First-Ever Report on Local Subsidy Transparency Released

Today, Good Jobs First released the first-ever report (report, press release) on local subsidy transparency in the United States, "Show Us the Local Subsidies." This is a welcome development, even if the bottom line is that the glass is nowhere near half full yet.

The report analyzes 64 incentive programs in the country's 25 largest cities and 25 largest counties. Of these, only 1/3 (21) report the name of the subsidy recipient online. Of these, a mere 10 list the amount of the subsidy initially awarded, and only six the actual number of dollars ultimately disbursed.

Memphis/Shelby County, New York City, and Austin each had a program that earned a perfect score for their online disclosure, and Chicago was not far behind. But 20 cities and counties, out of the 36 that had locally-controlled subsidy programs, did not report at all.

Why is local transparency so important? The reason is simple: there are thousands of local governments giving subsidies, so it is difficult to obtain information on them all. Without information, there is no way to hold firms to any commitments they might make in return for the subsidies, nor any way to hold governments accountable for giving the subsidies. From the standpoint of a researcher, it means it is virtually impossible to make a particularly reliable estimate of how much they all add up to.

In fact, since local subsidy reporting is so bad, when I made my estimates of state and local subsidies in Competing for Capital and Investment Incentives and the Global Competition for Capital, I could not find a better approach than to simply assume that they were about equal to state subsidies, as several experts suggested to me. While one would think that most cities give less than states (though Kansas City has given several $100+ million tax increment financing subsidies), the fact that there are so many more cities than states offsets this consideration. In fact, in Missouri local subsidies exceed state subsidies, and they did so in California until the state abolished TIF last year. So this assumption is not as outlandish as it seems at first glance. The resulting estimate is that there is $25-35 billion in local subsidies annually, enough to hire every laid-off local worker in the country.

That's why a serious push for local level transparency is so welcome. When Greg LeRoy and Good Jobs First began promoting state disclosure in the late 1990s, the number of states with company-specific reporting was in the single digits. As the new report notes, even in 2007, only 23 states had reached some level of transparency. This year, we are up to 46 states and the District of Columbia. Good Jobs First is promising a new state transparency report card later this year.

Thus, while the glass is very far from half-full on local transparency, the fact that there is enough to report on, and that more is surely on the way, is very good news indeed.

"Libertarian" Koch Brothers Have Taken Tens of Millions in Subsidies UPDATED

The Cato Institute, originally the Charles Koch Foundation, is one of the most influential libertarian think tanks in the country. With both Charles and David Koch on its board of directors, Cato has produced numerous studies on the evils of corporate subsidies (which it calls "corporate welfare"), dating back at least to the 1990s. Supposedly, Charles Koch himself (via Wikipedia) is opposed to "corporate welfare," and plans to oppose it this year.

I guess I'll believe it when I see it. As previously discussed in Dirt Diggers Digest, Koch Industries has received many subsidies over the years, and I doubt this leopard will change its spots. In fact, the full tally of giveaways they have received extends far beyond the article linked above.

The calculation below relies on Good Jobs First's Subsidy Tracker database and the New York Times subsidy award database (not the program database). While 98% of the entries in the Times database come from Good Jobs First, reporter Louise Story took the first big step toward aggregating by standardizing company names. However, this still does not connect parent and subsidiary companies, so I carried out this step for the Kochs by using the Wikipedia entry for Koch Industries. With a quarter of a million entries and counting in Subsidy Tracker, I cannot imagine how long this would take if I had to do it for every company.

Here are the subsidies I was able to identify for Koch companies.

Flagship Koch Industries has taken over $16.5 million in subsidies from 11 different awards, none of which are sales tax breaks (which generally are not subsidies).

Subsidiary Georgia Pacific has received 72 subsidies worth over $43.9 million (none of these were sales tax breaks).

Subsidiary Flint Hills Resources LP has received subsidies from Iowa, Kansas, Texas, and Michigan, according to the Good Jobs First Subsidy Tracker; the New York Times subsidy database, which omits Michigan but includes one more Iowa subsidy, puts the value of the Iowa and Kansas subsidies alone at just over $12.5 million (again, none of which were sales tax breaks).

Subsidiary INVISTA has received $217,504 in training grants from South Carolina, according to Subsidy Tracker. Several other subsidies appear to be connected to this subsidiary, but none have available subsidy amounts. Again, none were sales tax breaks.

