Ford Announces Giant Electric Vehicle Plant in Western Tennessee

 On September 27, Ford Motor Company announced plans to invest $5.6 billion at the Memphis Regional Megasite in Stanton, Tennessee, to build an electric vehicle (EV) assembly and battery plant, jointly with SK Innovation. The facility, dubbed “Blue Oval City” by Ford (in a reference to its corporate logo), is projected to employ 5,800 people as Ford makes its first big foray into EV production. The same week, Ford and SK Innovation revealed plans for two more battery plants in Glendale, Kentucky, south of Louisville, at an estimated cost of $5.8 billion.

Together with all the other recently announced investments in EV manufacturing, Ford’s new project highlights the commercial success of electric vehicles. But if you’re like me, you want to know about the subsidies it received. Glad you asked!

The short answer is that we have only partial information so far. As with the Nissan plant in Canton, Mississippi, or the deal made by Memphis for Electrolux in 2011, there will doubtless be multiple subsidies whose details will come out long after the initial announcements. That said, what we know already is ominous.

First, the state of Tennessee has pledged over $500 million to be given as a grant to the two companies; it will be voted on in a special legislative session in the near future.

From there, adding up the incentives becomes more difficult. The Memphis Regional Megasite is a subsidy in itself: 3,600 acres (about 5.6 square miles) with dedicated infrastructure. Tennessee Governor Bill Lee (R) said that over $200 million has already been invested in the Megasite.

The biggest incentive is likely to be electricity discounts: Blue Oval City will get power from the federally owned Tennessee Valley Authority (TVA). Electric vehicle and battery manufacturing are energy-intensive, and large rate discounts over the life of the facilities will add up. Hundreds of millions of dollars is a certainty, and it is easy to imagine the electricity subsidy alone totaling billions. Don’t believe me? Check out the Alcoa Aluminum plant in Massena, New York, where hydro-power discounts are saving the company $5.6 billion over 30 years, now the largest subsidy ever given in the United States for a single project (with Boeing’s $8.7 billion Washington State deal withdrawn in a WTO settlement).

The state will also establish a satellite campus of the Tennessee College of Applied Technology (TCAT) at the location, part of an $80 million investment into the TCAT system.

Finally, there is no information available yet on local subsidies. Property tax breaks (called PILOTs in Tennessee when a public entity technically retains ownership of the project) and sales tax exemptions are likely to add many millions more to the incentive package.

What is the final number likely to be? My guess is over a billion dollars, but the question is how much over. We’ll see, eventually. If we’re lucky.

 

Cross-posted with Good Jobs First.

Thanks to my colleagues Greg LeRoy and Kasia Tarczynska for helpful editorial suggestions.

Report Shows Huge Cost of Tax Breaks to South Carolina Public Schools -- Up 31% in Two Years

 My colleagues at Good Jobs First released a new report today showing that South Carolina public schools are losing high, and rapidly rising, amounts of potential revenue to property tax abatements controlled solely by county governments.

Thanks to Government Accounting Standards Board (GASB) Statement #77 adopted in 2015, governments that passively lose income to "tax abatements" are required, in their Comprehensive Annual Financial Reports, or CAFRs, to list the total losses annually. Passive losses occur when they are the result of the actions of another governmental unit. The most common scenario for this comes about when a municipal or county government gives a property tax break to a company, and overlaying taxing units (school, library, or ambulance districts, for example) are required to also waive their portion of the property taxes abated.

“The Revenue Impact of Corporate Tax Incentives on South Carolina Public Schools” shows that in South Carolina, these passive losses are happening with a vengeance. The state's public school districts collectively lost a total of $423 million to property tax abatements in fiscal year (FY) 2019. That's 31% more than in 2017, an absolute increase of $99 million in just two years.

Some of the biggest losses were in the poorest school districts, as measured by the percentage of students eligible for free or reduced-rate lunches. Six of these districts lost more than $2000 per student, including four that had majority Black plus Latino student populations.

“Our members struggle to teach in crumbling schools with poor heating and cooling systems and a lack of reliable internet connections,” said South Carolina Education Association President Sherry East. “It baffles me to continuously hear we don’t have enough money to fund our schools, yet this report shows we are diverting huge pots of money that could be available if we just consider tax reform in South Carolina.” (From the Good Jobs First press release.)

 This situation has been developing for over 20 years. Reporter Jay Hancock of The Baltimore Sun described South Carolina in 1999 as having "crumbling" schools that sometimes flooded in rainstorms. Despite the problems apparent even then, the state has continued to be an aggressive pursuer of new companies (Boeing and Alenia/Vought are two Megadeal-sized example).

What can be done? The report's top recommendation is to exclude school districts from any incentive deal. This is what California did in 2012-2014 when then-Governor Jerry Brown spearheaded the abolition of tax increment financing (TIF) and signed off on a much-modified version that prohibited the use of school funds in TIFs, as well as allowing all other overlaying jurisdictions to opt out.

