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largest subsidy ever given in the United States for a single project (with Boeing’s $8.7 billion Washington State deal withdrawn in a WTO settlement).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.

Boeing Moves More Jobs from Washington State to South Carolina

As first reported in The Wall Street Journal, Boeing is ending production of the 787 Dreamliner at Everett, Washington, and moving it to its newer facility in North Charleston, South Carolina. The company says this is the most efficient approach to reducing production of the jet from 10 per year to six per year in response to falling demand due to the coronavirus pandemic. 

Moving production to South Carolina means that more than 1,000 Boeing workers at its Everett plant will likely lose their jobs as they no longer have a model to build.

This development marks the latest step in Boeing's long-term assault on its unionized Washington workforce. When the state legislature there approved its $3.2 billion ($2 billion present value) subsidy deal for the 787 in 2003, legislators there were under the impression that they had “won” the project, that Boeing was now required to build all 787s in Washington. They were shocked and angered when the company announced that it would set up another assembly line in “right-to-work” South Carolina, complete with some $900 million in incentives, creating a plant that remains non-union to this day.

In large part, this new move became possible because this February, the company asked Washington to end the 2003 subsidy package, which had been ruled an unlawful subsidy by the World Trade Organization and upheld by WTO's Appellate Body (click on "Summary of key findings") in 2012. After getting hammered by the European Union in WTO compliance proceedings, Boeing decided it would clean its slate to be better positioned to attack EU-based Airbus for the subsidies it has received. The United States notified the WTO Dispute Settlement Body in May that Washington had terminated the subsidies in March. With no subsidy from Washington, the company no longer felt obligated to produce any 787s there. Note that there has been no indication that Boeing gave back the approximately $160 million a year it had received already under the 2003 subsidy deal.

According to the company, it did not receive any incentives to bring the remaining 787 production to South Carolina. That would be the right approach for Boeing to take if it wants to avoid further hassle with the World Trade Organization. Of course, we have seen plenty of examples where subsidies have been discovered long after a project was first announced. Think Foxconn in Wisconsin or Nissan in Mississippi. Call me cynical, but I wouldn't put it past Boeing to find a way to get a subsidy for the “new” jobs in South Carolina. After all, from 2003-2012, the company had net negative state income taxes overall nationally.

Between the runaway jobs and the World Trade Organization subsidy rulings, if there were ever a time and a company calling for no development subsidies, Boeing is it in 2020.

Cross-posted with Good Jobs First.

Thanks to Greg LeRoy for suggesting this article and for editorial improvements.

First-ever binding end to a border war: Missouri-Kansas UPDATED

Kansas Governor Laura Kelly has just signed an executive order that prohibits state subsidies being used to move existing Missouri firms in four Missouri counties to three Kansas counties, which together make up the Kansas City metropolitan area. Unlike previous voluntary no-raiding deals, such as NY-NJ-CT, Council of Great Lakes Governors, and even Australia's Interstate Investment Cooperation Agreement, this is not a voluntary agreement, but one with the force of law, a first in the country's history.

The binding nature of the agreement comes from the fact that both states have legally bound themselves. In June (h/t New York Times), the Missouri legislature passed and the Governor signed into law restrictions on using state subsidy funds (such as Missouri Works) from being used to attract companies operating in three counties in Kansas in the Kansas City metro area. The law stipulated, however, that this would not go into effect unless Kansas passed similar binding regulations on its state subsidies (Promoting Employment Across Kansas, or PEAK) being used to attract firms on the Missouri side of the metro area. Today's action by Kansas' Kelly meets the stipulations of the Missouri law.

Kansas and Missouri have thus joined the European Union as the only areas with legally binding no-raiding rules, anywhere in the world. Of course, the EU's provisions, based in the Guidelines for Regional Aid, cover the entire territory, whereas the Kansas-Missouri ban only applies in the Kansas City metropolitan area. However, since that's where almost all the job piracy between the two states takes place, the two states' action is truly historic.

The two states made a previous attempt at a binding agreement in 2014-16: Missouri passed a similar law to this year's in 2014, but Kansas' last-minute law just before a 2016 deadline in the Missouri law precipitated a stalemate, and no new deal was made until this year.

It should be remembered that an agreement of this type has been advocated for by a number of companies in the region, notably Hallmark and the Hall Family Foundation. Their work uncovered the hundreds of millions of dollars that had gone into the border war and led to pressure being put on both state governments to end the madness.

New article in Shelterforce highlights EU state aid rules

Greg LeRoy and I have written an article at Shelterforce explaining the basics of the European Union's rules governing subsidies, or "state aid" in EU-speak. As the article is ungated, and regular readers will remember much of the detail, I will not quote it here. Suffice it to say that the continuing reverberations of Amazon's HQ2 project have opened space to shine a brighter light on economic development subsidies.

