Defending Against Relocation Threats with Retention Subsidies -- Paid with Employee Taxes

When companies threaten to relocate, often desperate states and cities will give almost anything to keep them. As I mentioned in a previous column, New York City and Kansas City have been among the larger victims of this dynamic. In his most recent column, David Cay Johnston (now at Reuters) lays out a depressing, newish, way that states are cannibalizing their tax revenues to retain existing businesses: letting companies keep withheld taxes of their employees.

Painful as it feels to have a lot of hard-earned income taken from your paycheck for taxes, a new Illinois law does something Americans may find surprising. It lets some employers pocket taxes for 10 years.

You read that right -- in Illinois the state income taxes withheld from your paycheck may be kept by your employer under a law that took effect in May.

As Johnston shows, these deals were almost entirely for retention of existing facilities. Motorola, Chrysler, Ford, and Mitsubishi were not required to create any new jobs, while Continental Tire has to create 400 new jobs. Navistar, however, is getting this subsidy despite the fact that it will lay off 900 of its 3100 current workers. (Note that Illinois did some one-off deals using this tactic before the new law went into effect.)

I mentioned that keeping one's employees' taxes is not entirely new. For example, in Missouri, cities with an earnings tax (St. Louis and Kansas City) can use those anticipated revenues in tax increment financing subsidies. In 2004, Kansas City did just that, giving H&R Block a brand new headquarters building worth $308.4 million, paying $292.3 million of the cost through its TIF (KC Star, March 4, 2004), a more than 94% subsidy! This project was a relocation within Kansas City, under threat of relocation to Kansas.

The threat of relocation of such large projects is a huge one and can generate gigantic windfalls for the companies exploiting their mobility. Ultimately, we need national rules against job piracy so retention subsidies become unnecessary.