The second recommendation is to cap the duration (currently up to 40 years!) and cost of tax abatements, to at least reduce their outsize impact on schools. Finally, better transparency from county and municipal governments on the costs and outcome measures of subsidies can lead to improved policy in the future.

The research here is part of Good Jobs First's updating of its landmark 2018 report, The New Math on School Finance, which was the first to use GASB-77 data to address the impact of tax incentives on school budgets.

Note to the reader: I was not part of this research. But stay tuned...

Amazon defeated in New York UPDATED

In the biggest ever defeat for a subsidized project in history, Amazon announced February 14th that it was canceling its planned half of HQ2 for New York City, which was to receive subsidies worth at least $3.133 billion. After facing months of public opposition, the company provided a Valentine's Day present in the form of capitulation. Amazon showed that, like Electrolux, its efforts to extract maximum subsidies from 238 cities constituted corporate rent-seeking on a grand scale. Not only did Amazon conduct an exploitative public auction for the supposedly single HQ2 facility, it furthered the impression that it was engaging in rent-seeking by its refusal to discuss alternatives with New York officials, by its absolute insistence on opposing a union for its workers, and by its sudden though not unexpected cancellation announcement. Activists scorched the firm, too, for the fact that for the second year running, Amazon will pay 0 in federal income tax despite earning $11.2 billion in profits in 2018 and $5.6 billion in 2017.

This is not to be confused with Foxconn, which is looking more and more like an economic development failure. There, it appears that the company will not be able to provide the investment and benefits it promised in Wisconsin. With Amazon, what we have is a case of the company being unwilling to continue the political battle to obtain its $3+ billion in incentives. While Amazon is by far the largest project ever defeated, such defeats are not unprecedented. I participated in two successful campaigns in the late 1990s and early 2000s against abusive tax increment financing (TIF) projects in the St. Louis suburbs of Olivette and O'Fallon, but these were on the order of $40 or $50 million, not $3 billion. Alas, I was also on the losing side of an exceptionally bitter battle against a TIF-funded mall in Hazelwood, Missouri, which still hurts to think about. The residents lost their homes to eminent domain, the city administration was high-handed and manipulative, and the new mall contributed substantially to the death of at least two nearby malls, part of the $2 billion retail subsidy merry-go-round during 1990-2007 documented by the East-West Gateway Council of Governments.

In addition, as Richard Florida reports at Citylab and Good Job First points out at length, the victory has also energized reformers around the country searching for a solution to the problem of corporate bidding wars. I myself have received inquiries from multiple elected officials' offices about the European Union's systematic control of investment incentives, and I know of other efforts to make the shocking subsidy and perhaps even more shocking victory against it into a national teachable moment. For the first time in the over 20 years I have been fighting wasteful corporate subsidies, which is to say the vast majority of them, this is the first time it feels like it's possible that we could really see reform take place -- though not without a political battle royal. Buckle up!

Electrolux closing Memphis plant; Economic development malpractice leaves Tennesse holding the bag

On January 31, Electrolux announced (h/t Alan Freeman, ipolitics.ca) that it would be closing its new (2012) factory in Memphis, Tennessee, by the end of 2020. This facility, you may recall, was a subsidized relocation from L'Assomption, Quebec (a Montreal suburb) that had an aid intensity of at least 99%! Yes, Tennessee state and local governments gave Electrolux a free factory ($188.3 million at present value in subsidies) while allowing it to get rid of its union, cut 60 jobs, and save over $4 per hour in wages on the jobs they kept.

As if all that weren't bad enough, the state of Tennessee agreed not to put clawback provisions into the contract with Electrolux, although the state was already requiring such clauses in contracts with major companies like Volkswagen in Chattanooga. That piece of economic development malpractice has now come back to bite the governments involved where it hurts. Not only does the contract specifically prevent the state from getting its money back, state and local governments guaranteed loans connected with the project, the payments for which will last until 2036. According to the Commercial Appeal's article, state government is on the hook for $48.5 million in loans, while Memphis and Shelby County governments must pay off a further $28.0 million.

While Electrolux committed to employing 1,240 people in order to receive the subsidies, its peak employment appears to have been the 1,100 who were employed in 2017. Now, just two years later, the company employs only 530 in Memphis, a figure that has been stable for about a year, supplemented only by overtime and temporary workers, both of which have now disappeared.

The fate of the Memphis facility is to be consolidated into another Electrolux plant in Springfield, Tennessee, in a transformation that will add no jobs in Springfield because of increased automation. According to a story in the Canadian Press (paywalled behind the Nexis database), Electrolux plans to invest $250 million to centralize all its U.S. cooking production at the Springfield facility.

A final twist in the Memphis story is that in 2016 Electrolux workers formed a local union of the International Brotherhood of Electrical Workers. Union business manager Paul Shaffer says he was "assured" by the company that the closure was not related to the decision to unionize. Color me skeptical, but thanks to our old friend information asymmetry, we'll probably never know. But the timeline is: 2016, unionization; 2017, 1,100 workers; 2018, 530 workers; 2019, closure announcement. Yes, I'm still skeptical.