In addition, Tim Bartik of the Upjohn Institute has a series of thoughtful tweets commenting on our article. His one reservation with the EU approach appears to be that even with the scaling down of the maximum subsidy allowed for large projects, the amount allowable might still be too high. If I'm not reading too much into his comments, it seems he would favor an absolute dollar cap on subsidies for the largest projects. He also admits in his counterfactual analysis of Foxconn in Wisconsin that the Racine/Kenosha area wouldn't be eligible for the highest level of incentives under the EU rules, so his scenario of a $1.7 billion subsidy being possible isn't fully accurate. In fact, it looks to me that Kenosha and Racine counties are just slightly below the national average for income per capita, and certainly not less than 75% of the average, the key figure that would make an EU region able to have even a 25% regional aid maximum.* The next highest aid maximum allowed in the European Union is 15%, and 34% of that (the scaling factor for investment over 100 million euros) is just 5.1%. Thus, a $10 billion Foxconn project would be eligible at most for a tad over $510 million in subsidies, not $1.7 billion.

I'd love to hear your take on our article.

* More technically, a per capita GDP below 75% of the EU average is required for designation as a "107(3)(a) area," named for the treaty paragraph it is listed in. See Regional Aid Guidelines for 2014-2020, paragraph 150. 25% is the lowest aid maximum in a 107(3)(a) area, while 15% is the highest aid maximum in a 107(3)(c) area, available to regions between 75% and 100% of the EU average, plus a few exceptional situations such as very low population density.

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.

New article on tax increment financing in Missouri shows impact of KS/MO border war

After several years of work, my colleague Susan G. Mason (Boise State University) and I have published a new article on TIF in Missouri, specifically in the St. Louis and Kansas City metropolitan areas. "Exploring Patterns of Tax Increment Financing Use and Structural Explanations in Missouri's Major Metropolitan Regions" appeared in the July 2018 edition of the HUD journal Cityscape, downloadable for free here. We omitted the two cities from our earlier statistical analysis (in the paywalled Economic Development Quarterly, May 2010) because they are much larger than any other Missouri city and use TIF far more than any of them, making them statistical outliers.

In our earlier article, “Tax Increment Financing in Missouri: An Analysis of Determinants, Competitive Dynamics, Equity and Path Dependence,” we found that early adopters of TIF tended to be heavier users of TIF far past the first TIF adopted, that TIF as used in Missouri exacerbated inter-jurisdictional inequity (cities with higher poverty rates were less likely to use it than cities with lower poverty rates), and we found strong evidence for competitive dynamics in the use of TIF: Cities that were adjacent to a TIF-using city were two and a half times as likely as average to use TIF themselves, and implement more TIF projects.

The new article is an exploratory study, as it is impossible to generalize from two cases. But one thing we established clearly, based on complete data from 1988 to 2013 for St. Louis, and from 1988 to 2012 for Kansas City, is that Kansas City's tax increment financing projects are marked by much higher aid intensity (the EU term that equals subsidy/investment) than those of St. Louis. Indeed, even excluding 2009 in St. Louis, which was marked by several multi-billion projects with low aid intensity (and at least in the case of Northside Regeneration, had substantial state funding not reflected in Exhibit 4 of the article), the overall average aid intensity, ex-2009, is 17%.

By contrast, in Kansas City, the average aid intensity of the city's TIF projects comes to a whopping 36%,* more than twice as much. Everyone we interviewed on the question considered that there is much greater competition for investment with Kansas than with Illinois in the two metro regions. The difference in aid intensities is consistent with this thesis.

These points take on renewed importance as Missouri's Governor Mike Parson is convening the Governor's Conference on Economic Development in Kansas City this week. As you may recall, Missouri and Kansas came close to a truce in the border war in 2016, but it collapsed when Governor Sam Brownback proposed legislation that did not match what Missouri passed in 2014. Since Missouri has a new governor now and Brownback will be replaced in 2019, there is renewed optimism that a binding halt can be brought to the use of state subsidies in the border war.

The Governor's Conference will include a panel Friday on the border war in which I'll take part. We will discuss the background, data on the cost of the border war, and a potential solution. I will also point out that TIF is impacted by the border war, too. It will be great to try to persuade lawmakers and the governor.

Unfortunately, the cost to attend is prohibitively expensive, but I will report back next week.


* The mandatory typo occurs in Exhibit 3, Kansas City, in the line summarizing 1988-2006. First, the correct amount for total TIF reimbursement is $3,527,420,262, excising the stray "1" in the millions area. The correct aid intensity for that period is 36%, not the 21% listed and probably copied from the previous line.

