$19 billion? $8 billion? A few hundred million? Estimates are all over the map regarding the European Commission's imminent decision on whether Apple received illegal, unnotified state aid (subsidies) from Ireland. As I mentioned two years ago, two factors go into the Commission's claim: Ireland's creation of a corporate entity that is taxable nowhere, and the possibility that the company negotiated a tax rate far below the country's already-low 12.5% corporate income tax rate.
As you may remember from earlier posts, if the Commission rules against Apple, the sanction it will impose will be the repayment of the illegal subsidies, with interest. Some estimates of Apple's tax savings are astronomical (the New York Times reported an estimate Apple saved $7.7 billion in 2011 alone), which creates the possibility of an extremely high repayment order. On the other hand, recent cases have seen relatively low repayments, such as the mere €30 million the Commission ordered Starbucks to repay the Netherlands last year. Still, it is perfectly possible that the Commission used smaller cases as a way to establish the legal precedent regarding fiscal aid before dropping the bomb on Apple.
It's worth noting, as reported by Bloomberg, that the largest state aid repayment order ever made was approximately €1.4 billion charged to Électricité de France, followed by two orders in the €1 billion range. When this decision is announced, we may see a new record by a large margin. Or maybe we won't. Either way, the Commission will be giving us a clear sign regarding how seriously it intends to treat fiscal aid abuses.
Update: For a little perspective on fines, Chillin' Competition (via email) points out that the European Commission has just imposed an anti-trust fine on four truck manufacturers of over €2.9 billion , a new record.
Cross-posted at Angry Bear.
Showing posts with label subsidy estimates. Show all posts
Showing posts with label subsidy estimates. Show all posts
Sunday, July 17, 2016
Thursday, December 17, 2015
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.
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.
Friday, October 2, 2015
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!
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!
Tuesday, February 10, 2015
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.
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.
Tuesday, November 4, 2014
Time to comment on the GASB standards!
As I reported last month, the Government Accounting Standards Board (GASB) has proposed new rules that would require state and local governments to disclose subsidies in their financial reports. The proposal is now open for public comment from now until January 15, 2015.
Good Jobs First, which has long advocated for this change in accounting rules, has produced a detailed analysis and critique of the proposal. While any improvement in transparency is welcome, for governments' Comprehensive Annual Financial Reports (CAFRs, as they are called) to provide useful information to citizens and investors alike, they need to truly be comprehensive. The problem, as Good Jobs First points out, is that the way GASB has defined "tax abatements" (its rather odd choice for the broad category of economic development tax incentives -- odd because tax abatements per se make up only a subset of such incentives) leaves open the possibility that major categories of subsidies could be omitted altogether.
As Good Jobs First points out, GASB's specification that a "tax abatement" includes a government forgoing tax revenue means that tax increment financing (TIF) may not fall under the definition. The reason, as I have analyzed for the Sierra Club, is that a TIF recipient is legally deemed to have paid its property taxes in full, even though it individually benefits from the diversion of the incremental taxes. If someone has "paid" all her/his taxes, then how does one say that government has foregone the tax due? GASB has to make clear that it won't be blinded by the legalese here, but will instead be guided by what actually happens. One possibility would be to use phrasing seen in the WTO Agreement on Subsidies and Countervailing Measures, that the government promises to abate taxes "in law or in fact." Using this phrase has the advantage that the Agreement has been adopted verbatim into U.S. law, that being the way that the United States "signed" the Uruguay Round agreements, rather than ratify them as a treaty.
Tax increment financing is a high value subsidy in the United States. TIF in California was generating $8 billion per year in tax increment by 2010. Even in Missouri, local governments adopt TIFs worth hundreds of millions of dollars every year. It would be very problematic if GASB allowed its revised Generally Accepted Accounting Principles (GAAP) to ignore tax increment financing.
