 intra-EU BITs, and ISDS has now been knocked out of all of them.

Moreover, the ruling may well affect ISDS that was contemplated in treaties between the EU and other countries, such as the Comprehensive Economic and Trade Agreement with Canada. As the authors state, this fits with European Commission action against intra-EU BITs. As Bizikova points out, one prominent example of the Commission's view on this is the Micula case, in which the Commission essentially forbade Romania from paying the  arbitral award, by finding that to do so would be to give an illegal state aid.

In the wake of the ruling, the Dutch government (paywalled; I was able to read the first two sentences) announced in May that it would terminate its bilateral investment treaties with other EU Member States. Presumably, without an enforcement mechanism, there was no point to maintaining the agreements.

Of course, one swallow does not bring a spring and all that, but having a such a landmark decision in the world's second-largest economic entity after China is something to celebrate.

You hadn't heard this news, you say? Despite happening over three months ago, the reporting is restricted almost exclusively to legal and arbitration blogs, almost all European, with nary a peep from the mass media. According to my searches of their websites, there was nothing at the NYT, CNN, the Washington Post, the BBC (!), the Financial Times (!!), Associated Press, and other sources. The only major news source I am sure picked it up is Reuters (European, of course). Let's hope a few more people hear about it now.



* In the CJEU, one Advocate General may be assigned to a case to write a preliminary analysis after the Court concludes oral arguments. The CJEU has a total of 11 Advocates General as well as 28 Justices, one from each Member State. The Advocate General's Opinion is often adopted by the Court, but there is no requirement that it do so.

Tuesday, January 23, 2018

Amazon scores two more $5+ billion bids

A non-blogging friend points me to the announcement today of Maryland's subsidy bid that puts Montgomery County into one of the 20 finalist slots. Shockingly, Governor Larry Hogan (R-MD) put in a bid that would pay Amazon almost the entire cost of its facility, depending on what you think a proper discount rate should be now (hint: low).

"HQ2," which Amazon has stated will amount to an eventual $5 billion in investment, will receive a subsidy package worth over $5 billion in nominal value (but not necessarily present value) from Maryland. The largest element in this package is a jobs tax credit of 5.75% of wages for up to 17 years, on salaries averaging $100,000 per year (minimum $60,000, maximum $500,000). According to the story linked above, Amazon would max out this incentive with just 40,000 jobs. To simplify the math, this element would pay up to $5750 per year to Amazon X 40,000 employees X 17 years, or $3.91 billion.

Other elements of the package include state and local property tax credits (local governments would be 50% reimbursed by the state for their share), a sales tax exemption on construction materials, and an unspecified amount of infrastructure. According to the linked story, there would be "billions of dollars" in transportation upgrades in the state, though the article does not indicate how much would be Amazon-specific and how much would go elsewhere in the area.

Why do I say this offer is shocking? 1) It normalizes not just billion-dollar incentive packages, but multi-billion subsidy awards. Foxconn got $4 billion last year from Wisconsin, according to the Good Jobs First Megadeals spreadsheet, October 2017 update. Now, Amazon has received at least three (see below for St. Louis) offers of over $5 billion. In the European Union, a $1 billion incentive is virtually impossible even in the poorest EU regions, and absolutely impossible in cities as wealthy as the 20 finalists here. Indeed, few if any of the 20 would be allowed to offer any subsidy whatsoever. 2) What is possibly even worse, it normalizes paying subsidies greater than the cost of the investment (100+ % aid intensity, in terms of European Union state aid rules). Seriously, if a government is going to pay more than the entire cost of the investment, it should have a legitimate, large ownership stake, rather than using "investment" as a euphemism for "subsidy." 3) Have none of these cities noticed that unemployment is at historically low levels? That's precisely a reason not to give away the store. Let's look at the state unemployment rate for the 20 qualifiers in November 2017:

Colorado:           2.9%
Tennessee:         3.1%
Florida:              3.6%
Massachusetts:  3.6%
Indiana:             3.7%
Virginia:            3.7%
Texas:                3.8%   (two finalists)
Maryland:          3.9%
Georgia:            4.3%
North Carolina: 4.3%
California:         4.5%
Pennsylvania:    4.6%   (two finalists)
New York:         4.7%
Ohio:                 4.8%
Illinois:              4.9%
New Jersey:       5.1%
Ontario:              5.5%  (December 2017)
Washington DC  6.4%

Source: For U.S. states and DC, Bureau of Labor Statistics, Local Area Unemployment Statistics. For Ontario, Alberta Government Economic Dashboard, published 5 January 2018.

