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Fast Money & Foreign Objects
Taxpayer Subsidies to Companies Fall 70% as U.S. States Pull Back
Tim Jones
April 26, 2016 — 5:00 AM EDTUpdated on April 26, 2016 — 2:43 PM EDT Run
States and cities have dramatically scaled back taxpayer subsidies to corporations in the past two years, doling out fewer and smaller breaks to lure development projects.
Government subsidies of at least $50 million have plummeted about 70 percent since 2013, according to an analysis by Good Jobs First, a union-funded research and advocacy group that tracks the cost of tax breaks. The drop-off comes in the face of a tough new accounting rule that will force governments to release more information about the deals and a presidential campaign that has Republicans and Democrats alike criticizing "crony capitalism."
"It’s a reflection of the political climate of the times, a resistance to public debt and also to economic subsidies," said Richard Ciccarone, president and chief executive officer of Merritt Research Services LLC, in Chicago. “Subsidies have become more of a negative among politicians, and a lot of people are hot on that issue."
Economic-development competition has triggered decades of state-versus-state subsidy wars. Even as critics say local tax breaks have no impact on the national economy, they have become a standard part of doing business as companies play one jurisdiction against another, year after year.
Tax breaks in 2013 to such companies as Boeing Co., IBM Corp. and Toyota Motor Corp. were part of $17 billion from state and local governments, according to Good Jobs First. In 2014, the figure dropped to $7 billion, and last year fell to $4.8 billion, according to preliminary figures.
"Subsidies are getting more controversial," said Kenneth Thomas, a professor who specializes in government assistance to corporations at the University of Missouri-St. Louis. "People are more aware of them because the press pays more attention to them."
Heading West
He cited the recent opposition to building a $1 billion stadium for the National Football League’s St. Louis Rams. Critics said the public should be allowed to vote on the plan, as it was their dollars that would be committed. Amid the debate, the team announced its move to Los Angeles.
Part of public animosity toward such emoluments stems from their lack of transparency in state and local financial documents. Many governments disclose little information about the nature of tax breaks and their financial impact.
In response to almost 300 comments, the Governmental Accounting Standards Board approved a new rule in August requiring full disclosure from governments on the amount and impact of tax breaks. It takes effect this year for most governments, and next year for the remainder. It applies to all new incentives and those that remain in effect.
"Corporations have long gotten pretty much whatever they wanted under the guise that they are doing something wonderful for the community or society as a whole," wrote Tim Noonan of West Bend, Wisconsin, in a November 2014 letter to the board, arguing for greater disclosure of corporate incentives. “This is rarely ever the truth, they get what they want so a politician can make themselves look good for a reelection."
Greg LeRoy, executive director of Good Jobs First, said it’s premature to say precisely why tax breaks declined. Others cited politics that put tax-break-pushing politicians on the defensive as corporations move jobs overseas; increased budget and pension pressure in states; and lower unemployment, which reduces the incentive for governments to dangle money before companies.
Louisiana, where declining oil prices slashed tax revenue, still provided $7 billion in tax breaks in 14 separate deals in the past three years. The cost of tax breaks and other incentives to corporations have exceeded state corporate income and franchise tax revenue by more than $225 million since November.
The state can ill afford such largess. The new governor, Democrat John Bel Edwards, took office in January facing a $950 million deficit in the current budget year and $2 billion in the next two.
Nor are incentives guarantors of prosperity. German Pellets Louisiana, a manufacturer of wood fuel for commercial and residential use, in 2013 received a $75 million industrial tax exemption for capital improvements under a state program for job creators. It filed for Chapter 11 bankruptcy in February. In a court filing, the company blamed slumping oil prices, warm winters and a bad investment.
A spokesman for Louisiana Economic Development, Gary Perilloux, said the department administers 5 percent of the state’s tax exemptions and those have had a "relatively limited impact" on the fiscal situation.
"Incentives are necessary to keep Louisiana competitive with other states and global locations," Perilloux said.
Rancor Recorded
Corporations and job cuts are at center stage in Indiana’s May 3 presidential primary.
United Technologies Electronic Controls Inc. and its subsidiary Carrier Corp. in February said they would move heating and air conditioning assembly operations to Mexico, eliminating 2,100 jobs in Indianapolis and Huntington. Carrier had received $1 million in incentives from Indianapolis in 2011 to help it expand.
A video of the job-elimination announcement wound up on YouTube, drawing international attention.
Republican candidate Donald Trump, whose own New York real-estate company has received tax abatements for developments, has made the cuts central to his pitch to voters. Trump said that in retaliation he would impose taxes on Carrier air conditioning units made in Mexico and shipped to the U.S.
Ciccarone said there’s a danger in politicians overreacting to resentment toward corporate subsidies.
"The pendulum may have been too generous,” Ciccarone said. “A correction is healthy, but you don’t want to create a hostile environment to economic activity."
The new GASB rules will require state and local governments to reveal the description and purpose of all tax abatements, the dollar amounts involved and provisions for recapturing the revenue.
"As the transparency gets better, that will increase the public outrage," said Thomas, who has followed trends in public subsidies for more than 20 years. "There’s an ebb and flow to subsidies, but somewhere down the line there will be another recession, and we’ll see what state and local governments do."