To summarize:

Koch Industries: $16.5 million
Georgia Pacific: $43.9 million
Flint Hills: $12.5 million
INVISTA: $0.2 million

Total subsidies to the Koch brothers:$73.1 million

Remember, this is the minimum value of the Koch brothers' subsidies. Some of the entries had no dollar figures available, and there is always the possibility that some incentives were missed entirely or that the awards above were only a part of a subsidy package, not the entire value. In particular, local subsidies are not well covered in either database; the same is true for my national estimates. The  data just isn't widely available.

Meanwhile, Koch Industries is going to be the largest investor in the Big River Steel project in Osceola, Arkansas, which is expected to cost the state $132 million in incentives.

Like I said, when it comes to the Kochs fighting subsidies, I'll believe it when I see it.

UPDATE: Yasha Levine tweeted me to let me know about two stories he did at Exiled Online in 2010 and 2011. While I focus above on state and local subsidies, Levine's stories focus on federal and foreign subsidies received by Koch companies. The biggest takeaway is that the federal subsidies, especially the ethanol subsidy, dwarf what the Kochs have received at the state and local level, with the ethanol subsidy alone worth perhaps $1 billion a year. The mind boggles.

Check out Levine's stories for the gory details. Thanks, Yasha!

Cross-posted at Angry Bear.

Mississippi Sets a Record for Unreported Subsidies

As I have written before, when states announce a major new investment, it is far more likely that the announced subsidy is an underestimate than an overestimate. A new Good Jobs First study commissioned by the United Auto Workers unearths a new example of this, which I believe is the largest underestimate ever: Nissan in Mississippi.

When Nissan announced in 2000 that it had chosen Madison County, Mississippi, just north of Jackson, as the site for a new assembly facility, it was reported that the project had received $295 million in subsidies (at a present value of $289.7 million, as I calculated in Investment Incentives and the Global Competition for Capital). The project also was given the power of eminent domain, and while one family succeeded in avoiding condemnation, it no doubt weighed on voters when they overwhelmingly passed an eminent domain reform initiative in 2011.

It turns out, as Good Jobs First reports, that the announcements left a few things out. While the $295 million package was passed by the state legislature in a one-day session (North Carolina does this sort of thing, too), the project was also receiving incentives from Madison County, and the city of Canton agreed not to annex the plant for 30 years. In addition, it was eligible for huge subsidies under existing Mississippi programs, including Jobs Tax Credits, reductions in its business franchise tax, personal property and sales tax exemptions, as well as Advantage Jobs, which lets employers keep up to 90% of workers' state tax withholdings. This is a type of subsidy of which Good Jobs First is highly critical, as is David Cay Johnston.

Just how much was left out? $867 million, as follows:

Jobs tax credits: $400 million over 20 years
Franchise tax reduction: $72 million over 20 years
Advantage Jobs: $160 million over 20 years
County infrastructure: $25 million
County property tax abatement: $210 million over 30 years

Not only that, but Nissan received a further $68 million for an expansion in 2002, plus about $13 million in miscellaneous subsidies more recently. Finally, Good Jobs First estimates that the state had to spend about $90 million to finance the bonds for the infrastructure at the beginning of the project.

The report notes that employment is around 4500. Counting all the subsidies, but omitting the $90 million for financing, that comes to about a nominal value of $276,000 per job, more than the usual assembly plant project. In addition, about 20% of the jobs there are held by temporary workers, making the value of the project less than if all workers were directly employed by Nissan.

No doubt some of this information was available before. But the fact that it's taken over 12 years to get a full accounting of the costs of the project--and that the subsidy for the initial phase was almost three times the amount advertised--provides a stark warning about how difficult it is to have adequate oversight and accountability for even projects that receive a great deal of press coverage.

Four Easy Fixes for Corporate Taxation

Everyone "knows" that the corporate income tax is a mess. Ask any company. They pay too much in corporate income tax, face rates higher than in any other OECD country, and are just following the law when they use tax havens to keep profits eternally deferred from taxation and to perform general sleight-of-hand.

Don't believe a word of it. While some economists believe we shouldn't tax corporations at all, the corporate income tax (CIT) is a necessary backstop to the personal income tax (PIT). With no CIT or a rate lower than the PIT, individuals have an incentive to incorporate their economic activities so they aren't taxed on them, or are taxed less. Needless to say, this is something an average wage or salary worker would not have the ability to do. This is another area where we have one tax law for the 1%, and different rules for the rest of us.

So what should we do? The answers are simple, which is not to say that achieving them will be simple. Corporate interests hold a lot of political sway right now, and overcoming them will be anything but easy.

