Basics: Is That a Good Economic Development Deal? A Checklist UPDATED

In my last post, I discussed one of the most important sets of questions regarding any proposed economic development subsidy: How much does it cost? Is that too much? The answer, assuming that we are not going to overhaul our broken subsidy system overnight, was that we see if we're paying too much by looking at what other states and cities have paid for similar projects.

This presumes, of course, that we know how much the incentive package costs in the first place. There are, unfortunately, far too many cases where total incentives were far higher than what was originally announced to the press. Two noteworthy examples are Nissan in Mississippi and Electrolux in Tennessee. It may take sustained political effort just to keep politicians and economic development officials from trying to pass off this kind of balderdash.

Once we know the cost, we need to ask questions about the benefits of the project and the administration of the project by the relevant government(s). Without further ado, let's jump right in:

1) Is this a new project, or is the subsidy simply being given to move an existing facility from one location to another? If this is a relocation subsidy, just say no. It does the country no good to give subsidies to create no new jobs. Many times, such moves take place within a single metropolitan area (Kansas City, for example). One state's temporary gain creates an incentive for later retaliation. The Job Creation Shell Game has many more examples of these outrages, and points out that states already know how to write legislative language to prevent within-state relocations from being subsidized.

However, just because a project doesn't directly move an existing facility, that doesn't mean the jobs created will all be net new jobs for the national economy; indeed, they may displace existing jobs in the same state or same city. The automobile industry in the U.S. and Canada has shown this dynamic for decades, and the St. Louis retail study mentioned below provides another well-documented example.

2) Is this a retail project? This, too, is an automatic disqualifier. As Greg LeRoy of Good Jobs First like to say, retail is not economic development; it's what happens after you have economic development. Egregious cases like the wealthy St. Louis suburb of Des Peres (median household income of $90,000 in 1990), which in 1997 gave a $29 million subsidy to a local mall to attract a Nordstrom's, are legendary. But in the most comprehensive regional study of its kind, the East-West Gateway Council of Governments, the regional planning organization for metropolitan St. Louis, documented that from 1990 to 2007, local governments gave $2 billion in subsidies to retail. In that time period, retail employment grew by only 5400, which can probably be fully explained by income growth in the metropolitan area. In any event, these jobs vanished with the Great Recession.

Possible exception: Good Jobs First lists one possible exception: "Except in the rare instance where there is a true dearth (a low-income neighborhood without a grocery store, for instance), retail should be built without taxpayer aid." Amen to that.

3) How many jobs will be created? This is obviously the most common justification for incentives that government officials give. Once we know how many jobs are supposed to be created, we can calculate cost per job, an important comparison metric. It also gives us a clear benchmark to see if the proposed investor is living up to its commitments. But beware: Job numbers can be manipulated. Not only is indirect displacement possible, but the rosy numbers the company, consultants, and government throw around can be misleading. Only be concerned with what the company will be held responsible for, which almost(?) always means direct jobs. Consultants will bandy about model-based predictions of "indirect" and "induced" jobs, but if a company's subsidy won't be cancelled or cut for failure to meet those predictions, don't get distracted by them.

4) What are the pay and benefits for this job? The higher the better, obviously, and one more reason that retail should almost never be subsidized, since its job quality is usually substandard. Worker training is another positive characteristic an economic development can provide.

5) Does the project require the use of eminent domain? This is usually a disguised subsidy, since the possibility of a court deciding the value of a person's property gives the buyer more leverage in negotiating with property owners. Not to mention that the trauma of forced relocations is a highly disturbing one.

6) Does the area that will host the project have objective evidence of economic deprivation, such as high unemployment or low per-capita income? If not, the subsidy probably isn't needed, and just raises the subsidies that genuinely deprived areas will have to pay to land investments.

7) What is the track record of the company involved? Is it known for bad labor, environmental, or other practices? Demerits for problems here.

7a) Is the company's identity hidden by a site location consultant? It's worth saying "no" to this pernicious practice. Information asymmetries are bad enough already in the site location process without having taxpayers being deprived any way to evaluate the company involved.