Other types of potentially excluded subsidies identified by Good Jobs First include diversion of employees' withheld income taxes (because the source for the subsidy is not the company's own taxes) and and sales tax diversions, such as Missouri's Transportation Development Districts (again because the source of the subsidy is not the company's own taxes). The latter total hundreds of millions of dollars in Missouri annually. Furthermore, Good Jobs First flags highly ambiguous provisions which could lead to excluding performance-based subsidies (because the subsidy occurs after the investment or hiring, not before) and Payments in Lieu of Taxes or PILOTs (which in some state identify actual payments made by a recipient, but in Tennessee and perhaps others is simply the phrase used to describe property tax abatements).
I would suggest further that GASB require governments to cross-reference cash subsidies paid to companies in the "tax abatement" notes so the notes reflect all subsidies given to companies in one place. Cash subsidies already appear in CAFRs because they are on-budget, but grouping them with the more numerous off-budget tax-based subsidies will simplify research by bond analysts, academics, or anyone else, putting total subsidies in one convenient place within the CAFR.
In addition, Good Jobs First notes other deficiencies on the issue of transparency. There is no requirement for company-specific disclosure, which is especially important for large incentive packages but is best when universal. Furthermore, there is no requirement for governments to disclose their future commitments under multi-year tax agreements. This should be at least as troubling to bond analysts as it is to advocates for good subsidy policy, if not more so. It is impossible to tell the true fiscal position of a state or local government if it is allowed to hide large future liabilities.
Good Jobs First gives detailed instructions for commenting: The easiest way is to email your comments to Director of Research and Technical Activities, Project No. 19-20E, at director@gasb.org. What are you waiting for? It's time to comment!
Cross-posted at Angry Bear.
Good Jobs First, which has long advocated for this change in accounting rules, has produced a detailed analysis and critique of the proposal. While any improvement in transparency is welcome, for governments' Comprehensive Annual Financial Reports (CAFRs, as they are called) to provide useful information to citizens and investors alike, they need to truly be comprehensive. The problem, as Good Jobs First points out, is that the way GASB has defined "tax abatements" (its rather odd choice for the broad category of economic development tax incentives -- odd because tax abatements per se make up only a subset of such incentives) leaves open the possibility that major categories of subsidies could be omitted altogether.
As Good Jobs First points out, GASB's specification that a "tax abatement" includes a government forgoing tax revenue means that tax increment financing (TIF) may not fall under the definition. The reason, as I have analyzed for the Sierra Club, is that a TIF recipient is legally deemed to have paid its property taxes in full, even though it individually benefits from the diversion of the incremental taxes. If someone has "paid" all her/his taxes, then how does one say that government has foregone the tax due? GASB has to make clear that it won't be blinded by the legalese here, but will instead be guided by what actually happens. One possibility would be to use phrasing seen in the WTO Agreement on Subsidies and Countervailing Measures, that the government promises to abate taxes "in law or in fact." Using this phrase has the advantage that the Agreement has been adopted verbatim into U.S. law, that being the way that the United States "signed" the Uruguay Round agreements, rather than ratify them as a treaty.
Tax increment financing is a high value subsidy in the United States. TIF in California was generating $8 billion per year in tax increment by 2010. Even in Missouri, local governments adopt TIFs worth hundreds of millions of dollars every year. It would be very problematic if GASB allowed its revised Generally Accepted Accounting Principles (GAAP) to ignore tax increment financing.
Other types of potentially excluded subsidies identified by Good Jobs First include diversion of employees' withheld income taxes (because the source for the subsidy is not the company's own taxes) and and sales tax diversions, such as Missouri's Transportation Development Districts (again because the source of the subsidy is not the company's own taxes). The latter total hundreds of millions of dollars in Missouri annually. Furthermore, Good Jobs First flags highly ambiguous provisions which could lead to excluding performance-based subsidies (because the subsidy occurs after the investment or hiring, not before) and Payments in Lieu of Taxes or PILOTs (which in some state identify actual payments made by a recipient, but in Tennessee and perhaps others is simply the phrase used to describe property tax abatements).
I would suggest further that GASB require governments to cross-reference cash subsidies paid to companies in the "tax abatement" notes so the notes reflect all subsidies given to companies in one place. Cash subsidies already appear in CAFRs because they are on-budget, but grouping them with the more numerous off-budget tax-based subsidies will simplify research by bond analysts, academics, or anyone else, putting total subsidies in one convenient place within the CAFR.
