A State Lawmaker Group Against Relocation Incentives Is Gaining Steam. So Are The Incentives.

Last year, legislators in five states introduced bills to limit the kind of cutthroat site-selection incentives illustrated by the Amazon HQ2 contest or the massive Foxconn subsidy in Wisconsin. So far in 2020, 13 such bills have been introduced in 13 states — and one has passed, in the Utah House of Representatives.

The legislation, which would establish an agreement among states not to offer tax breaks to compete for each other's businesses, represents a rethinking of incentives, according to its sponsors. Too much tax money goes for incentives that do too little to create jobs or spur economic expansion, they argue, and they are trying to stop it.

Yet even economists sympathetic to the idea aren't sure it will work, pointing out that in the long run, there is no way to enforce the agreements in the face of the long-standing practice of offering tax breaks to lure businesses.

"The interstate compact is a good idea because it ends the bleeding that so many states find themselves in, restoring the free market when it comes to where a business wants to locate themselves," Florida Rep. Anna Eskamani told Bisnow.

Eskamani is part of a group of state lawmakers nationwide who call themselves the Coalition to Phase Out Corporate Tax Giveaways. Members of the group currently include 24 legislators from 13 states, mostly skewing Democratic, but including Republicans from three states. 

The group is pushing for passage of a model bill created by Chicago-based lobbyist Dan Johnson to create a pact among the states that agree to it. Under the bill, each member state would agree not to offer company-specific tax incentives or grants to lure a relocation from another member state. That includes the relocation of a corporate headquarters, regional office, a factory or other kinds of real estate development.

"The point of the interstate compact is that it would not start until multiple states sign onto it — so it doesn’t actually go into play if only one state passes it," Eskamani said.

The bill excludes workforce development grants from its ban, doesn't preclude local governments from offering their own tax breaks and allows states to offer incentives to companies already located inside their borders. There is also a mechanism, via a six-month written notice, to withdraw from the pact.

The stakes are high in the incentive game. Economists Cailin Slattery at Columbia Business School and Owen Zidar at Princeton University, in a January paper for the Journal of Economic Perspectives, estimated that states and localities spend at least $30B a year on business tax incentives in one form or another.

A handful of those deals are massive and receive considerable scrutiny. If the amount is large enough, and the case publicized enough, public opinion can even defeat incentives; when New York agreed to give Amazon a $3B incentive package for a share of HQ2, it generated such loud pushback from progressives that Amazon decided it wasn't worth the hassle.

Most incentive packages aren't in the same billion-dollar league as Amazon HQ2, Slattery and Zidar said. Even so, a small number of companies, about 0.01% of the total number opening new locations, receive about a quarter of all incentive dollars.

Good Jobs First, a tax incentive watchdog group, estimates that Walmart has obtained a total of more than $1.2B in tax breaks, infrastructure assistance, low-cost financing, free land and grants from state and local governments nationwide.

The states and localities the group tracks gave away at least $7.9B in tax breaks and subsidies in 2018 and numbers for 2019, which are not complete yet, are on pace to eclipse $9B.

The evidence that site-selection incentives work is spotty at best, according to the economists. 

"While we find some evidence of direct employment gains from attracting a firm via incentives, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level," Slattery and Zidar wrote. "We don’t ... see strong evidence of job growth in other industries or an effect on county-wide employment."

In the case of the Foxconn incentives, the state of Wisconsin and Racine County agreed to provide as much as $3B in subsidies to the Taiwanese manufacturer, which said it would develop an LCD panel factory and create about 13,000 high-paying jobs.

So far, Foxconn has missed its job-creation numbers, and while it is building a factory, it will not be like the one the company promised the state and county. The deal hasn't been called off, but it has received blistering criticism.

Illinois Rep. Bob Morgan, who introduced an interstate compact bill early in 2020, questions the need to spend money, or forgo revenue, for programs of incentives that don't demonstrably create jobs or improve the state economy.

Illinois has given relocation subsidies that haven't always panned out. Despite giving Sears $567M in 11 awards, for instance, the fate of that retailer hasn't become any brighter. In 2017, it told the Chicago Tribune it could no longer meet the job-creation threshold for the incentives, and has since cut at least 1,100 jobs.

Morgan also said that opportunity cost to his state is particularly high when it comes to incentives, which represent money that cash-strapped Illinois needs to use in other ways. 

"That's why the idea has traction," Morgan said. "The question now is how and when. It's still early in our legislative session in Illinois. We're having positive conversations about supporting the concept, but we're not down to the nuts and bolts yet."

The interstate compact isn't the only effort to rein in incentives at the state level. Last year, the governors of Kansas and Missouri inked an agreement to nix subsidies for companies relocating within the Kansas City metropolitan area, but across the state line.

“I think it's significant that two very red states did this first,” Good Jobs First Executive Director Greg LeRoy told the American Prospect. “It proves that this is not an elite, coastal, Democratic idea but it is a local business fairness idea.”

Under the agreement, companies would receive incentives only for net new jobs they create in either state. The municipal governments of the two Kansas Cities aren't required to participate, but as LeRoy pointed out, most of the incentives have been at the state level anyway. 

Whether the two states can maintain the pact is an open question. Despite evidence that site-selection economic incentives aren't effective, interstate pacts against them aren't a proven solution. 

"They haven't worked because if one of the parties decides it's in its best interest to drop out of the agreement, they can," Upjohn Institute for Employment Research Senior Economist Timothy Bartik said.

Agreements among the states to quit site-selection subsidies go back at least to the 1980s, he added, and none of them have lasted because they are unenforceable.

The federal government could impose rules to enforce such agreements if it wanted to, or states that want their agreements enforced could ask Congress to have them enacted in federal law, Bartik said, but those efforts haven't gained much traction.

Most of the incentives in the U.S. would be illegal in the European Union, under a series of regional agreements that restrict the practice, Bartik said. 

The incentives allowed in the EU vary with the distress level of local markets. Paris and Berlin, which have robust economies, can offer very little, while markets in a more distressed place like Bulgaria can offer more, Bartik said.

Eskamani argues that states — or at least her state — can be weaned off incentives.

"[Businesses] aren't going to ignore Florida," she said. "We're a fast-growing state with a population that businesses want to interact with. 

"But right now every state is racing to the bottom to serve the largest corporations," Eskamani said. "That impacts state revenue while at the same time gives large corporations a competitive advantage when compared to our state-based small businesses."

Florida has been generous over the years with certain companies, including a total of $545M in subsidies to Scripps Research Institute to set up operations in Jupiter, and a series of subsidies to Northrop Grumman totaling $485M.

Awareness of the problems caused by incentive wars is growing, Eskamani said, which she believes will help tip the balance against the practice. But the new coalition is pushing against an entrenched psychology of incentives. 

Mayors in particular risk backlash for not competing for jobs for their communities — at least, that will be the criticism if they openly say incentives are a waste of money, Michigan Economic Center Director John Austin said. If they do play the game, they will be accused of giving away tax revenues that could have been spent elsewhere.

For a lot of local officials, incentives are damned if you do, damned if you don't, he said, and offering incentives at least seems like they are doing something.

"There's been an acceleration of a winner-take-all attitude, as everyone wants a piece of the new tech economy," Austin said. "It's a mania to participate."