1. End the usefulness of tax havens for secrecy by instituting "publish what you pay." Currently, companies can hide all sorts of transactions because they are only required to publish "consolidated" accounts of their global operations. Thus, Starbucks reports losses on its British tax statements while telling investors how profitable it is in Britain.  Apple can get away with leaving its subsidiaries in Luxembourg, the Netherlands, and the British Virgin Islands off its annual report because it classifies them as not "significant." By forcing companies to un-consolidate their reports, we would know where their employees were, where their their sales (both source and destination of products and services) were, where they declared their profits and paid their taxes, etc. Part of the beauty of "publish what you pay" is that it doesn't require the cooperation of the tax havens to obtain the information.

2. End the usefulness of tax havens for avoidance by enacting unitary taxation. Upheld by the U.S. Supreme Court in 1983, unitary taxation treats multinational corporations the same way many states already tax the income of multistate corporations: considering all of a company's subsidiaries as a single entity, and using a formula to determine what portion of its global profits are taxable in your jurisdiction. The most common factors to put in the formula are sales, employment, and assets. Like "publish what you pay," this has the advantage of not requiring the cooperation of the tax havens, which have largely shown themselves to be minimally cooperative at best with global efforts to combat tax evasion and tax avoidance.

A big roadblock is the Organization for Economic Cooperation and Development (OECD), which promotes allegedly "arm's length" transfer prices that companies long ago learned to run rings around. Via the Tax Justice Network, Bloomberg reports that this allows U.S. and European companies to save over $100 billion a year on their taxes. As an indication of how uncertain lost tax estimates are, note on the one hand that this is significantly less than the $189 billion TJN estimates is lost to illegal tax evasion, but at the same time Bloomberg reports that the European Union says it loses EUR 1 trillion ($1.3 trillion) annually to tax avoidance and evasion, far in excess of these other two estimates. We're talking big money here. The OECD has begun a project called Base Erosion and Profit Shifting (BEPS), but there is widespread doubt about how much progress will come out of this. Bloomberg notes a major revolving door where OECD tax officials leave to work for tax avoidance consultants, and documents how many OECD conferences on tax are underwritten by the very enablers of tax avoidance in the accounting and legal professions. Unitary taxation would make the BEPS project unnecessary, but the OECD has long opposed unitary taxation.

3. In the United States, end the deferral of taxes until profits are repatriated. In other words, require companies to pay tax in the year the money is earned, rather than when it comes back home years later, if ever. Tax deferred is tax reduced, at the very least. To show just how difficult this will be politically, Robert Gilpin of Princeton University recommended this in his book U.S. Power and the Multinational Corporation--all the way back in 1975. (By the way, this book was quite influential on my thinking in graduate school and ever since.) Even now, U.S. multinationals are trying to get a "repatriation holiday" that would allow them to bring back $1 trillion in profits at a nominal tax rate, even though the 2004 repatriation holiday was a dud in terms of investment and job creation.

4. Don't cut the corporate income tax rate. There is a big difference between the headline rate of 35%, which is indeed tops in the OECD, and the effective rate of 12.1%, one of the lowest in the OECD. In fact, there is a significant economics literature showing that large countries can charge higher taxes than smaller ones do without suffering for it, just like the federal government can charge a much higher CIT than state governments can. There is no need for the U.S. to content itself with revenue neutral combinations of rate cuts and base broadening when government will actually put the money to work, something companies have avoided doing ever since the beginning of the recession which, need I remind you, began over five years ago.

While the road to truly fixing corporate income tax will not be easy, we seem to have reached a promising juncture in the battle with government initiatives like the Foreign Accounts Tax Compliance Act (FATCA) and the massive International Consortium of Investigative Journalists (ICIJ) tax  haven investigations. Last week (via markthshark at Daily Kos), the U.S., British, and Australian tax agencies reported that they had received an even larger data leak than ICIJ had, and that one was gigantic. We certainly can't count our chickens yet; instead, we need to redouble our efforts to force governments to stamp out tax abuse by corporations and the wealthy.

Cross-posted at Angry Bear.

My appearance on "The Big Picture" with Thom Hartmann

Here is a link for my appearance on Thom Hartmann last night.