In addition, Good Jobs First notes other deficiencies on the issue of transparency. There is no requirement for company-specific disclosure, which is especially important for large incentive packages but is best when universal. Furthermore, there is no requirement for governments to disclose their future commitments under multi-year tax agreements. This should be at least as troubling to bond analysts as it is to advocates for good subsidy policy, if not more so. It is impossible to tell the true fiscal position of a state or local government if it is allowed to hide large future liabilities.
Good Jobs First gives detailed instructions for commenting: The easiest way is to email your comments to Director of Research and Technical Activities, Project No. 19-20E, at director@gasb.org. What are you waiting for? It's time to comment!
Cross-posted at Angry Bear.
Sunday, October 26, 2014
October Tax-Cast Highlights Corporate Subsidies
This month's Tax-Cast from the Tax Justice Network highlights several issues covered here recently. There is an interview with Greg LeRoy of Good Jobs First on corporate subsidies in general and on the proposed changes by the Government Accounting Standards Board that would require state and local governments to disclose the incentives they give. In addition, John Christensen of TJN discusses the case of Irish state aid to Apple.
You can hear the entire podcast here:
You can hear the entire podcast here:
https://www.youtube.com/watch?v=84gaikIMwiA&feature=youtu.be
Sunday, December 9, 2012
NYT Series Illuminates -- And Confuses -- The State of the Subsidy Wars
Louise Story's series in the New York Times this week has created a substantial buzz about the issue of economic development subsidies.This is a welcome development, because it's an issue that doesn't get nearly enough attention in the highest profile media. Story has, in addition, appeared on shows such as MSNBC's "Morning Joe" and NPR's "Fresh Air," bringing subsidies to an even wider audience.
She crafted a number of stories that highlighted the big picture issues: imbalance in bargaining power between city governments and giant multinational corporations, the blatant conflicts of interest on display in Texas subsidy procurement, and a border war between Kansas and Missouri involving multimillion dollar incentives to move existing facilities across the state line, with no net benefit for the Kansas City metropolitan area, let alone for the U.S. as a whole.
The last few days have given me time to absorb the articles and the database Story created, as well as surveying the commentary on the web from well-known experts on subsidies. Several tentative conclusions seem in order.
First, as I pointed out in my last post, and backed up by Timothy Bartik's detailed analysis of Michigan, 5/8 of the national total is in the form of sales tax breaks, and probably the overwhelming majority of those sales tax reductions should not be considered subsidies. Here is what Bartik says about Michigan:
Second, changes of this magnitude mean that the Times estimates are not sufficiently accurate to use in a statistical analysis, as Richard Florida attempts in The Atlantic Cities. Finding out if incentives affect outcomes like wages, employment, or poverty is precisely the type of analysis we would like to do, but the fragility of the data makes this premature. The good news is that since the data on these state programs are all in one place, it should be possible to get a better handle on state incentives by cutting out those programs which should not be considered subsidies. Different analysts will no doubt have different judgments about what should be counted as a subsidy, but since the database is so inclusive, it should be useful no matter what your definition of subsidy is.
Third, there are some smaller errors in the program database as well. The one I have identified so far is that it counts net operating loss (NOL) tax provisions as subsidies in Illinois and New Hampshire, but not in other states, even though all states with a corporate income tax will have an NOL provision. In any event, this should not be considered a subsidy at all, but a part of a state's basic macroeconomic framework. In addition, Timothy Bartik pointed out to me in correspondence that the program database does not include single sales factor apportionment (only counting what percentage of a multi-state firm's sales take place in a given state, rather than standard three-factor apportionment that uses percentages of payroll and property as well) as a subsidy, which it should.
Fourth, the program database does not distinguish between investment incentives (subsidies to affect the location of investment) and subsidies more generally, which may or may not require an investment to obtain them. This is an important distinction I have tried to make clear by providing separate estimates in Investment Incentives and the Global Competition for Capital: $46.8 billion in incentives, and $65 or $70 billion in subsidies, depending on whether or not you count non-specific accelerated depreciation as a subsidy.