I've been telling people for years that we need to explicitly include corporate rent-seeking into models of site-location decisions. Both Investment Incentives: Growing Use, Uncertain Benefits, Uneven Controls (2007: download here from the first link) and Investment Incentives and the Global Competition for Capital (Palgrave, 2011) make this case strongly. How else can we interpret Electrolux's behavior, squeezing every last dollar out of desperate governments near the height of the Great Recession, and demanding no clawbacks, except as a manifestation of rent-seeking? It's time to revise site-location theory to reflect this.

And in my standard EU comparison, let me point out that an aid intensity (=subsidy/investment) of 99% is not allowable anywhere in the European Union, where the maximum aid intensity allowable is only 50%, and that only in the poorest regions of the Union, such as Bulgaria (and that only on the first €50 million of investment; with a maximum of only 25% on the next €50 million of investment, and a maximum of 17% on any investment increment over €100 million). People were saying it was a bad deal when it was announced in 2011, as pointed out in these pages and in the great series the Commercial Appeal produced at that time. We were right, far more than we wished.

Cross-posted at Angry Bear.

Foxconn is flailing in Wisconsin (Insert your joke here.) UPDATED

In what may end up as the biggest economic development failure in U.S. history, Foxconn announced Wednesday that its $10 billion Wisconsin factory will not be a factory. Instead, the company says, it will still create 13,000 jobs, but these will be research jobs rather than manufacturing ones. I'll believe it when I see it.

Accompanied by an almost $4.8 billion subsidy package as estimated by Good Jobs First (follow the link to the spreadsheet), the project was heavily criticized even before it was announced in 2017 (my take here and here). The massive subsidy helped normalize the idea of multi-billion investment incentives and gave Amazon a handy benchmark for its own effort to break the bank.

As I analyzed a year and a half ago, it didn't make sense to manufacture electronics in the United States when everything was cheaper in China, unless you were worried about access to the U.S. market. The illegitimate Trump regime had already created an unpredictable and protectionist trade climate, and this was long before the trade war with China really took off. If Foxconn felt it had to locate in the United States, the country was in a strong bargaining position, but by playing the states off against each other, it was still possible for a foreign company to score huge subsidies.

What happens next? As noted, Foxconn still says it will build a huge facility and hire 13,000 workers. But in 2018, it failed to meet its job creation target and forfeited what would have been a $9.5 million subsidy. I predict we will see more such failures from Foxconn until it finally pulls the plug. Indeed, on January 31, Good Jobs First called for the immediate cancellation of the deal, with the company financially responsible for expenses made by the state and by Racine County in connection with the project. This would be a fair resolution of the situation, appropriately leaving egg on the faces of the deal's promoters, the recently defeated Governor Scott Walker and the head of the illegitimate Trump regime.

As you see, I have managed to steer clear of the obvious puns. Instead, I invite you to insert your joke here.

UPDATE: Foxconn now says that it will indeed still build a factory, citing a conversation between CEO Terry Gou and Trump (h/t commenter Joel at Angry Bear). This is certainly clear as mud. As others have pointed out, several promised investments from Foxconn have failed to materialize at anywhere near the scale promised, including in Brazil, Pennsylvania, Indonesia, Vietnam, and India. So I am going to remain skeptical on what was a terrible deal in the first place.

Cross-posted at Angry Bear.

Amazon Wins!!!

Well, what did you expect? With 238 entrants and 20 finalists, the Amazon HQ2 location tournament resulted in a resounding victory for Amazon: Billions of dollars in subsidies and binders full of detailed information on the contestants. Plus, we got a surprise twist at the end, when Amazon announced it would choose two "headquarters" instead of one. Of course, I never thought that having two headquarters made economic sense ("Doesn't that defeat the idea of a headquarters as a central coordinating site?" I asked last year), and the same is even truer when you have three "headquarters."

Leaving aside how Amazon plans to coordinate three headquarters' operations, the subsidies boggle the mind and insult our intelligence. Let's lay out what we know about the subsidies so far, remembering that there are other subsidy elements that are likely to be discovered as things play out. That is what happened with Foxconn, for example: Its subsidies in Wisconsin were originally reported as $3 billion in state subsidies plus local tax increment financing (TIF). By June of this year, Good Jobs First was reporting that further subsidies plus a huge TIF award brought the total to $4.8 billion (Megadeals spreadsheet, June 2018 update; download here). Something is likely to up the total incentives Amazon will receive, above what we know today.

So, which cities got half of HQ2? Amazon split the project in half, with 25,000 jobs set to go to Long Island City, Queens, New York, and 25,000 to Crystal City, Arlington County, Virginia. This much leaked out the week before the official announcement, but the November 13th official notification added that Nashville would get a 5,000 job consolation prize (for $138.7 million in incentives) as well as the incentive packages from each of these three jurisdictions -- well, some of the incentives, anyway. As with Foxconn, this announcement was rapidly followed by the discovery of new incentives. I'll skip the various updates and skip straight to what is currently known.