I'm not the only person who is shocked. Greg LeRoy, executive director of Good Jobs First, told Middle Class Political Economist: "As a Maryland taxpayer, I am aghast that Gov. Hogan would propose to subsidize Amazon's new headquarters 100 percent with public dollars. I refuse to pay higher taxes for a company one-sixth owned by the richest person on earth."

LeRoy also pointed out that the St. Louis bid was released to the public last week after the city failed to be named a finalist. According to the St. Louis Business Journal, a partnership of the state of Missouri, the city of St. Louis, St. Louis County, the state of Illinois, and Illinois' St. Clair County offered Amazon $7.1 billion in subsidies, edging out Newark's $7 billion bid as the largest offering known so far. As with the Maryland bid, this is shocking for all the same reasons. Indeed, Missouri had one of the lower unemployment rates in November 2017, a mere 3.4%.

The Maryland and Missouri subsidy packages are simply horrifying. I wrote over six years ago that state and local subsidies were "more out of control than ever." In these six years, we have already seen five $2+ billion incentive packages, with at least one more on the way, and companies emboldened to request not millions, but billions of dollars of subsidies. I fear we are looking at a new ratcheting up of the investment attraction wars.

Friday, January 19, 2018

Amazon moves closer to breaking the bank with "HQ2"

Yesterday (Jan. 18), Amazon announced the 20 finalists for its "HQ2" project, that will supposedly create a second headquarters (why?) for the company somewhere in North America, most likely in the United States. With an alleged 50,000 jobs and $5 billion in investment, this development attracted 238 bids from cities and counties in the United States, Canada, and Mexico.

The finalists: Atlanta, Austin, Boston, Chicago, Columbus, Dallas, Denver, Indianapolis, Los Angeles, Miami, Montgomery County (MD), Nashville, New York, Newark, northern Virginia, Philadelphia, Pittsburgh, Raleigh, Toronto, and Washington.

The finalists will now be subject to months of unremitting pressure to give up as much as possible. It will not be pretty. Information asymmetry, capital mobility, and rent-seeking are the hallmarks of the site selection process. In the European Union a set of rules on subsidies limits this competition, whereas in the United States, it's the Wild West. This leads to much higher investment incentives being given in the United States than are given by EU Member States for similar projects even by the same company (AMD/Global Foundries, for example).

Interestingly enough, both the highest-known bid ($7 billion in Newark) and the lowest (0 in Toronto) are still under consideration. (Unfortunately, the other known 0 bid, by San Jose, was rejected.) I can think of scenarios where either might be chosen, but I can't get inside the mind of Jeff Bezos and other Amazon decision-makers. This is the heart of information asymmetry. So again, we have to wait and see what Amazon does. Will the company subject a smaller group of cities to still more torture? Stay tuned!

Sunday, October 22, 2017

Now Amazon wants to break the bank UPDATED

On Thursday (October 19), the first stage of the Amazon sweepstakes for a second headquarters, dubbed "HQ2," was completed as cities submitted their bids to the Internet giant. With a possible $5 billion investment and eventually 50,000 jobs at salaries over $100,000, this is one of the very best economic development projects to come along in a long time.

BUT IS IT?* I have a hard time understanding how this project even makes economic sense. Why does a company need two headquarters? Doesn't that defeat the whole idea of having a headquarters as a centralized coordination site? Dean Barber has gone so far to suggest that Amazon will "A/B test" the two headquarters: See which one does better, and close the other one (h/t Greg LeRoy). I can believe it, but as long-time readers know, this is an area where we're looking at the terrible information  asymmetry that bedevils governments in site selection bidding wars. In other words, we have no idea whether Amazon intends to close its existing headquarters in Seattle or close HQ2 if it doesn't work as well as the current headquarters. This is kind of an important point for assessing the impact of HQ2 on the United States as a whole. And then there's the effect that subsidizing Amazon will have on its competitors, which will reduce net job creation and net benefits for the country as a whole. On top of everything, unemployment is pretty low in most states, so why would they want to shell out billions of dollars for this project?