Finally, as Phil Mattera at Good Jobs First points out, the deals database misses a number of large awards, leaving out Tennessee's $450 million (present value) subsidy to Volkswagen and an even bigger package for ThyssenKrupp in Alabama. It also underestimates other awards, including Apple in North Carolina and Boeing in South Carolina. I also found that it underestimated subsidies to Dell and Google in North Carolina by omitting the local subsidy portion of the awards, a problem Ms. Story is aware of, as I noted in my last post.
The Times series has been great for the spotlight it has put on state and local subsidies and the sometimes vulgar politics surrounding the process of awarding them, and for compiling a great database of programs all in one place. However, its interpretation of the sales tax breaks, which are 5/8 of the national total but largely not subsidies, confuses the issue of total impact on state and local budgets and makes statistical analysis premature. This will require some work to fix, but it appears like most of the raw material is there to do it.
Cross-posted at Angry Bear.
She crafted a number of stories that highlighted the big picture issues: imbalance in bargaining power between city governments and giant multinational corporations, the blatant conflicts of interest on display in Texas subsidy procurement, and a border war between Kansas and Missouri involving multimillion dollar incentives to move existing facilities across the state line, with no net benefit for the Kansas City metropolitan area, let alone for the U.S. as a whole.
The last few days have given me time to absorb the articles and the database Story created, as well as surveying the commentary on the web from well-known experts on subsidies. Several tentative conclusions seem in order.
First, as I pointed out in my last post, and backed up by Timothy Bartik's detailed analysis of Michigan, 5/8 of the national total is in the form of sales tax breaks, and probably the overwhelming majority of those sales tax reductions should not be considered subsidies. Here is what Bartik says about Michigan:
For example, in my own state of Michigan, the New York Times database identifies $6.65 billion in annual state and local business incentives. Of this total, $4.83 billion is in “sales tax refund, exemptions, or other sales tax discounts”. Of this $4.83 billion, almost all of these refunds come from two provisions of Michigan tax law. First, Michigan does not apply the sales tax to most services, including business services, which saves businesses $3.88 billion annually. Second, for manufacturing, Michigan does not apply the sales tax to goods used as inputs to the manufacturing process, which saves manufacturers about $0.92 billion in sales tax.For those keeping score at home, that means that $4.80 billion of the $4.83 billion in sales tax breaks should not be considered subsidies, unless you consider manufacturing "specific" enough that this aid constitutes a subsidy, in which case only 80% of the sales tax breaks should be excluded from the subsidy tally.
Second, changes of this magnitude mean that the Times estimates are not sufficiently accurate to use in a statistical analysis, as Richard Florida attempts in The Atlantic Cities. Finding out if incentives affect outcomes like wages, employment, or poverty is precisely the type of analysis we would like to do, but the fragility of the data makes this premature. The good news is that since the data on these state programs are all in one place, it should be possible to get a better handle on state incentives by cutting out those programs which should not be considered subsidies. Different analysts will no doubt have different judgments about what should be counted as a subsidy, but since the database is so inclusive, it should be useful no matter what your definition of subsidy is.
Third, there are some smaller errors in the program database as well. The one I have identified so far is that it counts net operating loss (NOL) tax provisions as subsidies in Illinois and New Hampshire, but not in other states, even though all states with a corporate income tax will have an NOL provision. In any event, this should not be considered a subsidy at all, but a part of a state's basic macroeconomic framework. In addition, Timothy Bartik pointed out to me in correspondence that the program database does not include single sales factor apportionment (only counting what percentage of a multi-state firm's sales take place in a given state, rather than standard three-factor apportionment that uses percentages of payroll and property as well) as a subsidy, which it should.
Fourth, the program database does not distinguish between investment incentives (subsidies to affect the location of investment) and subsidies more generally, which may or may not require an investment to obtain them. This is an important distinction I have tried to make clear by providing separate estimates in Investment Incentives and the Global Competition for Capital: $46.8 billion in incentives, and $65 or $70 billion in subsidies, depending on whether or not you count non-specific accelerated depreciation as a subsidy.