8) What taxpayer protections are built in? Does the city or state have strong requirements on job quality and other best practices, and will it enforce them through clawbacks of the subsidies (requiring repayment) if necessary? This should be second nature to states, but in the past few years, Tennessee has negotiated at least three megadeals (Electrolux, Wacker Chemie, and Hemlock Semiconductor) that specifically excluded clawbacks from the agreement, even though clawbacks are on the books in Tennessee.

9) Would the investment go forward even without the subsidy? If so, obviously you don't want to give the subsidy. In practice, of course, you'll never really know. Did I mention information asymmetries?

10) Does the project connect to the public transportation grid? Alternatively, is it contributing to urban sprawl?

11) What is the opportunity cost to government? The total amount of state and local subsidies is more than enough to hire every public-sector worker laid off since the beginning of the Great Recession. Could the money going to the subsidy be better spent on education, health, or infrastructure?

To summarize: Just say no to subsidized relocations, subsidies to retail, anonymous investors, and subsidies in rich locations. Calculate the cost per job and aid intensity of the proposed project and compare them with those of similar projects. Then comes the more difficult task of estimating the benefits of the project (jobs, training, wages, etc.), where it is necessary to carefully examine claims made by proponents, which will always err on the side of overpromising. Dig into the proposed investor's track record. Companies rarely change their spots, with British Petroleum being a egregious example. And always ask if the money could get more economic development bang for the buck if spent on things like infrastructure, education, and health.

Good luck!


By the way, if you've got disagreements or suggestions, I'd love to hear them.

UPDATE: Phil Mattera of Good Jobs First let me know that I missed points 6, 9, and 10 in my original post. I can only plead temporary insanity.

Cross-posted at Angry Bear.

Subsidy Insanity in Western Missouri

I have written before about the gross waste of taxpayer monies on retail in the St. Louis region. According to the East-West Gateway Council of Governments (p. 18), governments in the bi-state metropolitan area pumped about $2 billion worth of subsidies into retail projects from 1990 to 2007, but only saw a net increase of 5400 jobs, meaning that each low-wage, low-benefit retail job cost the cities of the region $370,000 apiece. The price is only this low on the generous assumption that the subsidies were solely responsible for this job creation. However, given the growth of incomes in the metro area during that time period, it is likely that most if not all the jobs would have been created without the incentives provided.

It turns out something similar has been happening in the Kansas City region. As regular readers of this blog know, the border job piracy in the Kansas City metro area is probably the second-worst in the country, after metro New York City. As it turns out, there has recently been data released on the scope of job piracy there.

Less than a year after Governors Jay Nixon (D-Missouri) and Sam Brownback (R-Kansas) told New York Times reporter Louise Story, on camera, that there was no way they would back off of their wasteful poaching, a new Times story reveals that Nixon is now calling for an end to their futile battle.

Part of the reason for his change of heart probably lies with a recent study by the Hall Family Foundation showing that since 2009 alone, Missouri and Kansas City have spent $212 million on relocation subsidies to drag existing operations across the border, sometimes more than once as in the case of Applebee's. The net effect, however, has been virtually nil: 3200 jobs moved to Kansas, while 2800 move to Missouri, for a net movement of 400 jobs.

The math of course is simple: $212 million/400 equals $530,000 per net moved job. And remember, these aren't net new jobs, merely net moved jobs. As I've written on numerous occasions, job piracy is the least defensible use of development incentives, precisely because it creates no new jobs. Good Jobs First had a detailed analysis of the issue overall and the Kansas-Missouri border war in particular in January 2013.

However, if the most recent Times article is to be believed, we could be on the verge of ending this particular border war. Mind you, don't hold your breath. The two states tried before, according to Good Jobs First, and failed miserably. Indeed, there has yet to be a successful voluntary no-raiding agreement between states, even though there have been at least three attempts. But in this case, there has been a strong push for a cease-fire from a number of prominent Kansas City businesses, so there is a better-than-usual chance that this could be successful.

Really, though, there oughta be a law. A federal one.

Cross-posted at Angry Bear.