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.

Foxconn aims to break the bank

While the head of the illegitimate Trump regime makes multiple headlines telling the New York Times that he is above the law, we have to remember that there are plenty of other issues of concern to the middle class. One of the most striking is the latest huge bidding war for a gigantic Foxconn manufacturing plant (h/t David Haynes), slated to employ a massive 10,000 workers.

The linked article interviews an American consultant based in Beijing, Einar Tangen, who says that Foxconn's standard procedure is to get as much incentives out of state and local governments as possible; indeed, he says, "You can expect Foxconn to get as close to zero cost as they can. They can do it because they bring so many jobs." Yes -- and no.

Yes, 10,000 jobs is a lot of jobs for a single U.S. investment project. But Foxconn has strong motivations to invest in the United States, most importantly the fear of protectionist trade policies that will keep their iPhones and other electronics out of the country. This mirrors the mid-1980s, when exactly the same fear spurred most Japanese automakers to build at least one assembly plant in the United States. If the company has to have a presence in the U.S. market, especially as competitors were doing during the 1980s, the firm does not actually have that strong a bargaining position vis-à-vis the United States.

The problem, just as in the 1980s, is that as long as individual states do not coordinate their bidding (as happens in the European Union), the dynamic of bidding wars will induce them to offer outrageously high location subsidies, sometimes even in excess of 100% of the cost of the investment. Individual states do not take into effect what happens in other states when they do their cost-benefit analyses of economic development projects. The fact that the new investment will directly or indirectly destroy jobs at competing facilities is of no concern to policymakers in, say, Wisconsin, who will not adjust their cost-per-job estimates to reflect this dynamic.

While the United States has a strong bargaining position, individual states bidding against each other do not have a strong bargaining position. Foxconn believes it *has* to come to the United States, but it does not have to locate its new manufacturing plant in Wisconsin. Nor does it have to put it in Michigan, another state apparently in the hunt for this factory. But we can see that there will be a bidding war with at least two states pursuing the facility, and it will drive up the cost of location subsidies spectacularly. Perhaps we'll see a new all-time record.

Oddly enough, even the states have a factor increasing their bargaining power, a low unemployment rate. In May 2017, Wisconsin's unemployment was down to 3.1%, while Michigan's was 4.2%. For Michigan, this represents a decline of 10.7 percentage points (14.9% to 4.2%) since the peak in July 2009. All other things equal, both states should be less desperate to get these jobs than they would have been in 2009.

Call me cynical, but I'll believe it when I see it for the states to refrain from a bidding war.

Mike Pence subsidizes offshorers

The Indianapolis Star reports (h/t Greg LeRoy) that the Indiana Economic Development Corporation (IEDC), which is headed by Governor/Vice-Presidential nominee Mike Pence, has given millions of dollars in incentives to companies that have subsequently offshored jobs to countries including China, Mexico, Taiwan, and Japan.

Not only that, but the 10 companies that outsourced the jobs sent more jobs abroad from Indiana, 3800, than their agreements with the IEDC required them to create, 1087. For this, the companies were initially awarded $24 million. Moreover, four of the 10 companies failed to reach their job commitments and were subject to clawbacks and termination of future payments under their agreements.

This is a startling mix of good practices and terrible practices. On the good side of the ledger, the state uses both performance-based incentives and clawbacks. Not only that, the cost per job is quite reasonable compared to most states, a mere 24,000,000/1087 = $22,079 per job.

The fly in the ointment is that Indiana does not measure job creation goals against a company's pre-existing state workforce, but against its workforce at the project site location only. Thus, Vera Bradley added about 30 jobs at its headquarters in the Fort Wayne area while laying off 250 at another Fort Wayne-area facility, and is considered to be in good standing on its incentives. How can I put this charitably? This is idiotic. As we can see, the ten companies ran rings around the IEDC and got $24 million for creating -2713 jobs.

It's not like other states aren't aware of this problem, so why isn't Indiana paying attention? According to one source quoted by the Star, among the states that prohibit what Indiana has allowed are immediate neighbors Ohio and Michigan, near neighbor Missouri, and also North and South Carolina.

To top it all off, IEDC does not make companies' job performance numbers public. (Banging my head on the table...) Thus, it is impossible to independently monitor the performance of subsidy awards. If not for the existence of federal trade adjustment assistance application data, the Star could not have done this study at all. Fortunately, the data were there, and we are treated to one more instance of the widespread underperformance of subsidy recipients.

And remember: Pence is the guy that Donald Trump chose as his running mate.