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[image_credit]REUTERS/Shannon Stapleton[/image_credit][image_caption]Hell hath no fury like a Minnesotan scorned, but being overlooked by Amazon might not have been a bad thing.[/image_caption]
Oh, and subsidies. The state suggested it could award Amazon $3 million to $5 million in subsidies, in addition to potential local incentives. (We know this because the state just released the bid which, despite a media lawsuit, was only made public after Amazon gave the go-ahead.)
Maybe it was our winters, maybe it was our taxes, or maybe it was that our incentive package was paltry compared to other locations’. But after being rebuffed in New York, Amazon ultimately chose to go to northern Virginia, which offered $573 million in performance-based incentives, and Nashville, which offered $102 million in city and state funding.
Hell hath no fury like a Minnesotan scorned, but being overlooked by Amazon might not have been a bad thing, suggests new research out of North Carolina State University.
By analyzing data on state tax breaks offered to companies in 32 states from 1990 to 2015, the forthcoming study found the financial incentives U.S. states give businesses have a detrimental effect on states’ financial health.
Tax breaks
There are lots of different packages these types of incentives come in: property tax breaks; research and development tax breaks, which reduce taxes to companies working on technological innovations; investment tax breaks, which give businesses deductions based on investments made; and breaks for job training grants and job creation.
Incentives like these have been around in some form or another for about as long as the U.S. has, said Timothy Bartik, senior economist at the W.E. Upjohn Institute for Employment Research, who compiled the database used in the NC State analysis.
The current wave started in the ’30s, with southern states luring northern manufacturers by helping them build factories and buy equipment.
The trend ramped up after World War I as air conditioning made working in a factory in the sweltering heat more palatable, Bartik said. As northern states started feeling the competition, they jumped in with incentives.
States’ use of incentives to lure companies tripled in dollars between 1990 and 2001, after which their expansion slowed on the whole, but some states increased them while others cut back, Bartik said.
But even as their use has become widespread, deployment of incentives often ruffles feathers. Proponents see them as a way to to lure good jobs to a given area. Detractors see them as handouts to corporations.
Bruce McDonald, associate professor of public budgeting and finance at North Carolina State University and an author of the NC State study, got into the business of studying them after Raleigh, home to NC State, was named one of 20 finalists for the second Amazon headquarters.
“Everyone assumes financial incentives would have a positive effect because you’re bringing new business,” he said. But, “surprisingly little research definitively shows that. Most of the research has been on a case-by-case basis.”
So, the team set out to determine the effects of incentives on states’ fiscal health on the whole, attempting to account for different political characteristics, economic conditions, demographics and the structure of state governments and other factors that could affect fiscal health.
“Generally, financial incentives do a pretty bad job of impacting fiscal health, that is they’re going to move the state into a worse financial situation,” McDonald said. “The money that would have been coming into the government in some way is no longer coming in, but at the same time there’s an expectation of increased expenditures: more roads to pave, more public services to offer, more people you’re having to deal with.”
Use with caution
Not all incentives were created equal, though, they found: The study’s authors were surprised to find research and development tax credits hurt states’ fiscal health the most.
“That surprised everybody. We’re used to thinking about how much R&D has had such a positive impact,” he said. But R&D costs a lot, and many new technologies fail, he said.
Next came investment tax credits and property tax abatements.
Property tax breaks can go a couple different ways, McDonald said: If a business gets a tax abatement to revitalize an area, there’s a potential for positive benefit because it can increase the tax base in the long run. That’s especially the case for places not generating much in property taxes from the get-go.
But these instances are few and far-between, he said.
“Most of the time, somebody comes in and they’re being attracted to a certain area not because it needs revitalization but because that’s where they want to move to,” McDonald said.
Job training grants tend to foster dependence on the federal government, since the federal government often funds part of them, McDonald found.
Only job creation credits tended to have no significant effect, on average, on states’ fiscal health, according to the study.
