Economic Development, Tax Incentives and The Plutocracy It's Creating

Tax incentives have become part of the economic development lexicon. The public sector has become a crucial funding cog in private sector projects. If not for the public injection of funding, the project, supposedly, would not get done. So much for the "free" market.

A quick perusal of news stories of the last few months are littered with tales of incentives creating jobs and growth. Such as the stories about how much sport teams add to the local economy and how much the new Amazon facility in Kenosha will boost their prospects.

The Milwaukee Journal Sentinel, in Green Bay Prepares For Playoff Game At Lambeau,

"The estimated impact is $14 million," said Toll, who, maybe only because he was standing with the Packers stadium in the background, bears a surprising resemblance the stadium's namesake. Advance ripples of that economic wave arrived first thing Monday morning, with fans streaming into the Packers Pro Shop and snatching up all the NFC North Division champions baseball hats by noon.

Sadly, the boost felt in Green Bay is a loss for others. Unless the money spent is above and beyond what would have already been spent, there is no growth taking place. If consumers merely traded dinner and a movie for Packer memorabilia and tickets, there is not growth, but merely a realignment of spending.

Another blogger wrote, "Whether or not you like the priorities, pro sports are one of the few things that seem to be booming and sparking the Wisconsin economy in 2017, and we'll see more examples of it today."

Much of this optimism seems prefaced on the Build-It-And-They-Will-Come mantra. Much of this new development will simply displace and devalue older businesses. Again, realigning spending, and in the case of sports (or large, big-box retailers), funneling money to absentee landlords -- persons or businesses that do not live in the city or state from which they are receiving funding and consumer spending.

Gregg Easterbrook, of The Atlantic, detailed How The NFL Fleeces Taxpayers.

Judith Grant Long, a Harvard University professor of urban planning, calculates that league-wide, 70 percent of the capital cost of NFL stadiums has been provided by taxpayers, not NFL owners. Many cities, counties, and states also pay the stadiums’ ongoing costs, by providing power, sewer services, other infrastructure, and stadium improvements. When ongoing costs are added, Long’s research finds, the Buffalo Bills, Cincinnati Bengals, Cleveland Browns, Houston Texans, Indianapolis Colts, Jacksonville Jaguars, Kansas City Chiefs, New Orleans Saints, San Diego Chargers, St. Louis Rams, Tampa Bay Buccaneers, and Tennessee Titans have turned a profit on stadium subsidies alone—receiving more money from the public than they needed to build their facilities. Long’s estimates show that just three NFL franchises—the New England Patriots, New York Giants, and New York Jets—have paid three-quarters or more of their stadium capital costs.

Many NFL teams have also cut sweetheart deals to avoid taxes. The futuristic new field where the Dallas Cowboys play, with its 80,000 seats, go-go dancers on upper decks, and built-in nightclubs, has been appraised at nearly $1 billion. At the basic property-tax rate of Arlington, Texas, where the stadium is located, Cowboys owner Jerry Jones would owe at least $6 million a year in property taxes. Instead he receives no property-tax bill, so Tarrant County taxes the property of average people more than it otherwise would.

The situation has become so distorted that the revenues from suites, club seats and national TV deals are more important to most NFL teams than the average seats at stadiums.

The development panacea has trickled into college sports, too. As Eben Novy-Williams describes in College Football’s Top Teams Are Built on Crippling Debt:

Football critics nationwide often point to multimillion-dollar coaches as emblems of excess. They should be more worried about debt, which costs more and lasts longer. A high-priced coach might earn $4 million to $5 million a year. Meanwhile, according to public records, athletic departments at least 13 schools in the country have long-term debt obligations of more than $150 million as of 2014—money usually borrowed to build ever-nicer facilities for the football team. 

