In 2014, when electric carmaker Tesla dangled the prospect of building a $5 billion “Gigafactory” in one lucky state, it triggered a multi-state bidding war.
Nevada’s winning bid included $1.3 billion in tax breaks and incentives spread out over 20 years, including sales tax exemptions estimated to be worth $725 million and $300 million more in payroll and other tax breaks. For the local Storey County School District, that forfeited tax revenue added up to $38.6 million in 2017 alone. But the district’s funding is set to go up beginning in 2024, when certain breaks expire. Responding to criticism of the abatement deal in 2018, the county’s school superintendent said that the district would ultimately come out ahead, because the mining-dependent region will benefit from economic diversification and new technical education programs.
Quantifying the immediate and long-term impact of such blockbuster tax-break deals is the focus of a new report from the nonprofit think tank Good Jobs First, which tracks and analyzes tax abatements and incentives given to corporations in the name of boosting economic development. The report concludes that such arrangements cost U.S. public school districts at least $2.37 billion in fiscal year 2019 — an increase of $273 million from two years prior, or a 13% bump. It follows the nonprofit’s 2018 report tracking what its researchers call an “intergovernmental free lunch,” where one part of local government spends another part’s money.
The report, “Abating Our Future,” found the effects of these tax breaks varied across the country; of 2,498 school districts studied in the report, 97 reported foregone revenue of more than $5 million each. On a per-pupil basis, 149 districts lost more than $1,000 per student, with Storey County topping that list, reporting $35,000 of foregone revenue per student. Depending on state funding formulas, some districts saw subsidies eat into school budgets, forcing localities to cut education funding, raise taxes, or both. Districts with the highest rates of poverty, overwhelmingly serving students of color, tended to lose the most from economic development efforts, a phenomenon that Kansas City Public Schools Superintendent Dr. Mark T. Bedell attributed to “systemic racism.”
Corporate tax abatements are one of several strategies localities and states utilize to attract companies and new business opportunities, including building new infrastructure, offering job training grants or arranging for property transfers. Many of these tools seek to trade short-term tax revenue for immediate job gain. Examples include tax-increment finance districts, or TIFs, where municipalities divert future property tax revenue from areas defined as blighted to fund a specific project or general improvements, or development zones, which the government establishes to exempt businesses within them from certain tax obligations.
Abatements give companies a break on property taxes, which would normally fund public services, for a fixed time period. Public education in particular depends on property taxes, which supplies about three-fifths of all local school funding. But debates over offering tax breaks to lure businesses often lack detailed information about where the lost tax revenue was intended to go. Good Jobs First has been able to compile this information because of a 2017 change to how government bodies record and disclose financial data — an update to what’s called Generally Accepted Accounting Practices (GAAP), specifically the GASB Statement 77 on Tax Abatement. That requires states and localities to declare the sources of funding for corporate tax abatements and where such funds were siphoned.
The willingness of local leaders to forego this revenue is based on the assumption the new economic activity will cushion the loss by both providing the community with jobs and increasing local property values; when full taxation returns, the municipality will quickly make up any lost revenue, and then some. Laura Huffman, CEO of the Austin Chamber of Commerce, told Texas Monthly that the incentives the city gave for their own Tesla factory were working. “Tesla’s making real contributions back to the school district. It’s developing a site that was previously a mine,” she said. “So the value trade in this deal with Tesla, I think, is strongly in favor of the community.”
But the lead author of the Good Jobs First report, Christine Wen, argues that it’s not necessarily that simple, or effective.
“Let’s suppose a deal does lead to an increase in property value,” says Wen. “The negative impact on educational funding could accumulate during this time, so by the time students enter the workforce, they’re not as prepared as they should be. We know skilled labor is one of the most important parts of long-term economic development.”
Of course, others might insist that, without a tax incentive, the company in question wouldn’t come to town, so the subsidy isn’t giving away money so much as functioning as a kind of coupon to bring in new business and grow the tax base. Michael Farren, a research fellow at the Mercatus Center at George Mason University who studies tax incentives, says that “the broad body of academic research” finds that argument doesn’t hold up. “Academic research shows subsidies don’t work in creating economic growth,” says Farren. “There are tradeoffs that occur, necessitating higher taxes on everybody else or reduced services, or both, counterbalancing the stimulating effects of the subsidy. Investing in education creates increasing returns in the form of better productivity. A dollar spent on education will have a much larger impact over the long run than any subsidy spent on a business incentive, which both the theoretical and empirical evidence demonstrates.”
