Paying for Jobs

Tax Breaks and Bidding Wars

By | Updated Dec 1, 2016 10:33 PM UTC

Fork over taxpayer cash, or the jobs go elsewhere. That’s the threat behind the bidding wars among corporations, states and cities for factories, offices and other investments. The tax breaks handed out by U.S. states and cities in these contests have ballooned from hundreds of millions of dollars in the 1980s to between $50 billion and $80 billion a year today. Most efforts to call a truce have failed. What began as small concessions from cities and towns has morphed into a global free-for-all in which corporations and their shareholders gain at the expense of the overall economy and local taxpayers. Now President-elect Donald Trump has raised the issue to a national level by brokering just such a deal.

The Situation

Three weeks after being elected, Trump announced that Carrier had agreed to keep an Indiana factory open, saving about 1,100 jobs. Trump had threatened to impose a hefty tax on Carrier's Mexican-made products. But the deal was sealed with the help of about $7 million in incentives offered by Indiana, where vice president-elect Mike Pence is still governor. The stakes are often vastly higher. Since 2000, 16 development packages worth more than $1 billion have been handed out, from a deal to retain Nike jobs in Oregon to breaks for Nissan in Mississippi. The state of Washington in 2003 gave Boeing tax breaks worth $3.2 billion, then upped the ante 10 years later with an $8.7 billion offer to keep work on the 777X jetliner in Seattle. Asian countries are turning to tax breaks to lure research and development jobs. Singapore lets companies reduce their taxes by four times their R&D spending in a break that never expires. That’s helped the island top even Ireland, which for years has lured companies with tax breaks on profits from patented products. The European Commission has ordered Apple to pay a record 13 billion euros ($14.5 billion) plus interest in August 2016, saying Ireland illegally slashed its tax bill to lure Apple jobs. 

The Background

Thirty years ago, General Motors began a nationwide bidding war as local officials — including then-Arkansas Governor Bill Clinton — jockeyed for a $3.5 billion Saturn assembly plant. A relatively modest offer by Tennessee — estimated to cut costs by $34 per car — paid off, as GM chose the town of Spring Hill, whose population grew to 32,000 from 1,500 in 1990. Sometimes the deals can be as unpredictable as any other venture capital investment. In Rhode Island, former baseball All-Star Curt Schilling persuaded lawmakers in 2010 to loan him $75 million for a video-game startup. It collapsed, leaving the state with a yearly debate over whether to pay millions on the debt or lose its investment-grade bond rating. Port St. Lucie, Florida, is under similar constraints, allocating more money for a now-defunct visual-effects studio than police cars. And Charlotte dipped into public funds to pay $5 million to settle bank loans issued for construction of the Nascar Hall of Fame, which has proved less popular than projected.

The Argument

Many economists view corporate subsidy competition as a race to the bottom, and generally a waste, given studies showing that nine out of 10 job-location decisions aren’t based on enticements. Trump's deal with Carrier won praise from those whose jobs were saved. But others criticized the use of state largesse and federal arm-twisting (Carrier is a unit of United Technologies, a major defense contractor) to interfere with the working of market forces that promote the efficiencies that benefit consumers. Deals can also come at the cost of spending on services like schools that provide the labor force for the companies being wooed. Well-targeted incentives can lead to development that boosts an economy. Perhaps one of the best examples came in Florida in the 1960s, when the state created the Reedy Creek Improvement District near Orlando to support Disney’s theme park plans. With a government that’s for all intents and purposes run by the company, Disney built not only Walt Disney World but the water, power and road infrastructure surrounding it. The area now ranks with New York City as the most-visited destination in America.

The Reference Shelf

  • A Good Jobs First list of the largest economic development subsidy packages offered by U.S. state and local governments.
  • Institute on Taxation and Economic Policy report: “Tax Incentives: Costly for States, Drag on the Nation.”
  • New York Times article: “As Companies Seek Tax Deals, Governments Pay High Price.”
  • The Council of State Governments blog on Tesla picking Nevada after a bidding war.
  • Bloomberg article on the push for greater disclosure of tax incentives in financial documents.

First published Feb. 11, 2015

To contact the writer of this QuickTake:
Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this QuickTake:
John O'Neil at joneil18@bloomberg.net