Finally, as Phil Mattera at Good Jobs First points out, the deals database misses a number of large awards, leaving out Tennessee's $450 million (present value) subsidy to Volkswagen and an even bigger package for ThyssenKrupp in Alabama. It also underestimates other awards, including Apple in North Carolina and Boeing in South Carolina. I also found that it underestimated subsidies to Dell and Google in North Carolina by omitting the local subsidy portion of the awards, a problem Ms. Story is aware of, as I noted in my last post.
The Times series has been great for the spotlight it has put on state and local subsidies and the sometimes vulgar politics surrounding the process of awarding them, and for compiling a great database of programs all in one place. However, its interpretation of the sales tax breaks, which are 5/8 of the national total but largely not subsidies, confuses the issue of total impact on state and local budgets and makes statistical analysis premature. This will require some work to fix, but it appears like most of the raw material is there to do it.
Cross-posted at Angry Bear.
Sunday, December 2, 2012
NYT: $80 Billion in State and Local Subsidies Annually (Updated)
In today's New York Times, Louise Story begins a series, "The United States of Subsidies," ten months in the making, with a story focusing on General Motors closures, the border war for investments between Kansas and Missouri in the Kansas City metropolitan area, and a new estimate of state and local incentives to business, $80 billion a year. Backing this up, and no doubt contributing to the long lead time, is a database of 150,000 state and local subsidy deals going back at least 20 years. Given its appearance in the country's newspaper of record, the series is sure to elevate the issue of state and local subsidies to a prominence it has never known before.
Since my 2011 estimate was $70 billion per year in total subsidies to business, and $46.8 billion in location incentives, the Times figure represents a substantial increase if accurate. Ever since David Cay Johnston reviewed my book when it first came out, he has argued that my $70 billion figure was probably an underestimate, and the new report would seem to back him up. Nevertheless, I will certainly be spending some time analyzing the database to see just what is in it. According to the story, $18 billion per year is accounted for by corporate income tax breaks, a whopping $52 billion by "sales tax relief," and the other $10 billion unspecified but most likely property tax breaks. I have some questions about these numbers, however.
First, it seems to me that property tax breaks likely exceed $10 billion a year. When California axed tax increment financing earlier this year, it was generating $8 billion in tax increment all by itself. Although California cities were by far the biggest user of TIF, municipalities in almost every other state still use it, as well as myriads of property tax abatements offered at the local level. Story is well aware of this. She writes:
there were several states in Missouriwhich local subsidies exceeded state subsidies, including Missouri and Michigan, so my default assumption was that they were equal if I did not have adequate information on local incentives, as is usually the case due to the huge number of governments involved.
On the other hand, there is some chance that the $52 billion in sales tax subsidies could be an overestimate; it all depends on what The Times includes in this category. My own thinking about sales tax has changed since I first created the subsidy estimates in my 2000 book, Competing for Capital. My estimate for Minnesota, for example, included many hundreds of millions per year in sales tax exemptions for business services. Now, I tend to think of these tax breaks as methods to avoid tax cascading (paying the sales tax on a good more than once, by taxing the full value of every intermediate good) and not a subsidy at all. They have been removed from my estimate of total subsidies in my more recent work, which did not prevent my estimate for 2005 (published in 2011) from being $20 billion higher than that for 1995 (published in 2000). I do still count some sales tax breaks as subsidies, particularly those on plant and equipment, which apply to the initial investment rather than ongoing operations.
While this may seem like a sterile academic argument, in fact it makes a big difference whether incentives are $50 billion a year or $80 billion a year, approximately 600,000 public sector jobs paying $50,000 annually. The larger the true figure, the more pressing is the case for subsidy reform. The inauguration of this new series of articles, plus the database, will help us put a better number on the value, a critical first step toward galvanizing public opinion to force politicians to rein in subsidies.
I will be commenting more on this series over the course of this week.
UPDATE: Text corrected to reflect that although I had specific data for local incentives in Michigan, the total of local incentives was somewhat lower than that of state incentives. In addition, it is clearly true that TIF in California exceeded state subsidies, so obviously so did the total of local subsidies. However, I did not know this at the time I made the estimate.