Taxpayer Subsidies to Companies Fall 70% as U.S. States Pull Back
Tim Jones
April 26, 2016 — 5:00 AM EDTUpdated on April 26, 2016 — 2:43 PM EDT Run
- Dollar amount of big tax breaks slides $12 billion since 2013
- Corporations have `gotten pretty much whatever they wanted'
States and cities have dramatically scaled back taxpayer subsidies to corporations in the past two years, doling out fewer and smaller breaks to lure development projects.
Government subsidies of at least $50 million have plummeted about 70 percent since 2013, according to an analysis by Good Jobs First, a union-funded research and advocacy group that tracks the cost of tax breaks. The drop-off comes in the face of a tough new accounting rule that will force governments to release more information about the deals and a presidential campaign that has Republicans and Democrats alike criticizing "crony capitalism."
"It’s a reflection of the political climate of the times, a resistance to public debt and also to economic subsidies," said Richard Ciccarone, president and chief executive officer of Merritt Research Services LLC, in Chicago. “Subsidies have become more of a negative among politicians, and a lot of people are hot on that issue."
Economic-development competition has triggered decades of state-versus-state subsidy wars. Even as critics say local tax breaks have no impact on the national economy, they have become a standard part of doing business as companies play one jurisdiction against another, year after year.
Tax breaks in 2013 to such companies as Boeing Co., IBM Corp. and Toyota Motor Corp. were part of $17 billion from state and local governments, according to Good Jobs First. In 2014, the figure dropped to $7 billion, and last year fell to $4.8 billion, according to preliminary figures.
"Subsidies are getting more controversial," said Kenneth Thomas, a professor who specializes in government assistance to corporations at the University of Missouri-St. Louis. "People are more aware of them because the press pays more attention to them."
Heading West
He cited the recent opposition to building a $1 billion stadium for the National Football League’s St. Louis Rams. Critics said the public should be allowed to vote on the plan, as it was their dollars that would be committed. Amid the debate, the team announced its move to Los Angeles.
Part of public animosity toward such emoluments stems from their lack of transparency in state and local financial documents. Many governments disclose little information about the nature of tax breaks and their financial impact.
In response to almost 300 comments, the Governmental Accounting Standards Board approved a new rule in August requiring full disclosure from governments on the amount and impact of tax breaks. It takes effect this year for most governments, and next year for the remainder. It applies to all new incentives and those that remain in effect.
"Corporations have long gotten pretty much whatever they wanted under the guise that they are doing something wonderful for the community or society as a whole," wrote Tim Noonan of West Bend, Wisconsin, in a November 2014 letter to the board, arguing for greater disclosure of corporate incentives. “This is rarely ever the truth, they get what they want so a politician can make themselves look good for a reelection."
Greg LeRoy, executive director of Good Jobs First, said it’s premature to say precisely why tax breaks declined. Others cited politics that put tax-break-pushing politicians on the defensive as corporations move jobs overseas; increased budget and pension pressure in states; and lower unemployment, which reduces the incentive for governments to dangle money before companies.
Louisiana, where declining oil prices slashed tax revenue, still provided $7 billion in tax breaks in 14 separate deals in the past three years. The cost of tax breaks and other incentives to corporations have exceeded state corporate income and franchise tax revenue by more than $225 million since November.
The state can ill afford such largess. The new governor, Democrat John Bel Edwards, took office in January facing a $950 million deficit in the current budget year and $2 billion in the next two.
Nor are incentives guarantors of prosperity. German Pellets Louisiana, a manufacturer of wood fuel for commercial and residential use, in 2013 received a $75 million industrial tax exemption for capital improvements under a state program for job creators. It filed for Chapter 11 bankruptcy in February. In a court filing, the company blamed slumping oil prices, warm winters and a bad investment.
A spokesman for Louisiana Economic Development, Gary Perilloux, said the department administers 5 percent of the state’s tax exemptions and those have had a "relatively limited impact" on the fiscal situation.
"Incentives are necessary to keep Louisiana competitive with other states and global locations," Perilloux said.
Rancor Recorded
Corporations and job cuts are at center stage in Indiana’s May 3 presidential primary.
United Technologies Electronic Controls Inc. and its subsidiary Carrier Corp. in February said they would move heating and air conditioning assembly operations to Mexico, eliminating 2,100 jobs in Indianapolis and Huntington. Carrier had received $1 million in incentives from Indianapolis in 2011 to help it expand.
A video of the job-elimination announcement wound up on YouTube, drawing international attention.
Republican candidate Donald Trump, whose own New York real-estate company has received tax abatements for developments, has made the cuts central to his pitch to voters. Trump said that in retaliation he would impose taxes on Carrier air conditioning units made in Mexico and shipped to the U.S.
Ciccarone said there’s a danger in politicians overreacting to resentment toward corporate subsidies.
"The pendulum may have been too generous,” Ciccarone said. “A correction is healthy, but you don’t want to create a hostile environment to economic activity."
The new GASB rules will require state and local governments to reveal the description and purpose of all tax abatements, the dollar amounts involved and provisions for recapturing the revenue.
"As the transparency gets better, that will increase the public outrage," said Thomas, who has followed trends in public subsidies for more than 20 years. "There’s an ebb and flow to subsidies, but somewhere down the line there will be another recession, and we’ll see what state and local governments do."
Taxpayer Subsidies to Companies Fall 70% as U.S. States Pull Back