New York city and state both provided large incentives to the company. State benefits comprise mainly $1.525 billion in Excelsior employment tax credits, plus another $325 million based on the size in square feet of the Amazon offices, or a total state package of $1.85 billion. New York City will provide a job creation tax credit of $897 million over 12 years, plus a partial property tax abatement of $386 million over 25 years, according to a Good Jobs First analysis of the city's press release on the project.

But wait, there's more! Good Jobs First reports that the city will also provide a subsidy known as a payment in lieu of taxes (PILOT) that could itself cost another $100+ million. Last, as far as we know, but not least, the project will be located in a federal Opportunity Zone, which will provide further, though not-yet-estimated, benefits to long-term capital investors like CEO Jeff Bezos.

Total so far: $1.850 billion + 0.897 billion +0.386 billion = $3.133 billion, and likely more. While Amazon wants to emphasize the cost per job of its incentives, it only considers the first of these subsidies in its public calculation. But with just these three programs, we are already at a cost of $125,333 per job. While this doesn't sound horrible compared to some incentive packages we've seen recently, it completely omits that with such large numbers of jobs, there are diminishing returns in the value of each job due to the increasing likelihood of dumping thousands of workers and their families on a locality's infrastructure and educational system. Further, as I predicted in January, it normalizes the use of aid intensities* above 100%: $3.133 billion/$2.5 billion = 125%! Mind you, this is the nominal subsidy, not at present value, but with the 10-year Treasury note at 3.08% on November 16, the proper discount rate will be in that (low) vicinity, as has been the practice of the Organization for Economic Cooperation and Development in estimating the present value of U.S. subsidies for over 20 years.

To add a final insult to injury, the Amazon site will be in a federal Opportunity Zone, but the company's project is destroying one of the things that would be most welcome there, affordable housing. Politico (h/t Daily Kos) reports that the New York outpost of HQ2 will displace a planned 1,500 units of affordable housing from two developers.

In Virginia, a second $2.5 billion investment, 25,000 job facility will be opened by Amazon as well. There, the company will receive $573 million in job creation tax credits. Virginia Tech University also plans to open a new "Innovation Campus" less than two miles from HQ2/Virginia. The $1 billion campus has been considered one of the biggest draws for Amazon in its location decision, and Good Jobs First includes the entire $1 billion as a subsidy for Amazon. I disagree; building new educational infrastructure will provide benefits to the students that they will always possess regardless of who their future employers may be, so I see the company as unable to capture much of the $1 billion as a subsidy. A university is a great economic draw, but this extends far beyond any single employer. If we exclude the new campus as a subsidy, the aid intensity in Virginia is only 22.92%.

Combining the two locations, we now find, even without the new Virginia Tech campus, that Amazon will receive $3.706 billion in subsidies for the HQ2 project proper. For the combined project, that brings us to an aid intensity of 76.1% of the investment.

Long-time readers know it's time for a comparison with how this would be treated in the European Union under its regional aid guidelines. First, no region in the European Union is eligible for a 76.1% aid intensity, not even the poorest part of Bulgaria. Second, HQ2 is not going to the non-existent U.S. equivalent of Bulgaria, but to two of the richest places in the United States. What would Amazon get in state aid (=subsidies) for locating such a facility in London or Paris?  Not one penny. Rich regions can't give investment attraction incentives, period. So the entire $3.7 billion and counting subsidy for the company would be disallowed if rational regulation of the bidding wars existed.

Happily, these subsidies have come in for a great deal of criticism around the country. As The New York Times editorialized, "New York's Amazon Deal is a Bad Bargain." And how does it know New York overpaid? The same way I recommended back in 2014, comparing to a similar deal. And there's no more similar deal than the other half of HQ2 that went to Virginia. Seeing that New York paid more than twice as much as Virginia for an equivalent project, the Times rightly concludes that New York paid more than it had to. Whether much political resistance to HQ2/New York develops or not, it's great to see the press analyzing these deals well.

To end on a down note, though, we need to recognize the harm the Amazon auction did to transparency. The company made the finalists sign non-disclosure agreements, although a couple did make it into the public eye (Newark, New Jersey, and Montgomery County, Maryland, two of the largest finalist offers, though it appears Pittsburgh topped them all).  Hopefully some of the losers will now come forward. However, that's not the point; we need real-time transparency if there is to be any democratic oversight of the multi-billion giveaways that look to become more common than ever.

* Aid intensity is a metric, first used in the European Union, that allows us to compare the size of subsidies regardless of the size of the project. It is calculated as subsidy divided by investment. An intensity of 100% at present value means that the government is paying the entire cost of the investment. Thanks to reader TM for pointing out that I should have clarified this in the original article.

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.

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.