Cross-posted at Angry Bear.
Since my 2011 estimate was $70 billion per year in total subsidies to business, and $46.8 billion in location incentives, the Times figure represents a substantial increase if accurate. Ever since David Cay Johnston reviewed my book when it first came out, he has argued that my $70 billion figure was probably an underestimate, and the new report would seem to back him up. Nevertheless, I will certainly be spending some time analyzing the database to see just what is in it. According to the story, $18 billion per year is accounted for by corporate income tax breaks, a whopping $52 billion by "sales tax relief," and the other $10 billion unspecified but most likely property tax breaks. I have some questions about these numbers, however.
First, it seems to me that property tax breaks likely exceed $10 billion a year. When California axed tax increment financing earlier this year, it was generating $8 billion in tax increment all by itself. Although California cities were by far the biggest user of TIF, municipalities in almost every other state still use it, as well as myriads of property tax abatements offered at the local level. Story is well aware of this. She writes:
The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards.Thousands of local governments give subsidies, and these are overwhelmingly related to property tax. In my most recent estimate,
On the other hand, there is some chance that the $52 billion in sales tax subsidies could be an overestimate; it all depends on what The Times includes in this category. My own thinking about sales tax has changed since I first created the subsidy estimates in my 2000 book, Competing for Capital. My estimate for Minnesota, for example, included many hundreds of millions per year in sales tax exemptions for business services. Now, I tend to think of these tax breaks as methods to avoid tax cascading (paying the sales tax on a good more than once, by taxing the full value of every intermediate good) and not a subsidy at all. They have been removed from my estimate of total subsidies in my more recent work, which did not prevent my estimate for 2005 (published in 2011) from being $20 billion higher than that for 1995 (published in 2000). I do still count some sales tax breaks as subsidies, particularly those on plant and equipment, which apply to the initial investment rather than ongoing operations.
While this may seem like a sterile academic argument, in fact it makes a big difference whether incentives are $50 billion a year or $80 billion a year, approximately 600,000 public sector jobs paying $50,000 annually. The larger the true figure, the more pressing is the case for subsidy reform. The inauguration of this new series of articles, plus the database, will help us put a better number on the value, a critical first step toward galvanizing public opinion to force politicians to rein in subsidies.
I will be commenting more on this series over the course of this week.
UPDATE: Text corrected to reflect that although I had specific data for local incentives in Michigan, the total of local incentives was somewhat lower than that of state incentives. In addition, it is clearly true that TIF in California exceeded state subsidies, so obviously so did the total of local subsidies. However, I did not know this at the time I made the estimate.
Cross-posted at Angry Bear.
Tuesday, January 31, 2012
Expensive Subsidies Help State and Local Governments Drag Down Recovery
The release of gross domestic product data on Friday highlighted how the contraction of state and local governments has been a drag on economic recovery since the end of the official recession. As Nicholas Johnson of the Center on Budget and Policy Priorities explains, 2011 was the third straight year that state and local government output has fallen, reaching -2.3% in 2011, the worst since 1944, as shown in the chart below.
Paul Krugman amplifies this point, noting that investment in physical capital by state and local governments has fallen from over $290 billion (constant 2005 dollars) in 2008 to a little over $250 billion today, well over 13%. He further emphasizes that a lot of the cuts on current spending by governments has fallen on education. State and local governments, constrained by balanced budget requirements, are not doing their part to "win the future." This is precisely what Krugman predicted in December 2008 when he said that "50 state governors who are slashing spending in a time of recession" would counteract the stimulus that would be enacted at the federal level in 2009.
As readers of this blog know, a big chunk of state and local deficits could be offset by cutting corporate subsidies rather than cutting programs. My estimate of these subsidies comes to as much as $70 billion per year, more than enough to pay for the 656,000 state and local jobs Johnson reports have been lost since their peak employment in 2008.
