States Use Tax Breaks in War for Jobs

Tax incentives have become a competitive weapon as states try to lure employers or keep them happy

New Jersey is granting Panasonic a $102.4 million tax credit to move its North American headquarters—nine miles. The incentives, announced on Apr. 20, will help defray the cost of leasing a new high-rise office tower to be built in Newark to replace Panasonic's digs in Secaucus, which the Japanese electronics maker has outgrown.

The company concedes that its decision to stay in New Jersey, where it employs 800 workers, was swayed by the tax break. Peter Fannon, vice-president of technology policy at Panasonic North America, says the company fielded "quite competitive" offers from Atlanta, San Diego, Los Angeles, and Brooklyn, N.Y., among others. Says Fannon: "We would not be in New Jersey without [this program]." Officials in the town of Secaucus don't see it as a win for their state, though. "We shouldn't be using tax dollars to play one municipality off of another," says town administrator David Drumeler.

State and local governments eager to recover some of the more than 8 million jobs lost during the recession are giving away $70 billion in annual subsidies to companies, according to calculations by Kenneth Thomas, a political scientist at the University of Missouri-St. Louis. States have long relied on fiscal incentives to lure businesses, or keep existing employers from decamping to other locales. Such largesse is coming under renewed scrutiny during this time of strapped budgets. State deficits could reach a combined $112 billion in the fiscal year starting July 1. "The tragic irony of it is that in order to pay for these things, they're cutting other areas that really are the building blocks of jobs and economic growth," says Jon Shure, director of state fiscal strategies for the Washington-based Center on Budget and Policy Priorities.

While several organizations track subsidies, there is no comprehensive national database. The competition "is as intense as I have ever seen it," says Dennis C. Cuneo, a managing partner at the Washington office of Fisher & Phillips who has handled site selection deals for Toyota Motor for more than 15 years.

Ohio Governor John Kasich, a first-term Republican who criticized "corporate welfare" as chairman of the House Budget Committee from 1995 to 2000, says states have no choice but to be in the game. "When other states come in and they offer significant ways for people to have lower costs, you either compete with it and win, or you lose," he said in an Apr. 14 interview in Columbus.

Kasich has offered American Greetings, the second-largest maker of greeting cards in the U.S., up to $93.5 million in incentives to remain in the Cleveland area. Restaurant chain Bob Evans Farms has been offered $20.9 million in state and local subsidies to relocate from Columbus to a suburb about 20 miles away. In a statement announcing the move, the company said that redeveloping its existing campus would have been less cost-effective than building a new headquarters.

With the national unemployment rate at 8.8 percent, the threat of a company pulling up stakes is enough to open states' wallets. "States and communities are afraid to play chicken," says Jeff Finkle, who heads the International Economic Development Council, a Washington nonprofit.

Columbus Mayor Michael Coleman, a Democrat, thinks Bob Evans Farms was bluffing when company officials told the Kasich administration that it was considering moving its headquarters and 400 jobs to Texas. Dan Williamson, a spokesman for Coleman, says Bob Evans Chief Executive Officer Steven A. Davis confided to the mayor that he had "no intention" of leaving Ohio. Margaret Standing, a spokeswoman for the company, issued a statement saying: "We have a responsibility to all of our stakeholders with a decision of this size to have investigated all of our options."

Some groups are crying foul over the sweetheart deals politicians are cutting companies, even as they take a knife to core spending. New Jersey Policy Perspective, a nonprofit that advocates equitable tax policy, says that Governor Chris Christie has granted 69 companies $822 million in tax breaks over the next 20 years, which is equal to the amount the governor cut from education this fiscal year. Ohio, facing a budget shortfall of $8 billion, has proposed cutting funding for education by $852 million in its latest two-year spending plan, according to budget documents.

American Greetings says it was considering moving its headquarters, along with 2,000 jobs and $150 million in annual payroll, from Brooklyn, Ohio, to the Chicago area before the state offered it $93.5 million. The company is weighing whether to remain in Brooklyn or move elsewhere in the Cleveland area, says spokeswoman Patrice Sadd. "If American Greetings leaves Brooklyn, you will have a community that will be the big winner, and you will have a community that will be the big loser, and the state will have paid for that," says Cuyahoga County executive Ed FitzGerald.

Kansas has offered movie theater chain AMC Entertainment a generous incentives package to move away from Kansas City, Mo., The New York Times reported in April. Officials in Missouri are considering making a counteroffer. Neither the company nor state officials would comment. The bidding war helped prompt an Apr. 5 letter signed by 17 corporate executives asking the governors of the two states to quit offering inducements to lure businesses across state lines. "At a time of severe fiscal constraint the effect to the states is that one state loses tax revenue, while the other forgives it," the letter said. "The only real winner is the business who is 'incentive shopping' to reduce costs."

One big problem is that the public can't scrutinize corporate decision-making and states don't compare notes, so there's no way to do a cost-benefit analysis of tax incentives, says Greg LeRoy, executive director of Good Jobs First, a Washington-based center that tracks economic development deals. "As long as the whole system is designed to require public officials to play poker with, really, two hands tied behind their back, you're going to see job blackmail," he says.

Bloomberg News


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