Enthusiasm for the business-luring practice hit a pre-pandemic fever pitch with both Amazon.com Inc.’s HQ2 contest, which pitted cities against each other in the race to land the e-commerce retailer’s second home office, and Foxconn’s yet-to-materialize factory in southeast Wisconsin. “Anybody understands that companies go where the talent is,” says Ron Kim, a New York State assembly member from Queens who helped lead the push among progressive New York politicians to derail Amazon’s HQ2 development in Long Island City over the multibillion-dollar benefit agreement being offered to the tech giant. “Instead, we normalize that cities can bribe companies. I’m hoping in light of recent conversations, especially around Amazon, we can turn a different page, and go back to what we used to be good at, investing in public education and early education.”
The report isn’t comprehensive: Tax abatement data was only available for roughly one-fifth of the nation’s more than 13,000 school districts, since there’s no independent reporting for many school districts, and in dozens of states, local governments aren’t adhering to new accounting standards.
The $2.37 billion figure only takes into account 1,806 districts, meaning the total amount is likely multiple times higher, and any true cost-benefit analysis of these breaks is extremely challenging for much of the country. “Communities cannot determine if tax abatements given to corporations in the name of economic development are worth the price if they don’t know the costs, especially to education,” the report noted.
As the report highlights, many school districts that have seen resources evaporate in such deals serve predominantly low-income communities. In Louisiana, the Industrial Tax Exemption Program (ITEP) has long been used to provide funding to incentivize corporate relocations or factory construction. In 2019, teachers in East Baton Rouge, banding together as part of a larger grassroots community movement called Together Louisiana, pushed back and unanimously voted to walk out if the local school board OK’d an additional abatement for an already-operating ExxonMobil Corp. facility. Local officials rejected the incentive, a story that made national news. But the issue is far from resolved; foregone education revenue in the state’s three poorest districts has increased since 2017, and in late 2019, two other corporations scored abatements to open new facilities. In South Carolina, four of the six school districts that lost more than $2,000 per pupil have a majority Black and brown students. State losses there leapt 31% between fiscal 2017 and 2019, totaling $423 million.
Urban districts tend to have larger tax abatements, says Wen, because it’s more expensive for companies to operate in cities, and these areas have more overall real estate value to utilize. In many cases, the disproportionate losses to BIPOC students have been severe. In New York, Good Jobs First research found a “statistically significant” association between greater tax abatements and districts with higher shares of Black and Hispanic students; the state reported more than $377 million in foregone revenue in fiscal 2019. Among cities, the Philadelphia City School District posted the highest net tax abatement, with a reported $112 million in foregone revenue, or $871 per pupil.
The reallocation of school funding comes at a particularly challenging time, says Lisette Partelow, senior director of strategic initiatives, K-12 education at the progressive Center for American Progress. Lower-resourced districts are struggling with the effects of the pandemic, which has hammered public school enrollments (and funding) and added costs related to cleaning and upgrading facilities. Factor in the additional challenges that schools may face in the coming years when students who may have fallen behind due to remote learning during the pandemic need remedial help, and these abatements may have an even more pronounced impact, Partelow says. Even with a boost from the recently passed American Rescue Plan, which dedicated $123 billion for K-12 education, schools still may be struggling. A General Accounting Office study from June 2020 found roughly 54% of the nation’s public school districts “need to update or replace multiple building systems or features in their schools.”
Historically, poorer districts have been hit hard on multiple levels. First, they tend to tax at a higher rate than more wealthy districts, since lower area real estate values means it’s more difficult to raise funding from property taxes. Secondly, having less resource to tax means these districts rely more on state funding, so they get hit harder when state budgets reallocate money towards tax abatements. Many districts haven’t recovered from Great Recession-era funding cuts, Partelow says, which has led to more than a decade of systemic disinvestment.
“Saying the solution is tax cuts is astounding because we have so many data points showing that it doesn’t work,” Partelow said.
The best way to protect education funding is to simply shield it from abatement programs, and have states and localities rewrite the laws governing these programs, argues the report. The next best solution would be capping the amount of school revenue that can be utilized for such programs, either a small percentage share, such as 2% or a per-pupil rate such as $200. If neither of those solutions work, the report argues, at least give school boards the power to opt in or out of these tax break deals, as cities and counties can.
Despite the increase in abatements, the research by Good Jobs First is “absolutely shining a light on these deals,” says Donald Cohen, executive director of In The Public Interest, a policy center focused on privatization. But with the practice so widespread, cities and states feel the need to compete against each other and fear not playing the game.
“Schools don’t need less money to educate,” Cohen says. “There’s no conceivable scenario where giving them less money improves education. But policymakers fear being responsible for losing jobs by not making these deals. It’s an understandable fear. It’s basically wrong, but understandable.”
In New York, Kim argues that the focus on short-term benefits tends to lead to short-term thinking among elected officials, and the instant high of bringing new jobs instead of prioritizing education funding.
“Education investment is better economic development,” he says. “The return on investment may not come around when you’re in office; arguing for Pre-K means you won’t see results for 10-15 years. We need the kind of leadership that can transform the discussion away from subsidizing companies like Amazon, but it’s hard.”