McDonald and his colleagues concluded that incentives can bring a return on investment, but also put the state’s financial health at risk.
“As such, they are a financial tool that should only be used with caution,” the study finds.
Some states appear to use them more than others.
Average the annual subsidies out over 10 years, from 2006 to 2015, and Minnesota ranks 28th among the 32 states in the study in terms of incentives relative to the size of the value added by its industries, at 0.4 percent, according to the study. New York ranked first, at 4.7 percent, while Washington comes in last at 0.2 percent.
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Minnesota’s tax incentives also tended to have a larger return on investment than other states’, the study found.
In recent years, Minnesota spent the largest share of its incentives on jobs subsidies, followed by investment subsidies, training and then R&D subsidies, per the study.
A 2012 New York Times investigation found Minnesota’s state and local governments spend $45 per capita on subsidies each year. Its agriculture, finance and telecommunications sectors were the biggest beneficiaries. Alaska, the heaviest per-capita subsidizer, spent $991 per capita, while Nevada, the lightest, spent $12 per capita.
Some of Minnesota’s biggest recent subsidies include $585 million in infrastructure funding to Rochester’s Destination Medical Center, contingent on private investment; $250 million in tax breaks for infrastructure approved by the Legislature in 2013 for Triple Five Group, the Mall of America’s owner, to help expand the mall. Also of note: the Minnesota Vikings Stadium, which the state helped fund directly, at $348 million.
Finding a strategy
Bartik, who has studied the effects of incentives extensively, has a list of reforms states could enact to get more bang for their buck when they offer them.
He suggests incentives should be target firms that benefit from clustering in a given area, which tends to increase their cost-benefit ratio.
Incentives to big businesses can be balanced with programs to help small businesses. Bartik suggests expanding states’ manufacturing extensions (similar to agricultural extensions, public agencies that do research on ag and advise farmers, but for manufacturing), and spending on customized job training.
He also suggests states set caps on incentives, making sure abatements for businesses don’t diminish budgets in areas like education and infrastructure, which also help grow business.
Bartik also thinks governments should limit one-time deals to lure companies, which often don’t actually influence their decision to locate.
When it comes to business incentives, “You need an economic development strategy, but you need to have one that’s affordable and that’s cost-effective,” he said.
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Thank you Ms. Kaul, very nice.
Yes, thank god Minnesota avoided this. The idea of giving incentives to a company like Amazon is insane. Hopefully what happened in New York and the Foxconn disaster in Wisconsin will get people to think more critically about subsidizing billionaires.
Business socialism has a long and storied history here in ‘Merca, at least as far back as when the railroads moved west.
As far as more critical thinking about it, I have high aspirations and low expectations (hat tip to the Common Man).
Sadly, the lesson here is probably that these companies got too greedy. Once they return to the regular level of business socialism (great term, btw) everything will be back to normal.
Socialism for the rich and the middle class and poor suffer what they must.
Well said.
I have grown very tired indeed of the seemingly endless articles dedicated to lionizing the great genius that is Bezos. I have repeated to anyone anytime, he is a monopolist – being a fan is akin to the Messianic, like king-worship – supporting the like is impoverishing most people gradually.
What isn’t stated generally is that working people have to pick up the slack. What taxes Bezos does not pay, and he/Amazon apparently don’t pay any, is paid for out of the wages of wage earning people generally making less in a year than Jeff Bezos does every time he blinks.
Why is entrepreneurialism at record lows in America? Because government exists primarily to serve “efficiencies”, gigantism in business, while effectively penalizing small business. The property taxes alone for a small storefront in Minneapolis average around $15,000. So giant corporation comes in and doesn’t have to pay property taxes, which then just effectively raises taxes for everyone else.
It is extortion, basically. But maybe I get to call it that in this comment section. It is very hard to get paid to say that in America.
Surely there are other states that will welcome Amazon with open arms.
Paul, it’s not a question of “welcoming”, it’s about subsidizing, a very different proposition. I’m sure you “welcome” people into your home… but I doubt you pay them to sit in your living room. Sure, many states would “welcome” Amazon, but few can afford the subsidies.
