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?

The Job Creation Shell Game

The Job Creation Shell Game

State and local governments waste billions of dollars each year on economic development subsidies given to companies for moving existing jobs from one state to another rather than focusing on the creation of truly new positions, according to a study released today by Good Jobs First, a non-profit, nonpartisan research center based in Washington, DC.

“What was long ago dubbed a Second War Between the States is, unfortunately, raging again in many parts of the country,” said Greg LeRoy, executive director of Good Jobs First and principal author of the report. “The result is a vast waste of taxpayer funds, paying for the geographic reshuffling of existing jobs rather than new business activity. By pretending that these jobs are new, public officials and the recipient companies engage in what amounts to interstate job fraud.”

Interstate job piracy is not a fruitful strategy for economic growth, LeRoy noted: “The costs are high and the benefits are low, since a tiny number of companies get huge subsidies for moving what amounts to an insignificant number of jobs.” LeRoy added: “The flip side is job blackmail: the availability of relocation subsidies makes it possible
for companies that have no intention of moving to extract payoffs from their home states to stay put.”

Summarizing studies demonstrating that interstate job relocations have microscopic effects on state economies, the report reviews the history of economic competition among the states and presents eight case studies of those areas of the country where job piracy is currently most pronounced.

Interstate Job Fraud

State and local governments waste billions of dollars each year on economic development subsidies given to companies for moving existing jobs from one state to another rather than focusing on the creation of truly new positions, according to a study released today by Good Jobs First, a non-profit, nonpartisan research center based in Washington, DC. 

“What was long ago dubbed a Second War Between the States is, unfortunately, raging again in many parts of the country,” said Greg LeRoy, executive director of Good Jobs First and principal author of the report. “The result is a vast waste of taxpayer funds, paying for the geographic reshuffling of existing jobs rather than new business activity. By pretending that these jobs are new, public officials and the recipient companies engage in what amounts to interstate job fraud.” [Study: States Waste Billions Luring Jobs from Each Other]

Good Jobs First report, The Job Creation Shell Game:

This study describes how state and local governments waste billions of dollars each year on economic development subsidies given to companies for moving existing jobs from one state to another rather. It also looks at how the existence of relocation subsidies emboldens some large companies to demand large job blackmail subsidies to stay put. The report offers policy recommendations to address the problem.

For more on wasteful corporate subsidies, see Good Jobs First's Paying Taxes To The Boss:

As Americans file their state income tax returns this month, some may dislike paying taxes but most take heart from the fact that their dollars support public schools and colleges, roads and transit, health care and public safety. However, for some people, the personal income taxes they see deducted from their paychecks aren’t supporting public services. Indeed, this is true for workers at more than 2,700 companies in 16 states. 

Nearly $700 million is getting diverted each year. And it is very unlikely that the affected workers are aware, given that no state requires that the diversion be disclosed on pay stubs.  

Where is the money going? To the employers of those workers. A growing number of states are diverting revenue traditionally devoted to funding essential government services to pay for lavish subsidy awards to corporations for job creation or sometimes simply job retention. The practice of redirecting large portions of the state personal income tax (PIT) withholding deducted from paychecks means many workers are, in effect, paying taxes to their boss. 

Along with the worker deception, many of the programs are entwined with two of the most controversial practices in economic development: the economic war among the states and job blackmail. Many PIT diversions are paying corporations to simply relocate existing jobs from one state to another; others are used by states when they capitulate to companies that threaten to move to another state.

Economic Engine or Albatross?

Marc Marotta, the board president for the Bradley Center, in the Milwaukee Journal Sentinel, declared the Bradley Center an economic engine.

Most of the workers are non-union, low-wage, seasonal and without benefits. Not the type of jobs most economic development aims to, nor should, create. Most of the millionaire athletes that play at the Bradley Center don't live in Milwaukee - their tax and spending dollars spillover outside Milwaukee. Often, the money spent on sporting events leaks outside the host region.

To be an economic engine, a project has to lure customers from outside the area that would not otherwise be spending money, or induce locals to spend more than they otherwise would. If people decide to go to the Bradley Center rather than a movie one night, there is no growth. This is merely a realignment of leisure spending. The majority of dollars spent at these events are simply a substitution of spending patterns (a basketball game rather than eating dinner out).

And, again, perplexingly, many whom would routinely be lumped in with the ultra-conservative, government-is-bad, no-new-taxes cabal are saying they need public dollars to continue their private entity. So...government can't do anything right, they don't know how to properly spend tax dollars...but when the government is giving millions to stadiums and arenas, they're investing wisely. Yes, screw public transportation, green energy, and modernized sewer and water systems. Sport stadiums are much more crucial to our economic future.

If extra-market forces (taxpayer subsidies) are good when it comes to stadiums, why aren't taxpayer subsidies good for public works programs, light rail, greening older buildings, or facilitating universal health care? Those subjects seem much more important to the average citizen than sporting facilities.

It's also very strange to claim the Bradley Center is an economic engine and then offer up nothing quantitative to back up that claim. But then again, actual studies looking into the effect of stadium subsidization have found that stadiums have little to minimal impact on the local economy.

For Further Reading:
Basket Case
Buck The System
Conclusions On Subsidies For Sports Franchises
Economic Impacts Of Tourism
Sports, Jobs, & Taxes
Stadiums & Convention Centers As Community Loss Leaders
The Stadium Gambit & Local Economic Development
Stadium Swindle