The new era for subsidy disclosure begins

Yesterday, December 15, was the first day the new Government Accounting Standards Board (GASB) subsidy reporting rules came into effect. From now on, every state and local government's annual financial reports will be required to report on tax subsidies they give, or even simply lose revenue to (say, a school district losing revenue to a city-granted property tax abatement). This will be the biggest increase in subsidy transparency in the 20-odd years I have been studying the issue.

Good Jobs First's Greg LeRoy put it well: "In the history of incentive reform, it is no exaggeration to refer to Before 77 and After 77. When this new data starts flowing in 2017, we will finally have a price tag on corporate welfare like never before." As I told GASB in my comments in January, this could put me out of the business of estimating corporate subsidies, and that would be a great thing because we would have really useful data comparable across states and cities.

With good data, we could finally make inroads into important questions, starting with whether investment incentives work -- in the sense that governments which give more incentives have something concrete to show for it in terms of unemployment rates, income, or poverty reduction. This is a question Richard Florida has tried to answer using Louise Story's New York Times subsidy database, but with weak data it's hard to be confident in statistical results. But now we stand on the brink of having good data.

Of course, we will have to wait until late 2017 to get it, since most government fiscal years will end June 30, 2017. But I think we are entitled to a partial celebration now.

Time for a new incentives estimate!

It's been over four years since I last published an estimate of U.S. state and local government subsidies in Investment Incentives and the Global Competition for Capital, and the data there represented the situation circa 2005. So I think it's time to begin a new estimate, don't you?

We have a great place to begin. As you may recall, in December 2012 Louise Story of the New York Times published a series of articles, "The United States of Subsidies," which was accompanied by two searchable databases, one of individual deals and one on subsidy programs. The latter was far more comprehensive than anything previously published.

Unfortunately, the program database was flawed because $52 billion of the reported $80 billion in annual subsidies were for sales tax breaks that were for the most part not subsidies at all, but ways to prevent sales tax from being charged for inputs into goods that would pay full sales tax on their final sale. Upjohn Institute economist Timothy Bartik documented that $4.80 billion of the $4.83 billion in sales tax "subsidies" in Michigan fell into this category. There were smaller errors in the program database as well, such as wrongly including net operating loss provisions and omitting the cost of single sales factor apportionment (h/t Timothy Bartik).

Now, dear reader, I'd like to solicit your help. The first step is to review the sales tax breaks in the database, so as to include those relatively few that are genuinely subsidies, such as exemptions for capital goods, which by nature are targeted at investment. If you have insights on this for any of the sales tax programs, I would be extremely grateful if you would share them with me. I would also appreciate any assistance on step 2, which is updating from the 2011 data Story used. If you have the numbers or know the sources, please send them to me. Finally, the same is true for step 3, gathering information on local subsidies, which is much sparser than state-level program data. I will, of course, acknowledge your help in any publications based on this work.

For this project, you can email me at kpthomas@umsl.edu

Thanks in advance!

Final subsidy accounting rules published!

On Friday, the Government Accounting Standards Board (GASB) published the final version of its new rules requiring governments to make reporting on subsidies a standard part of their financial reports (known as Comprehensive Annual Financial Reports, or CAFRs). Since GASB determines the content of "Generally Accepted Accounting Principles," its new rules will have to be widely adopted.

Subsidy reformers such as Good Jobs First did not get everything they wanted in the new rules, but their publication represents a gigantic step forward in subsidy transparency. In particular, every government that gives tax-based subsidies will be required to report the amount they give each year. Moreover, every government that loses revenue to subsidies given by another government must report the amount as well. Most commonly, this will be school districts and other political units that lose property tax revenue to tax increment financing (TIF) or property tax abatements.

GASB continued its incomprehensible use of the term "tax abatement" as its catchall for all tax-based subsidies. As I pointed out in my own GASB comments, the term properly only refers to property tax abatements, a smallish proportion of local subsidies used in fewer states than TIF (see Greenbaum and Landers, "The TIFF over TIF," 2014, no ungated version available). On the plus side, as Good Jobs First points out, the final rules make clear that subsidies such as tax increment financing are included in their definition of "tax abatement," although a strict reading of the draft definition might well have excluded it and other subsidies. I considered this a worry in my GASB comments, because too much focus on legal fictions (TIF recipients are legally deemed to have paid their taxes, for instance) would obscure the fact that a subsidy exists. Happily, GASB opted to be inclusive in the definition, which will make it more difficult for governments to evade the new rules.

The real drawbacks of the new rules are that they don't require that the recipients, even the largest ones, be identified (this is optional); they don't require governments to say how many subsidies are in place (just the total cost of subsidies for that year); and they don't require a listing of future subsidies already committed. In addition, as I pointed out in my comments, they do not require a cross-listing of non-tax subsidies such as grants and loans so that people reading a CAFR can determine how much a government is spending and committed to spend on total subsidies.