Amazon HQ would employ 2,000 folks, salaries range from $50,000-$165,000. If you call the average salary at HQ $80,000 and apply Minnesota State tax of 7.2% to annual salary of 2,000 workers (not including support staff or construction and start up jobs) and multiple it by 10 years, you will see what Minnesota lost by not getting Amazon. Simple math, simple answers.
I’m glad someone is looking out for the financial interests of urban and coastal elites. They need socialism more than anyone else.
Bezos had no intention of opening an HQ in Minnesota, or anywhere other than in New York and Beltway DC. It was all about the troves of insider information economic planners would readily hand to him for free, about municipalities and states all over the country, that he has turned around and monetized. It was a scam from the get-go. Bezos is a scam artist extraordinaire.
The simple answer is, this jobs jobs jobs mantra is servile, and this Bezos fanboydom is un-American, if America was supposed to be about an empowered citizenry free from economic extortion by elite power players and corporations.
I don’t see how we are making America great (again) if we are giving every advantage to the likes of Bezos (or any of those foreign corporations wanting to mine in northern Minnesota), while we put the economic screws to small business and wage earners. But then everybody seems to love monopolies these days.
William, I know we but heads a lot here, but I am 100 percent on board with your comment. Have a great weekend.
Read, appreciated, and enjoy the weekend too. Hats off to all of those sick of America’s elite selling out America to corporations foreign and domestic, banks and billionaires, making excuses for the 1% hogging all the gains and making a polluted mess of America in the process.
Yes, the math is very simple. Anything more than a very modest subsidy would be terrible for Minnesota. Thank god we have governors who understand economics. Poor Wisconsin had a governor who didn’t, and the subsidies he gave Foxconn will hurt that state for years to come. At least he got votes out.
Yes, I was interested to note that the Bartik post cited (on which “subsidies” work for a state and which don’t) uses Wisconsin’s Foxconn “deal” as the supreme example of what doesn’t work. We should recall that many of the “movers and shakers” who were upset with Gov. Dayton for not bidding hard for the Amazon HQ were the same people who wanted Minnesota to bid higher for Foxconn. We can hope everybody has learned the lesson, but I doubt it.
Joe,
The problem is that few if any subsidies are ever tied to REAL deliverable’s like a certain number of jobs. Companies seeking these subsidies almost always exaggerate their plans and promises and then fail to deliver… yet they keep the money. It’s very difficult to claw back subsidies after the fact when companies deliver a fraction of the jobs and economic stimulus they promise.
I did read an article in the Washington post recently about Remington going bankrupt in part because subsidies they’d gotten to build a manufacturing plant in NC got pulled when they failed to meet benchmarks. But that’s an exception, not the rule.
Paul, if you cannot get a contract based on reaching certain benchmarks that kick in the subsidies, you are a poor businessman. The object of any development deal is to have the party getting the break to put in enough capital that they don’t walk on the project. That is why folks who put in 25-35% down on a house don’t walk out on the loan. As usual, not sure Government has a clue on any of this.
Joe, you don’t seem understand the nature of these “contracts”. It’s not a question of what business gets out of it, it’s a question of what the public who provides the subsidy gets out of it. The “public” is not a business. Furthermore, regardless of contract structure or requirements, without enforcement the contract is irrelevant.
Ask Best Buy & Target who the enemy is and you get Amazon. No way could Amazon be awarded 100’s of millions in state subsidies only to later poach Best Buy & Target employees. Keep what we have is the first priority.
It IS nice to so many comments critical of corporate subsidies like this, and it’s nice to see a Minnpost article that’s examines them as well. For decades progressive were pretty much on their own in this regard while neoliberals drank the subsidy=growth cool-aid. It wasn’t that long ago that our State government dumped a billion dollars on a single New Jersey billionaire who didn’t promise to create a single new permanent job. Dare I hope those days are over?