New Jersey Subsidies Get Even Worse

As if New Jersey's subsidies weren't bad enough already, Leigh McIlvaine at Good Jobs First reports that the state has just passed new legislation that expands the state's investment incentives even further. On Thursday (September 18), Governor Chris Christie signed the New Jersey Economic Opportunity Act of 2013, which reduces the number of state subsidy programs but unleashes the two remaining ones to give even more money than ever. Not only that, the new law reduces job quality provisions and guts geographic targeting of subsidies to the poorest areas of the state. The bill easily passed the Democratic-majority state legislature, making this a bipartisan fiasco.

As Governing magazine reported and I covered in my last post, from the beginning of 2011 through early 2013, New Jersey gave an astonishing $1.9 billion in investment subsidies, "more than the previous 15 years combined," as the magazine noted. The new law removes annual spending caps for Grow New Jersey and the Economic Redevelopment and Growth (ERG) grant while reducing the minimum job creation and investment requirements, thus paving the way for even more applicants to qualify. There is, however, a maximum subsidy per firm of $350 million, a level not reached -- yet.

New Jersey Policy Perspectives (see link above; h/t Leigh McIlvaine) details the decline in job quality standards. For the first time, retail facilities are eligible "if they are 150,000 square feet or larger, at least half-filled with a full-service supermarket or grocery store and located in one of New Jersey’s four poorest cities," which sounds like a description of a Wal-Mart Super Center. "Tourism destination projects" (read: Bass Pro Shop or Cabela's, most likely) are also eligible in Atlantic City. Worse still, tourism projects are not subject to the state's normally high wage and benefit standards. Additionally, Christie vetoed long-standing prevailing wage requirements for workers at recipient firms.

Finally, as Newark's Star-Ledger points out, virtually every location in New Jersey is now eligible to use state subsidies.  This has the effect of diluting the incentive effect these programs could provide to the poorest areas of the state. This is yet another example of a phenomenon I have written about extensively: It is extremely hard to maintain the targeting of subsidy programs to the poorest areas of a jurisdiction as there are always political pressures from richer areas to be included as well. This is true even in the European Union (though far less so than in the United States), where EU state aid law and Commission negotiation over Member States' regional aid maps provide strong support for targeting.

To sum up, it looks like New Jersey will spend over $1 billion a year on incentives -- just at the state level -- while reducing job quality standards, subsidizing low-end retail jobs, and greatly weakening the geographic targeting of its subsidies to the poorest parts of the state. This is a prescription for failure at the state level and an inducement to other states to increase their subsidies as well, exactly the opposite of what needs to be happening.

New Jersey Subsidies More Out of Control than Ever Under Christie

I have written before how state and local subsidies are more out of control than ever, and more recently how the number and size of megadeals has increased substantially since the Great Recession.

Now a new study from Governing magazine (h/t to Al at LinkedIn group Economic Development 2.0) exhaustively analyzes New Jersey's five largest incentive programs and their growth since 2011. Governor Chris Christie has made aggressive use of incentives a centerpiece of his economic development strategy, but the magazine's comparison of New Jersey's job performance with than of surrounding states shows that it simply isn't working. Not only that, according to the report, "at least 20 companies receiving incentives filed layoff notices" before fulfilling their job requirements.

But it is the sheer dollar value of incentives that makes the head spin. According to the magazine's estimates, the state awarded $904 million in 2011 and $872 million in 2012. Adding in this year's awards brings the total to $1,950 million which is, Governing notes, "more than the previous 15 years combined." (Note: 15 years is the entire life of these programs.)

Moreover, some of the biggest incentive awards have been some of the most outrageous. The Urban Transit Hub Tax Credit awarded Panasonic $102.4 million to move nine miles, within the state, from Secaucus to Newark. As I have reported before, giving subsidies to move existing facilities is the most obviously wrong form of incentive use, because no new jobs are being created, but tax revenue is cut. Interstate job piracy is bad, but for the state to fund intra-state piracy is lunacy.

Meanwhile, New Jersey's July unemployment rate came in at 8.6%, #43 of the 50 states.

Kudos to Governing and reporter Mike Maciag for a great piece of reporting, providing a well-documented case study of what out-of-control subsidies look like as the country tries to recover from its ongoing jobs depression.

Cross-posted at Angry Bear.

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.