Still, the new rules represent a tremendous advance over the status quo. Every state and local government will now have to report the value of the subsidies it gives every year. CAFRs are audited reports, meaning that multiple sets of eyes will look at the documents even before the public sees the reports and can cross-reference them with everything else known about a government's subsidies. Good Jobs First will be expanding its Subsidy Tracker database to include the new data in governments' annual reports. I'm looking forward to all these developments, and you should be, too.

Cross-posted at Angry Bear.

Elon Musk has received billions in subsidies

While receiving subsidies is nothing new for the Forbes 400 or even multi-hundred millionaire pikers like Mitt Romney, a recent story in the Los Angeles Times (via Good Jobs First) shows that Elon Musk (#34 in the Forbes 400) is a champion at getting subsidies for his companies. According to the Times article, Musk's three companies, Tesla, Solar City, and SpaceX, have received a total of $4.9 billion (nominal value) in subsidies over the years. The article says that Tesla and Solar City stand out in the importance of the subsidies relative to the size of the company.

While SpaceX has received only $20 million, both Tesla and Solar City have received over $2 billion each, if you count the value of the subsidies their customers have received for buying Tesla vehicles and Solar City installations. This is more significant in the case of Solar City (about $1 billion) than for Tesla (about $321 million). Even without these sums, the companies have directly received about $3.5 billion, most notably for the new Gigafactory in Nevada and for a solar panel facility in Buffalo, New York.

Regular readers will remember that I have long argued in my books and elsewhere that these subsidies represent a transfer from average taxpayers to the much wealthier owners of the companies involved, worsening the already substantial inequality in the United States. These investment incentives have to be offset by higher taxes on others, reduced government services, or higher levels of government debt. While they are not the biggest driver of inequality, they do their part. Moreover, location subsidies reduce the country's economic efficiency: It may well have made more economic sense to locate the battery Gigafactory as close as possible to Tesla's assembly plant in Fremont, California.

While Musk refused to be interviewed for the Times story, he responded the next day on CNBC. Among other things, he argued that it was wrong to report a single figure for subsidies, which makes it seem like he received one big check. This is right as far as it goes. However, I think it would make more sense to give a single present value for the subsidies rather than the nominal value, which overstates the value of multi-year subsidies such as those for Tesla. Moreover, as Good Jobs First points out, it is perfectly necessary for taxpayers to know what their long-term liabilities are for multi-year subsidies in order to properly assess the impact on government finances.

Musk also defended the Tesla subsidies as merely necessary to make the project happen faster, rather than necessary to happen at all. Yet it conducted a multi-state auction in an all-too-common use of its location decision for rent-seeking. As I analyzed at the time, the deal was below average in terms of cost per job and aid intensity compared to other automobile facilities, and it is 13 times larger than Nevada's previously largest incentive package.

Ultimately, the Musk story is far too familiar on a number of dimensions. Most importantly, it is a tale of rent-seeking and the policy/political drivers of inequality.

Cross-posted at Angry Bear.

Why subsidize data centers?

A number of authors (Good Jobs First, David Cay Johnston, me, and me, among others) have pointed out that data centers (aka server farms) in the United States create very few jobs, yet receive state and local government subsidies that routinely exceed $1 million per job. I'm sure you already know that numbers like those make me ill: the typical automobile assembly plant will receive $150,000 or so per job, and require all sorts of component facilities to feed it -- though, sadly, economic development officials often given incentives to the supplier plants as well.

So why $1 million or more per job? Data centers pay reasonably well, and the biggest are connected to famous tech names like Apple, Google, and Facebook, but it seems to me that it's hard to get around the facts that there just aren't that many jobs, and they don't require an army of supplier facilities bringing indirect jobs.

But surely the competition for jobs is so steep that governments have no choice but to subsidize them? Actually, no. Aside from the fact that $1 million per job probably gives away more than the value of the investment to the government, my investigations have turned up multiple examples of companies building data centers without incentives.

One I've mentioned here before: American Express in 2010 built a $400 million data center in Greensboro, North Carolina, without any incentives at all. The leading explanation has been that Amex had already decided it was going to close a 1900-job call center in Greensboro (announced in 2011), a move it knew would trigger clawbacks of any incentives on the 50-150 job data center -- so it didn't bother seeking subsidies. Did I mention that North Carolina has cheap electricity?

More recently, I have found four Google data centers that opened or expanded without incentives in the last few years. New and expanded facilities in the Netherlands, Ireland, Finland, and Belgium all take advantage of cooler temperatures to reduce their electricity use. While Google did not respond to my email asking whether it received subsidies for those facilities, and IDA Ireland similarly was unresponsive, the Netherlands Foreign Investment Agency did respond with a confirmation that it had provided no "state aid" (EU-speak for subsidies) to the brand-new $773 million, 150-job data center opening in Groningen province in 2017. In addition, a search of the EU's Competition Directorate case database did not reveal any Google state aid cases for data centers. Thus, it appears that none of these cases received incentives.

