Why Tax Incentives to Big Business Should be Interrogated by Local Nonprofits

September 18, 2017; Times Free Press (Chattanooga, TN)

NPQ has long made the case for more and broader tax activism among nonprofit organizations, and that includes the uses that tax money is put to.

A series of articles in the Chattanooga Times-Free Press is delving into the still too-often hidden world of economic development incentives. Some may mistakenly believe that only nonprofits get grants from the government, but that’s hardly the case. They are labeled differently, of course, but the effect is government largesse just the same.

In Tennessee, Volkswagen, Nissan, Electrolux, Dow Corning, and the German chemical firm Wacker have combined collected over $2.1 billion in state tax incentives in the past decade. This works out to a little more than half of $4.1 billion in incentives in the state, as tracked by the nonprofit Good Jobs First.

This is part of a larger trend. Nearly five years ago, the New York Times estimated that nationally economic development incentives to for-profit corporations cost $80 billion a year. Since then, the pace has, if anything, only accelerated. For example, in 2013, the state of Washington committed to paying out $8.7 billion in tax abatements over 16 years to keep Boeing producing in the Seattle area, only to see more than 12,000 workers laid off (15 percent of Boeing’s state workforce) this spring.

Much more recently, as NPQ noted, the state of Wisconsin inked a deal valued at $3 billion to attract a Foxconn facility. This is supposed to secure 13,000 jobs, which works out to a subsidy of a little over $230,000 per job. Amazon’s “HQ2” project is also expected to result in large government subsidies from the city and state where it chooses to site its second headquarters.

As the Chattanooga Times-Free Press article notes, the $230,000-per-job price-tag for Foxconn is hardly unprecedented. Indeed, the German automaker Volkswagen—the main focus of the Times-Free Press article, in 2008 received an $800 million incentive package from the state of Tennessee for a little under 2,900 jobs, which was “equal to $277,000 per direct job created by VW.” In 2015, business was good, so Volkswagen wanted to expand. But why pay for the expansion all by yourself when you can get state and local officials to pitch in? And the state and local officials obliged, providing “another $260 million of incentives for 2,000 more jobs to build a new sport utility vehicle, or $130,000 a job.”

When private investors fork over that kind of money, they typically expect to receive an ownership share of the company in return. But some public officials feel differently. The article notes, “Chattanooga Mayor Andy Berke said the benefits from the VW plant ‘have far exceeded the costs’ of the tax breaks, incentives and infrastructure and training investments.”

The article highlights a few other prominent cases:

  • Wacker…got $210.5 million in incentives in 2009 for 500 jobs at its polycrystalline silicon plant in Charleston ($421,000 per job). That was still only about half of the $479.4 million of incentives offered in 2009 to Hemlock Semiconductor (controlled by Dow Corning) for a similar polycrystalline silicon plant in Clarksville that closed before production started.
  • Nissan, based in Japan, got a $200 million subsidy for 2,000 jobs in Smyrna and Decherd in 2000, another $230 million for its North American headquarters with 1,275 jobs in Franklin, Tenn., in 2005 and $98 million for its electric car and battery plant in Smyrna in 2009. (Nissan also got $1.25 billion in 2000 for an auto assembly plant with 4,000 jobs in Mississippi, according to Good Jobs First.)
  • Electrolux, based in Sweden, got $210 million in incentives in 2010 for 1,240 jobs at an appliance production plant in Memphis.

The Times Free Press writers go out of their way to try to make the best possible case for the economic development subsidies. For example, with the Volkswagen deal, the writers cite University of Tennessee economic studies that suggest that with “indirect” jobs included—everything from parts manufacturers to food trucks where workers buy lunches—the number of jobs generated totals 12,400 jobs (if you accept the estimate of a greater than 4:1 multiplier ratio) and maybe the new expansion money might lead to another 10,000 jobs. Add all of these jobs, and the cost per “VW-related job” falls to $36,668 per job—a veritable bargain. And, assuming you count not just the VW jobs, but also the VW-related jobs, then state and local governments make back over $50 million in year in sales tax and other tax collections.

So, how does this affect nonprofits? Well, in considering the value of economic development incentives, one might recall an old concept that the economic studies cited in the article seemed to have cast aside: opportunity cost. In other words, is the highest, best use of public funds to subsidize large corporations to come to your community? We’ve got some reasons for thinking this might not be the case:

  • According to the U.S. Small Business Administration, 64 percent of net new private sector jobs are generated not by large corporate recipients of economic incentive payments, but from businesses with fewer than 500 employees. This doesn’t make large employers unimportant, but it does suggest that economic development resources might be better placed than they are now.
  • Some underutilized economic development strategies, such as employee ownership—which can be a highly effective way of preserving family-owned companies when business owners retire and no children want to take over the business—might get the state and localities a lot more job gain for the economic development buck. For example, in its first 25 years of operation (1987–2011), the Ohio Employee Ownership Center, which provides technical assistance for conversions to employee ownership, reports a cost of $772 per direct job retained (no need for complicated job multiplier math), with an estimated 15,000 employee-owners benefitting. Given that baby boomers nearing retirement own 3 million businesses in the United States and employ 24.7 million people, this is one job strategy that might merit greater resources.
  • And, of course, there is the issue of the next best use of the tax dollars foregone. As noted above, we are talking about real money here. For example, as part of its Tennessee incentive package, Volkswagen is exempt from all property taxes—save those for schools—for 30 years. (See, you don’t need to be a nonprofit to be exempt from property taxes). So, what if that money instead was invested to meet public needs? There are surely many possibilities. To pick one: Maybe the state could up its investment in early childhood education. A 2015 study by the Center for High-Impact Philanthropy at the University of Pennsylvania found that the low estimate of returns to early childhood education was 4:1, with some suggesting returns as high as 12:1. According to the state budget, Tennessee spends just shy of $110 million in this field. Of course, early childhood education requires a longer time horizon, but, arguably, Tennessee residents would benefit if resources shifted from the $200 million-plus a year currently paid in corporate subsidies to preparing the next generation for success.

Recently, government reporting accounting rules were altered by the Government Accounting Standards Board to require annual disclosures of the cost to the public of these tax abatements. Next time your local city council or state legislature cries, “No resources,” you might want to consider giving these economic development deals in your own community a closer look.—Steve Dubb