It's important to emphasize that from a national point of view, this spending actually creates very few new jobs. While a multi-hundred-million incentive may appear to attract a new automobile assembly plant in one state, this will be offset by reduced sales from existing plants, which eventually leads to one closing (James Rubenstein, in 1992, indeed found a one-to-one relationship of auto plants opening and closing in North America). Similarly, local governments in the St. Louis metropolitan area poured over $2 billion in subsidies to retail between 1990 and 2007, with the net increase in jobs, 5400 ($370,370 per job!) not exceeding the percentage increase in local income, according to a report by the regional planning organization, the East-West Gateway Council of Governments. In other words, no jobs were actually created by these incentives, as the growth in retail would have occurred anyway due to income growth.
While it would not offset the entire state/local budget deficit, cutting subsidies would go a long way toward that goal, allowing the "Fifty Herbert Hoovers" to rehire workers and cut less from their budgets. Moreover, it would reduce income inequality slightly by ending these transfers from average taxpayers to subsidy recipients who are richer on average.
Paul Krugman amplifies this point, noting that investment in physical capital by state and local governments has fallen from over $290 billion (constant 2005 dollars) in 2008 to a little over $250 billion today, well over 13%. He further emphasizes that a lot of the cuts on current spending by governments has fallen on education. State and local governments, constrained by balanced budget requirements, are not doing their part to "win the future." This is precisely what Krugman predicted in December 2008 when he said that "50 state governors who are slashing spending in a time of recession" would counteract the stimulus that would be enacted at the federal level in 2009.
As readers of this blog know, a big chunk of state and local deficits could be offset by cutting corporate subsidies rather than cutting programs. My estimate of these subsidies comes to as much as $70 billion per year, more than enough to pay for the 656,000 state and local jobs Johnson reports have been lost since their peak employment in 2008.
It's important to emphasize that from a national point of view, this spending actually creates very few new jobs. While a multi-hundred-million incentive may appear to attract a new automobile assembly plant in one state, this will be offset by reduced sales from existing plants, which eventually leads to one closing (James Rubenstein, in 1992, indeed found a one-to-one relationship of auto plants opening and closing in North America). Similarly, local governments in the St. Louis metropolitan area poured over $2 billion in subsidies to retail between 1990 and 2007, with the net increase in jobs, 5400 ($370,370 per job!) not exceeding the percentage increase in local income, according to a report by the regional planning organization, the East-West Gateway Council of Governments. In other words, no jobs were actually created by these incentives, as the growth in retail would have occurred anyway due to income growth.
While it would not offset the entire state/local budget deficit, cutting subsidies would go a long way toward that goal, allowing the "Fifty Herbert Hoovers" to rehire workers and cut less from their budgets. Moreover, it would reduce income inequality slightly by ending these transfers from average taxpayers to subsidy recipients who are richer on average.
Monday, January 2, 2012
Investment Incentives and the Global Competition for Capital
The Vale Columbia Center on Sustainable International Investment has just published my new article in its "FDI [foreign direct investment] Perspectives" series, "Investment Incentives and the Global Competition for Capital." This piece summarizes my book of the same name, and makes the following main points:
- Investment incentives (subsidies designed to attract investment) are widely used around the world at all levels of government.
- Incentives are expensive. As I have discussed before, the cost to U.S. state and local governments is $50-70 billion per year. In the Philippines, the cost has been estimated to equal 1% of gross domestic product.
- Investment subsidies tend to be both economically inefficient and inegalitarian (average taxpayers pay subsidies to richer owners of capital), while some incentives subsidize environmentally harmful projects.
- Companies have more information about governments than governments do about the companies with which they are bargaining ("information asymmetry"), leading to a tendency for governments to pay more for an investment than they need to.
- Developing countries sometimes pay far more in incentives than developing countries do for a similar investment. Goias state in Brazil gave Usina Canada $125 million in tax breaks for a $25 million ethanol facility, for example.
- The best control mechanism for controlling investment incentives exists in the European Union, where the "state aid" rules require advance notification of all subsidy programs and all large individual subsidies (which also provides the best transparency in the world), advance approval by the European Commission, aid limits no higher than 50% of the investment tied to specific regions' income per capita, and sharp reductions in the maximum aid available to projects over 50 million euro. As a result, large projects receive considerably less in the EU than they do in the United States.