For some schools, millions in TV money can support a high level of debt service. That includes the University of Alabama, which plays Clemson for the national championship on Monday. The Crimson Tide owes $225 million over the next 28 years. In the Big Ten, also flush from a rich media deal, the University of Illinois owes more than $260 million. If that revenue stream fails to grow or starts to drop, as it already has for some programs in the top tier of college football, the results could be crippling.

How can these can't-fail projects, guaranteed to bring jobs and growth, lead to such debt? The reality appears to be almost exactly the opposite of what all the boosters are claiming. The beneficiaries of these projects are not workers or the community, in general, but the ownership that gets to avoid costs and pocket the profits.

Much has also been made of the new Amazon development in Kenosha. Again, supposedly, a big win for the community and its workers. First, this ignores the numerous stories of the abusive practices in Amazon warehouses. The company has been investigated by OSHA over its warehouse practices. Second, these warehouse jobs are low-wage and typically temporary positions. The pay is usually 16% lower than average warehouse worker pay. The Institute for Local Self-Reliance (ILSR) found that local brick-and-mortar retailers employ 47 people for every $10 million in sales, Amazon employs just 19 people for every $10 million in sales.

Between 2012 and 2014, Amazon extracted $431 million in tax incentives and other subsidies from local and state governments. ILSR also found that Amazon has eliminated about 149,000 more jobs in retail than it has created in its warehouses.

As Daniel Gross explains, "Paying more, making work more attractive, and offering perks is one tried and tested way of meeting the need for labor when labor markets are tight. Another tack is to design machines, systems, and consumer experiences that reduce or eliminate the need for human labor. Amazon is doing that, too. The New York Times reported in December that Amazon is now experimenting with a retail concept dubbed Amazon Go. It has built an 1,800-square-foot store in one of its office buildings in Seattle that should start operations next year. Open at first only to Amazon employees, it will be stocked with drinks, snacks, and prepared meals. One thing it won’t be filled with is many retail employees. The store will be outfitted with technology — a smartphone app, scanners, sensors — that will enable people essentially to load goods into their bag, then walk out and pay without stopping at a check-out lane." Thus, while Amazon takes these subsidies whilst promising jobs, they are actively pursuing strategies to eliminate their need for workers.

Amazon received $21.8 million in TIF subsidies for the Kenosha facility and $10.3 million in state enterprise zone tax credits. These final subsidy numbers also increased from the originally proposed $17 million TIF subsidy and $7 million in credits.

All of these subsidies have helped Amazon grow from a 2006 market value of $17.5 billion to a 2016 market value of $355.9 billion. 8 other large retailers, over the same period, have seen their combined market value drop $102.4 billion.

This phenomenon ties into recent research on Rising U.S. Business Concentration and The Decline in Labor's Share of Income.

The economists look at firm-level data on the labor share of income to see what’s happening. Using firm-level data on sales and employee compensation, they find a strong correlation between increasing concentration of sales among firms and a lower share of income accruing to workers in the same industry. The five economists argue that competition within these industries is shifting income toward successful, less labor-intensive firms “superstar firms.” 

Note that it’s not a lack of competition resulting in higher price markups that’s causing the decline in the labor share of income in these industries, as some other research has argued. Rather, this new paper emphasizes the role of competition in shifting sales toward firms with a lower share of income going to workers. The analysis of the data by the five authors shows that most of the decline is due to the shift in higher sales toward firms with low labor shares.

Much of this tax incentive, economic development paradigm seems to be funneling money into fewer and fewer, select hands. Whether it be sport or big-box retailers, much of the incentives offered seem to be counterproductive and often fail on delivering the jobs and growth for the communities and their workers.

For Further Reading:
With 6,000 New Warehouses Jobs, What Is Amazon Really Delivering?
4 Ways Amazon's Ruthless Practices Are Crushing Local Economies
A Local Book Publisher Laments Amazon's Impact
Before You Click On Amazon, Here's Why Your Choice Matters
How Amazon's Tightening Grip On The Economy Is Stifling Competition, Eroding Jobs and Threatening Communities
Will Amazon Fool Us Twice?