So why did Google demand over $140 million (present value) in subsidies from North Carolina back in 2007? I think we're looking at the "usual suspect" once again, rent-seeking. Of course, North Carolina couldn't foresee the Amex no-incentive deal that didn't happen until 2010, but now that we can see how Google and American Express do business when they have to, it's time economic development officials around the country learned to "just say no" on data centers.

Cross-posted at Angry Bear.

U.S. 76, EU 6 UPDATED

No, it's not a sports score. It's the number of $100 million incentive packages offered in each place beginning in 2010. This is based on my first paper to use the September 2014 February 2015 update of Good Jobs First's Megadeals database (you can download the entire update in spreadsheet form).

I've said before that U.S. investment incentive use is totally out of control. The new paper confirms this beyond my worst nightmares. Think about it: The United States and the European Union have comparably large economies, yet U.S. state and local governments have put together an average of 15 $100 million packages per year in 2010-2014, compared to 1.2 per year in the EU. Yes, more than ten times as many per year in the U.S.!

The U.S. incentive packages are bigger, too. The largest of the six EU packages (Global Foundries in Dresden, Germany, in 2011) comes to about $285 million at an exchange rate of $1.35 per euro (and the euro is down to less than $1.15 now). Boeing, Sempra Energy, Intel, Cerner Corporation, Cheniere Energy, Shell, Tesla, and Chrysler all received packages worth over $1 billion. Moreover, Boeing's incentives were accompanied by substantial retirement and other benefit concessions from its workers.

How does this happen? Governments in the European Union and the United States both face the same need to attract investment, but the EU has a binding legal framework that restricts what Member States can do. Every subsidy program or large individual subsidy must be notified in advance to the European Commission, and only implemented if the Commission approves. Every region in the EU has a maximum subsidy level it can give, with a limit of 0 for the richest regions and only 50% (subsidy/investment) for the poorest regions, mostly in the former Communist countries. Finally, investments larger than €50 million have their maximum allowable subsidy cut sharply, by 50% on the amount between €50 million and €100 million, and by 66% for the amount over €100 million.

Because of the lack of a framework in the United States, state and local governments spend almost $50 billion per year just to attract investment, and up to a further $20 billion in subsidies not even requiring investment, according to my estimates. This is more than enough to rehire every state and local employee who lost their job since the recession. All other things equal, subsidies make the economy less productive, and these subsidies transfer money from average taxpayers to the far richer subsidy recipients. In other words, they slow economic growth and contribute to economic inequality.

Changing this is a huge job. The first step is simply knowing what the stakes are, achieving transparency in how much governments give to business. Things are improving on the transparency front, but we still have a long way to go. Then we've actually got to change the rules...

UPDATE: Greg LeRoy of Good Jobs First sent me an updated version of the spreadsheet, which has 76 incentive packages greater than $100 million that it has discovered since 1/1/2010. The updated spreadsheet is now available at the Megadeals link above.

My GASB Comments

Well, I should have taken my own advice and not waited until the last minute to submit my own comments on the proposed standards for government accounting of subsidies. But, at long last, they are in. Below please find them in their entirety.

Director of Research and Technical Activities

Project No. 19-20E

Government Accounting Standards Board

January 14, 2015

Dear Director:

I am writing to comment on the proposed standards for reporting the “tax abatements” given by state and local governments as part of their Comprehensive Annual Financial Reports (CAFRs). Let me begin by saying that I welcome this proposal and want to urge the Board to be sure these standards are truly comprehensive.

I write from a unique vantage point because my best-known academic work consists of making estimates of the value of subsidies given to companies by state and local governments. This includes two books: Competing for Capital: Europe and North America in a Global Era (Georgetown University Press, 2000) and Investment Incentives and the Global Competition for Capital (Palgrave Macmillan, 2011). In my latter book, I estimate that in 2005 state and local governments gave just under $50 billion in business attraction subsidies and perhaps another $20 billion in subsidies not tied to making an investment. In addition, I have written numerous journal articles and book chapters on tax incentives and other forms of subsidies to attract investment. The proposed standards, if done correctly, would put me out of the estimation business, and that would be a great thing. In the United States, there is a terrible lack of transparency in the use of these incentives, which makes informed policy analysis very difficult and, in some cases, impossible. Not only that, the lack of transparency hinders the ability of bond and other financial analysts to determine the true long-term financial position of a government entity that may be seeking to borrow through the bond market.

I am regularly interviewed by, and have my work cited in, well-known publications such as The Wall Street Journal, Bloomberg, The St. Louis Post-Dispatch, Los Angeles Times, etc. I have consulted on these issues for the Organization for Economic Cooperation and Development (OECD), the International Institute for Sustainable Development, the North Carolina Budget and Tax Center, and the Missouri chapter of the Sierra Club. I hold the position of Professor of Political Science at the University of Missouri-St. Louis, where I have taught for 23 years. Let me note for the record that the comments which follow are my own personal recommendations and my views are not necessarily shared by my employer or consulting clients.

