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Friday, July 22, 2011

Why is economic development a “middle-class” issue?

Some of you may have found it odd that a blog devoted to the situation of the middle-class has had so many articles on economic development. “How does that affect the middle class?” you may ask. That's a fair question, and today I'll take a whack at it.

My academic work has had a fairly straightforward development from considering business-government bargaining (and the profound impact rising business mobility has had on that) to considering the economic development subsidies that play such a big role in that bargaining – and in ways of controlling those subsidies. See in particular my books Competing for Capital and Investment Incentives and the Global Competition for Capital. What those books show is that the unregulated competition, job-poaching approach of the U.S., is not the only possible one. The European Union has imposed rules specifically limiting the subsidies given to large mobile companies. And, overall, the EU regulatory rules (sharply limiting subsidies in rich areas, allowing higher subsidies in poorer regions such as the East European new member states) work in holding down the size of the incentives given to companies. Hyundai got $115,000 per job from Alabama, but only about $75,000 per job from the Czech Republic, even though Alabama is much more prosperous than the Czech Republic and shouldn't have to give away as much, all other things equal. The EU's “regional aid guidelines,” as they are called, really have teeth.

Without further ado, then, let me address why the middle class should care about economic development subsidies.

  1. Economic development subsidies represent a transfer from the average middle-class taxpayer to business owners, who on the whole are much wealthier. In other words, investment incentives exacerbate income inequality within the country. Companies using their mobility to extract subsidies are often busy reducing their wage bill or regulations as well through the site location process.
  1. Governments justify all sorts of middle-class unfriendly policies through the need to compete for investment. Whether it's proposing “right-to-work” laws in Missouri and New Hampshire, cutting business taxes in (your Republican state here), slashing government jobs, or gutting regulations to coddle the “job creators” who are actually sitting on trillions of dollars of cash already, competition for investment is the means by which races to the bottom (in taxes, wages, environmental and social protection) are usually thought to occur. By the way, I like Dale Murphy's Oxford University Press book The Structure of Regulatory Competition as an antidote to those who think that races to the bottom are some kind of urban myth.

  2. Tying these two factors together, investment subsidies drain money from other government spending programs, increase debt, or require a higher tax burden on someone else, or some combination of the three.

For me, then, my commitment to reducing inequality is what fueled my interest in economic development subsidies. As my dissertation adviser Charles Lipson always says, people become interested in political science because they care about politics, and I'm certainly no exception. Economic development is obviously not the only issue that affect the middle class, but I hope I've convinced you that it is actually quite significant. I'd be pleased to hear your thoughts.

Tuesday, July 19, 2011

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.

Subsidy Transparency Only Works if Citizens Make Governments Comply

Minnesota is the home to the first statewide law mandating subsidy transparency, way back in 1995 ( Among other things, the law provided that state and local subsidy programs had to create job creation and wage level requirements, though it did not specify what they had to be.

The law made it possible to analyze some aspects of Minnesota economic development, including wage performance, subsidies and sprawl, and subsidized relocations within the state (

However, a new study by the St. Cloud Times (July 17) shows a troubling unevenness in cities' compliance with the law's reporting requirements, a full 15 years after it was first adopted. While some programs, like the state's Jobs Opportunity Building Zone (JOBZ) program, generally make it easy to see whether job creation and wage commitments have been met, some cities do a bad job reporting on whether local subsidy programs do the same.

For example, the article says the city of St. Cloud (northwest of the Twin Cities) has at least seven tax increment financing (TIF) projects since 1995 that did not establish job and wage standards as required by the 1995 law. By contrast, nearby St. Joseph  and Waite Park did attach such standards to their TIFs. Sauk Rapids, population 12,773 (2010 census), has adopted 22 subsidies (mostly TIF) since 1995, yet did not respond to the newspaper's request for job and wage information with data it should have at its fingertips.

This variation at the local level is important because in Minnesota because, according to Good Jobs First, local subsidies far exceed state subsidies, with $333 million in TIF provided in 2009.

The point, then, is that while transparency is the #1 precondition for subsidy reform, citizens have to keep on their toes to make sure transparency required by law actually exists in practice.