- Outside the European Union, transparency is the first important reform needed in most of the world.
Friday, July 29, 2011
Wisconsin Subsidies Could Hire 12,000+ State Workers
As we reach the home stretch of the August 9 Wisconsin Senatorial recall elections, it's good to keep in mind just how much businesses there receive in subsidies from the state. To my knowledge, no one has ever made an estimate of total business support there, and so Wisconsin was not used in constructing my national estimate of $70 billion per year in subsidies by state and local governments nationwide.
In light of the upcoming election, I made a special calculation of subsidies in Wisconsin based primarily on the 2011 Summary of Tax Exemption Devices plus the five programs tracked by Good Jobs First in its report “Show Us the Subsidies” This will give us some insight into the potential impact of business subsidies on state employment. As we will see, I estimate the giveaways could be redirected to create over 12,000 middle-class public jobs.
The tax exemption report gave helpful descriptions of the provisions, but certainly I would be able to do a more thorough job in identifying programs with the help of in-state budget experts. So, here I present a conservative estimate of the subsidies to business in Wisconsin.
What I count: I try to make my estimates internationally comparable, so my goal is to identify programs and tax provisions that would be considered a subsidy elsewhere in the world. In particular, I look for provisions that are specific to an industry, a region, a type of business (i.e., small and medium enterprise), or specific goals like R&D, job creation, or pollution control. European Union state aid rules are my model here.
I include, then, most of the state's corporate income and franchise tax exemptions (omitting a few smaller ones to save time), with the important exception of Net Operating Loss provisions, which apply to every corporation and hence are not specific. Wisconsin has a recycling surcharge, which has subsidies for small firms (exempt below $4 million in gross receipts) and for large ones (a cap of $9800 regardless of corporate income).
Sales tax exemptions are the most difficult to judge. When I first made a national subsidy estimate in my 2000 book, Competing for Capital, I counted a large number of these tax breaks as subsidies. I am now persuaded that many sales tax provisions are simply designed to prevent what's known as tax cascading: if businesses had to pay sales tax on all their raw materials and intermediate goods and services, the final consumer would be paying some multiple of the statutory sales tax when purchasing a final good. So now I only count sales tax breaks on machinery and equipment, which are designed to attract investment (pretty much every state does this, and it comes to a lot of money); and industry-specific sales tax exemptions. Thus, if legal services to businesses were exempt from sales tax, I would not consider that to be a subsidy; but, if legal services were only exempt for the banking industry, that would be a subsidy to banking and I would count it. Again, specificity is a key consideration.
Wisconsin presents one other conundrum with sales tax: personal property and supplies used in farming are exempt from the tax. Normally, I'd say that just prevents tax cascading, but if I read the 2009 Summary of Tax Exemption Devices (p. 58) correctly, this provision only dates back to 2007, which may argue for considering it industry-specific – or may argue that a similar provision for manufacturing is no longer a subsidy. I present the estimate both with and without this provision below.
Finally, Good Jobs First tracks five discretionary economic development subsidies, and I include that $37.8 million as well.
Subsidies in Wisconsin
Corporate income tax subsidies $128.1 million
Recycling surcharge tax subsidies $ 38.4 million
Discretionary econ development $ 37.8 million
Sales tax exemptions excluding
personal property used in farming $398.6 million
Total with personal property/farming $602.9 million
Personal property/farming $187.6 million
Total with personal property to farmers $790.5 million
Even excluding the iffy final category in the table, we're looking at over $600 million in subsidies to business per year, enough to hire 12,000 state employees making $50,000 annually in salary and benefits. While it is certainly possible that some of the support to business should be maintained, the large number of public jobs it is costing Wisconsin strongly argues for explicitly weighing which is the better use of the state's money.
Instead, as we know, the Walker administration pushed even more tax breaks through the legislature earlier this year, further exacerbating the state fiscal crisis. This highlights the importance of the August 9 recall elections, as well as the probable recall of Walker himself next year.
(I'd be interested in your feedback on the procedure I used to make this estimate, as well as the political issues involved. If you would like a copy of the full calculation, please contact me.)
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