Let me begin by highlighting an important terminological problem caused by the Board’s use of the term “tax abatement” as its catch-all term for the policies under discussion. In fact, a “tax abatement,” properly so called, is only one form of subsidy to attract investment to a state or locality, and most likely not the most important one, depending on the governmental entity in question. A true tax abatement relieves its recipient from having to pay certain taxes that would otherwise be due, most usually the local property tax. It is merely one form of a broader category of support for business investment that I generally call an “investment incentive,” “location incentive,” or “location subsidy.” I define all three of these terms as “a subsidy to affect the location of investment.”

What, then, is a “subsidy”? To answer this question, we can turn to the “Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, April 15, 1994,” which was adopted into U.S. law via Public Law no. 103-465. Thus, the definition of a “subsidy” established in the Uruguay Round’s “Agreement on Subsidies and Countervailing Measures” (SCM) is in fact a provision of U.S. law. This is important to keep in mind in the discussion that follows.

Article 1 of the SCM defines a subsidy as follows:

1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:

            (a)(1) there is a financial contribution by a government or any public body [note that his means this section applies to all state and local governments within the United States] within the territory of the Member (referred to in this Agreement as “government”), i.e. where

                        (i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);

                        (ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits); [footnote omitted]

                        (iii) a government provides good or services other than general infrastructure, or purchases goods;

                        (iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; [an anti-evasion rule]

                                    Or

            (a)(2) there is any form of income or price support in the sense of Article XVI of GATT 1994;

                                    And

(b) a benefit is thereby conferred.

To sum all this up, the Agreement on SCM establishes a definition of “subsidy” that includes any potential subsidy mechanism, carried out by any level of government (for example, the Washington B&O tax reduction that was a major element of the European Union’s complaint against subsidies to Boeing, a case the EU won), one not evaded by simply claiming that it was a private body carrying out the subsidy. In effect, if the subsidy exists in law or in fact, the subsidy rules come into play.

This principle that a subsidy existing in law or in fact must be counted is an important one when examining the Board’s proposed rules. Some tax measures that are obviously subsidies under the SCM definition (again, something incorporated into U.S. law) might not be considered “tax abatements” using a strict reading of the definition of that term. Consider the case of tax increment financing (TIF). In the states with which I am most familiar, a TIF recipient is legally considered to have paid its property tax even though its payment flows immediately back to its own benefit. If the entity has legally paid its property tax, how can one say that government has “foregone” the revenue? The answer, of course, is to look at the facts as well as the law. GASB’s rules must ensure that they follow the facts and ignore legal fictions. Otherwise, huge swathes of tax-based subsidies will not be counted, and bond analysts and other researchers will not have the facts they need to establish the true financial situation of a government. This is similarly true of situations where the tax foregone is not due from the subsidy recipient. For example, many states allow companies to keep personal income tax withholding from their employees. In Missouri, local taxing districts called transportation development districts collect an extra sales tax from customers, but keep the money until they have received the entire subsidy they negotiated from a municipal government. It does not matter whose taxes are foregone; the rules must capture the subsidy itself in order to be useful. These are not small programs, either. In California, by 2010 TIF was generating $8 billion a year in tax increment for local governments, which was largely plowed back into paying the subsidies they were tied to (or equivalently, paying off bonds which funded the subsidies). In the much smaller Missouri economy, both TIF and transportation development districts see hundreds of millions of dollars of new subsidies committed annually by municipal governments.

In light of the fact that investment incentives may not be entirely tax-based, I believe it to be important to at least cross-list cash grants paid to companies with the “tax abatement” they receive. From anecdotally talking to reporters calling me about various incentive packages they are covering, it appears to me that there is an increasing trend for cash to make up a significant chunk of these packages. If the new rules require such cross-listing, we can then see in one place how much money a state or local government is committing in subsidies to attract businesses. This information gives us important clues about future fiscal trends from a government, as heavy users of incentives tend to remain such well into the future; however, there is no telling from one year to the next what the split will be between cash and tax-based subsidies.

On a related point, the rules absolutely need to include future amounts committed for tax incentives. Once again, without such transparency it is impossible for bond or other analysts to derive a true financial picture for a particular government.

Last, I would urge that the reporting of location subsidies be made on a firm-specific basis. If a single company is receiving tens of millions of dollars in tax breaks per year from a given municipality, with many more tens of millions committed in the future, it could signal that the municipality is highly vulnerable to anything which adversely affected the recipient. A city like Flint, Michigan, was devastated when the numerous subsidized General Motors facilities in the city began to go out of business in the 1980s.

In summary, then, the most important principle to consider is that transparency must be comprehensive. If the rules have loopholes allowing governments to not report certain types of subsidies, those subsidies will not be reported, and everyone relying on data reported under the new rules for accurate financial information – from citizens to investors – will be misled by numbers that don’t reveal a government’s true financial situation. Please require the most comprehensive reporting possible, for your efforts to live up to their potentially game-changing value.

Sincerely,

Kenneth P. Thomas

Professor of Political Science

University of Missouri-St. Louis