Governments, across different levels, compete to attract investments, domestic and foreign, that they believe will create jobs for the locals and boost the local economy. In recent times, as the famous example of US cities competing to attract Amazon's second headquarters show, this competition has escalated into a debilitating arms race to offer the largest amount of subsidies with deeply questionable benefits in return.
Now thanks to watchdog group Good Jobs First, it has now become possible to track the business investment subsidies offered by governments to various corporates in the US. It shows that over the past five years, state and local governments, which are facing an acute fiscal crunch to deliver even basic services, have pledged the US technology giants at least $9.3 bn in subsidies. Apart from the Amazon second headquarters, the largest recent handout was the $4.8 bn promised to Foxconn for its new plant in Wisconsin.
Sample this,
In the last tax year local governments in Nevada lost more than $105m as a result of state abatement programs. Nevada is home to Tesla’s “Gigafactory” - which received $1.3bn in tax benefits, the largest such subsidy the state has ever awarded... Tesla accounted for $68.7m of last year’s loss. Good Jobs First calculates that Tesla’s tax breaks resulted in one school district, Storey County Schools near Reno, losing $36.7m of revenue.
Local governments frittering away scarce resources on subsidies with questionable benefits on large companies is far from the only issue. Most of these subsidies would involve intense lobbying by businesses and their bespoke nature for each company mean significant exercise of discretion by the political representatives and officials concerned. The attendant opportunities for cronyism and corruption are significant. The several exposes in recent times of local government corruption among state and city level leaders in the US is a manifestation.
At a conceptual level, this cannot but not be regarded a market failure. Cities and states competing in an open market to attract businesses have to be regarded as a monopsony situation. All the more so since, even in a large country like the US, there are only a handful of the big companies which are likely to consider investment decisions at any point in time. The carefully cultivated hype around such investments, despite all the evidence pointing not only to job creation coming mainly from smaller and younger enterprises and larger ones being net job destroyers, has not shaken the faith in large companies.
This trend is now common across the world. In India, industrial policy is dressed up as fiscal concessions and input subsidies to attract large firms. States compete with each other in offering the most attractive package. In fact, some have even started to offer a share of the salary of the first few employees to lure investments. However, like in the US, there is little to suggest that business investment decisions themselves are influenced by such fiscal offers, and at best, this competitive race among States may marginally influence investment location decisions.
It is difficult to regulate such decisions. After all sovereign governments are fully empowered to offer such subsidies. A more meaningful attempt to reverse the trend may be to force governments to publicise such information at a very granular level (like the recent US Governmental Accounting Standards Board Statement 77) and also develop a mechanism to hold corporations accountable for the promises made in return for the subsidies. Perhaps a nationally organised attempt to quantify and publicise the social balance sheet of these companies would be useful. In any case, information and civil society action, especially at the local government and provincial levels, may be a more effective response to such policies.
Update 1 (16.05.2020)
A ProPublica investigation of the corporate tax breaks given to Sears by Illinois state since 1989 as part of incentives to retain Sears headquarters in the state but to a new location at Hoffman Estates away from Chicago,
In Sears’ case, state and local officials awarded the company subsidies and tax deals worth more than $536 million over the past three decades — the largest package of governmental incentives ever given to a single company in Illinois... When the deal was getting off the ground in 1989, an economic impact study forecast that a special tax district created for Sears would generate the equivalent of $626 million in total property tax revenues by 2012. Total revenues wound up actually being closer to $338 million, when adjusted to 1989 dollars — 54% of what was projected... The study, conducted for the news organizations by the Center for Tax and Budget Accountability, or CTBA, a bipartisan research and advocacy organization focused on social and economic justice, found no evidence that Hoffman Estates wound up better off in terms of property values and employment than similar towns around Chicago that spent little or no money on tax deals for corporations.
Hoffman Estates would likely have experienced significant growth without Sears, the study suggested. Suburbs similar to Hoffman Estates saw gains in jobs and property values without giving hundreds of millions in incentives to a single company. CTBA used a statistical method known as a “difference-in-differences,” which measured the economic impact of the Sears deal by comparing before-and-after economic trends in Hoffman Estates to similar, nearby communities over the same time period between 1980 to 2017. CTBA relied on nine economic variables, ranging from annual employment figures and median income to the taxable property values in each municipality. The Sears deal “absolutely wasn’t worth the money,” said Ralph Martire, the CTBA’s executive director. “None of the anticipated benefits came anywhere near materializing.”
More here.
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