Cities & Corporate Financial Incentives
Rip Off or Reasonable? Cities & Corporate Financial Incentives
By Carly Berke
On Friday, October 18th, the Initiative on Cities held a discussion on corporate financial incentives in cities and how they may adversely affect economic development. University of Texas at Austin Professor Nathan Jensen and BU Political Science Associate Professor and Director of Undergraduate Studies David Glick led the presentation, exploring how cities use tax rebates, subsidies, and other financial incentives to attract corporate investment, and, more importantly, how these relationships help or hinder economic development.
Jensen, a professor in the Department of Government at UT Austin, is a leading expert on economic development incentives and how they’re used within policymaking. His book, Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain, explores why politicians and governments use economically inefficient policies to attract investment as a means to strengthen their public image, which inadvertently creates fiscal shortfalls and contributes to growing economic inequality.
Jensen opened with a general overview of what financial incentives look like at the city level, which are plentiful and offered for a variety of reasons. But Jensen’s research has revealed a startling discrepancy between political motives for corporate incentives and smart economic policymaking.
“It turns out that most of the choices that politicians make in terms of incentives are actually the opposite of what the economists would say are the most efficient types of incentives,” said Jensen.
One of the most well-known examples of corporate financial incentives in action is the bid war that ensued after Amazon announced it was searching for a new city to house its second headquarters. 238 bids were offered from both large and small cities across the country, producing a wide range of incentives that varied in size and scope. Some cities, as Jensen explained, put up enormous numbers in an attempt to capture Amazon, like Dallas, who offered its own airport as part of a 99-year incentive worth $22 billion. But the relationship between financial policy and corporate investment isn’t always crystal clear, as Jensen explained, given Amazon didn’t go with the largest bid; in fact, between the three bids offered across the Washington metropolitan area (D.C., Maryland, and Virginia), the tech giant chose Arlington, VA as one of the two locations across which it would split its headquarters, even though Virginia’s bid was smaller than D.C. and Maryland’s bids.
99% of U.S. cities now offer some type of financial incentive for private companies, although they vary across the country; Texas cities, for instance, typically uses a sales tax, while others frequently offer tax abatements. But these incentives are widely regarded as economically impractical, as they fail to actually foster the economic development they’re designed to produce.
“The important thing is that cities are encouraged to [offer incentives] to unlock state incentives,” said Jensen, explaining how many states mandate a local incentive before a state incentive is offered. “Sometimes it isn’t to extract from the city, but to open up other potential incentives.”
For instance, Boston’s financial incentives for companies contain critical provisions, like living wages, transparency, and minority contracting, all conditions that have led companies like Apple and Facebook to pursue an incentive in Boston at the local level, unlock the Massachusetts state incentives, and then pull out at the city level.
One industry that’s taken advantage of city and state incentives is the film industry. Outside of film hubs Los Angeles and New York, filmmakers have increasingly sought out state tax incentives that sometimes cover up to 30% of production costs. But for cities and states who house new filmmakers, there is almost no return on investment – filmmakers will shoot their production and then leave, often bringing in their own crews and creating little to no job growth in the area.
Another example that illustrates why incentives do little to foster economic development is Applebees, who infamously moved their headquarters twice across state lines in Kansas City, starting in Kansas City, Missouri, where they received a 10 year tax abatement for being “new business”, hopping five miles over to Kansas City, Kansas to qualify as new investment, and later moving back to Missouri, offering virtually zero new developments for Kansas City itself.
Many of these incentives are driven by political interests; local and state-level politicians are eager to entertain corporate interests or enhance their credibility. In many cases, political figures like mayors or governors are working unilaterally to offer tax incentives to companies, overseeing billions of dollars in grants, infrastructure improvements, and tax abatements. Political figures want to be credited as the reason companies came to their city/state and thus be credited for stimulating economic development.
“Why did 238 cities with no chance of getting Amazon’sHQ2 go all in? If you didn’t, you were open to criticism,” said Jensen. “This is a story of public perceptions.”
The political drive behind these policies is also reflected in the fact that over a majority of private companies in transition would have relocated to the city regardless.
“These [incentives] aren’t effective in shaping investment decisions,” said Jensen. “In most cases, even though it’s a large amount of cash and expensive for cities, incentives are so small for firms that it won’t actually shape investment decisions. Companies often pick a location and then delegate to their tax analysts or consultants how to maximize incentives or minimize taxes.”
With little return on investment for economic development, politicians and governments are being increasingly scrutinized for wasting public dollars. Jensen explained how surveys show that residents are more likely to protest incentives when a direct tradeoff between public services and tax incentives is evident. Non-profits organizations and activists are also starting to push back against irresponsible corporate tax incentives by fighting for better transparency in government policies and a stronger commitment to company disclosures.
“If there’s a belief you can change with mayors, it’s that most of these companies are coming anyway,” said Jensen.
Jensen has conducted extensive research in Texas on these programs, sometimes facing pushback from companies that challenge him when he submitted requests for public records regarding the programs and projected wages and job growth. He’s also studied an economic incentive abatement program in the state called Chapter 313, a tax abatement program meant to offset property taxes that companies pay to school districts. Texas has awarded more than $7 billion in tax credits through this program; the problem is that the vast majority of companies who participate would have relocated to the district regardless of tax incentive — meaning local governments completely waste dollars that could otherwise be put in education or public services. It is this flaw in institutional design, Jensen argues, that enables companies to rack up tax credits and abatements at the expense of taxpayers without providing economic benefits in return.
Professor Glick joined the conversation to pose questions regarding his own work with mayors as the co-Principal Investigator on the IOC’s Menino Survey of Mayors, who either understand or fail to recognize why these programs are “bad policy but good politics.”
While Jensen said political leaders are increasingly aware of the research that reveals the economic inefficiencies of corporate financial incentives, not all have really committed to addressing the flaws in their design. And within the IOC’s mayoral research, no commonality or theme seems to emerge between mayors who aware and committed to the problem and mayors who aren’t.
“I’m not sure how salient [these issues are] in many communities,” said Jensen. “There’s this new rule where you have to disclose tax evasions, but only about 50% of cities are actually disclosing. We find a strong state gap – California cities are not complying, Texas cities are average.”
Companies rely heavily on consultants and analysts to work tax incentives in their favor, with virtually no lines of defense protecting taxpayers.
“There’s no one who has financial skin in the game to block [these problems]. School teachers are largely on the sidelines, even though that’s the group that’s harmed most by local tax evasions,” said Jensen.
According to Jensen, the one place these incentives might work is actually areas of high unemployment, signifying there’s a way to utilize these tax programs to help poor communities, but it’s critical to ensure incentives are properly offered to strengthen economic growth.