One of the things brought up was a new study by the Institute for Policy Studies and Campaign for America's Future showing that the CEOs behind "Fix the Debt" have benefited from tax breaks for executive compensation to the tune of about $1 billion in 2009-11, for just those companies. This tax break lets companies count pay using stock options -- which doesn't cost the companies anything -- as if it were cash pay and thus deduct it against corporate income. According to Citizens for Tax Justice (via Common Dreams and Huffington Post), the Fortune 500 saved $11.2 billion with this loophole in 2012. Apple alone profited by $3.2 billion from 2010 to 2012 from this tax break.

Appearing tonight on "The Big Picture" with Thom Hartmann

I will be talking austerity tonight with Thom Hartmann on his show, "The Big Picture." The program reaches 50 million homes in the United States, and you can look for a station here. Alternatively, you can watch it online here. The show starts at 7:00pm Eastern Daylight Time, and I am told my segment will begin about 7:15.

The European Union released its unemployment figures this week. Eurozone unemployment increased from 12.0% in February to 12.1% in March, up from 11.0% in March 2013. Greece reached 27.2% unemployment in January 2013 (most recent data available), while according to Eurostat's harmonized unemployment measure, Spain reached 26.7% in March.


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Tell me again why we want austerity here in the U.S.?

Bad Economic Development Ideas from Conservatives

Good Jobs First today released a new study debunking so-called “business climate indexes” and showing them to be cover for an ideological agenda of cutting taxes and cutting wages.

“Grading Places: What Do Business Climate Indexes Really Tell Us?” is written by University of Iowa emeritus professor Peter Fisher, a well-known expert on investment incentives and fiscal policy, with a preface by Good Jobs First director Greg LeRoy.

This is an ambitious study that analyzes six different indexes published by five different groups. Four are simple combinations of a wide variety of policy variables, each with its own idiosyncratic weighting systems, all of which are published by conservative organizations such as the Tax Foundation or the American Legislative Exchange Council (ALEC).

Two use “representative firm” models to attempt to calculate the tax burden on different types of companies in each state. One is sponsored by the Tax Foundation, the other by the Council on State Taxation.

Since Good Jobs First just knocked out the ALEC study in December, and because the Tax Foundation index is far more widely cited (at least 3 times as much, according to searches of the premium Nexis news database; subscription required), I am going to focus primarily on the critique of the Tax Foundation’s State Business Tax Climate Index (SBTCI).

The SBTCI measures 118 features (p. 49) of state tax law grouped in five categories (p. 50): personal income tax (33.1% of the index), sales tax (21.5%), corporate income tax (20.1%), property tax (14.0%), and unemployment insurance tax (11.4%). As the study shows, these weightings are the source of the most mischief. They are based on the variability of each factor among the states; that is, personal income tax varies the most, and so on.

However, a study by Ernst & Young for the Council on State Taxation determined the actual percentages that businesses pay in state and local taxes, based on analyzing tax returns. Counting the five taxes listed above, the costs are: property tax, 45.9%; sales tax, 30.8%; corporate income tax, 8.7%; unemployment insurance tax, 7.7%; and personal income tax, 6.7% (p. 51).

It won’t surprise you that using the Tax Foundation data with the Ernst & Young weights gives you a very different ranking of the states, with “six states’ ranking changing 20 or more positions, and another 11 states by 10 to 19 positions” (p. 51). In fact, there is essentially no correlation between the Tax Foundation’s ranking and the one constructed by Fisher (-.05, to be exact). In other words, the Tax Foundation’s tax ranking tells you literally nothing about business taxes paid as a percentage of gross state product.

If that is so, what is the whole point of the Tax Foundation exercise? Fisher does not mince words (p.51):

 But the TF sticks with its system because it enables the Foundation to heavily penalize states with more progressive tax systems above all, while concealing this objective in an arbitrary system of scaled and weighted numbers.

 As if this were not enough, the four simple indexes produce widely varying scores: Massachusetts ranks from best on the Beacon Hill Institute’s State Competitiveness Index, 22^nd on the Tax Foundation’s State Business Tax Climate Index, 26^th on ALEC’s Economic Outlook Ranking, and 38^th on the Small Business and Entrepreneurship Council’s U.S. Business Policy Index (p. 68).

In some ways, this could be considered a feature, and not a bug. As Peters explains (p. 68), “Conversely, those arguing for lower taxes could find, in 39 states, a measure that ranks them in the highest 15 states, and 27 could find a measure placing them in the highest 10.”

The bottom line is that, like the ALEC report analyzed in December, these indexes are designed to pressure state governments into  lowering taxes, even if that requires cutting spending that benefits business throughout the state (such as a university system); and putting downward pressure on wages, even though it is hard to see how you create a prosperous state based on low-wage jobs.