I'm not going to try to prognosticate the HQ2 location (I almost said "the winner," but there is a good chance of overbidding in a public auction with so many competitors), because there is no way to wave away the information asymmetry problem. I think we can be confident that it will be a place that is already a tech hub. CNN offers eight plausible contenders (Atlanta, Pittsburgh, Toronto, Dallas, Austin, Boston, San Jose, and Washington, DC), while the New York Times predicts Denver. Instead, I want to highlight some specific bids that caught my eye.

One of the good stories is Toronto. Both the city and the province of Ontario were quick off the mark to say that while they would certainly do things like facilitating land assembly, there would be no cash subsidies for Amazon. The city's application to the company emphasizes its abundance of tech talent. As a sign that this "no subsidies" talk is not empty, we can point to the announcement earlier this month that Ontario had secured a new investment from Thomson Reuters, adding 400 jobs over two years, scheduled to eventually grow to 1,500 jobs. This project received no financial support at all, only what provincial officials described as "concierge service" (h/t Carpentry of the Heart).

Another major city not getting involved in the bidding war is San Jose. Like Ontario officials, Mayor Sam Liccardo argues that talent availability is the key to attracting businesses. While this tells us nothing about incentives the state of California might provide, it is good to see two of the major potential sites taking an anti-subsidy position.

At the other end of the spectrum, New Jersey is offering $5 billion over 10 years, and Newark will provide another $2 billion over 20 years. This is crazy on a number of levels. First of all, it has a nominal aid intensity of 140%: New Jersey and Newark will pay all the costs of the project and give Amazon some more money on top of that. Second, this is 18 times bigger than the largest subsidy the state has given in the past ($390 million). (We saw the same situation with Nevada and Tesla, but that was only 13 times the state's formerly largest incentive package.) Whether the state is really capable of managing a deal of that size is doubtful; indeed, the $390 million American Dream retail/entertainment project has been under construction for more than 10 years. Third, while not all of the approximately 50 238 bids have yet been revealed, currently the second-highest bid is $500 million from Worcester, Massachusetts (state support is currently unknown), 1/14 the size of Newark's package. This is reminiscent of the disparity in bids between North Carolina and Virginia for a Dell manufacturing facility in 2004: $300 million (nominal) vs. $37 million! Fourth, and finally, this project requires the legislature to tear up the current geographic targeting of the state's Grow NJ subsidy fund, currently restricted to the four poorest cities in the state, Passaic, Paterson, Camden, and Trenton.

Now, we wait. Amazon does not plan to announce its decision until next year. There is plenty of time to announce a list of finalists and subject them to more pressure. I am going to guess that when all first-round bids are revealed, the number 2 bid will be over $1 billion; indeed, there may be several $1+ billion bids. This is going to get ugly before we're done.


*Bonus points if you recognize the literary allusion.

Friday, August 25, 2017

Reports of Obamacare's death are greatly exaggerated: All counties to be covered for 2018

Obamacare has now obtained an insurer for every county in the country, defying Republican claims that the program is collapsing. As reported by The Hill, "At one point or another over the past year, more than 80 counties have been at risk of having no ObamaCare insurer on the exchanges in 2018." On Thursday (Aug. 24), the last "bare" county, in Ohio, was covered by insurer CareSource. Insurance companies have until September 27 to sign contracts, so it is not yet guaranteed there will be no bare counties for 2018.

As you no doubt remember, Chicken Little Republicans have proclaimed the sky to be falling ever since the Patient Protection and Affordable Care Act was passed in 2010. We were subject to ridiculous predictions about "death panels," skyrocketing premiums, predictions of no fall in the uninsured, horror stories that weren't, and of course the ever-popular "job killing" meme.

Instead, three years of the ACA (Q4 2013 to Q4 2016) brought the uninsured rate for adults 18-64 down from 20.8% to 13.1% (but an increase to 14.2% in Q2 2017) while unemployment fell from 6.7% in December 2013 to 4.7% in December 2016 (and 4.3% in July 2017). In addition, personal bankruptcies fell from 1.5 million in 2010 to just 771,000 in 2016, according to Consumer Reports.

As the recent increase in the uninsured rate shows, the ACA is still vulnerable to sabotage by the Republicans. Given that the increase occurred disproportionately among younger adults, Gallup speculates that uncertainty about the consequences for disregarding the individual mandate may explain a large amount of the change. There remain several routes for sabotage to take place. At the same time, there is a bipartisan effort in the Senate to stabilize the individual marketplace, potentially with explicit funding for individual subsidies.

Constant vigilance!

h/t David Ayon