Sep. 20, 2011 -- In a time of pinched public budgets, should governments still be giving tax credits to companies? Recent examples of economic development money gone awry range from the egregious to the merely silly.
In California, solar panel maker Solyndra went bust after having soaked up $528 million in federal development aid. In New Jersey, angry taxpayers are protesting the so-called Snooki-subsidy—a $420,000 tax break given by the state's Economic Development Authority to producers of the TV show "Jersey Shore," which some residents say depicts Jersey's citizenry in an unflattering light.
There's practically no state that doesn't offer some kind of corporate tax credit that doesn't leave you scratching your head:
In Washington, poultry farmers get tax-free chicken-bedding. Georgia gives a tax break to people who patronize companies that refurbish corporate jets. Michigan subsidizes restaurant meals eaten by restaurant employees. Who says there's no free lunch?
Still other breaks apply to corporate relocations: One company is paid millions to stay put; another is paid millions to move.
In every case, the rationale is the same: Public money is being used to promote what development authorities believe is public good—job creation, say, or job retention; the nurture of a promising new industry or the protection of one old and ailing.
Economic development spending by states and cities totals $70 billion a year, according to Kenneth Thomas, associate professor of political science at the University of Missouri at St. Louis. The biggest chunk of that, he says—some $46.8 billion—goes for incentives effecting the location of private investment: ensuring, say, that the company filming the "Jersey Shore" films it on the Jersey shore.
Thomas says there's little evidence that this spending results in net job creation. What more typically results, he and other experts say, is a re-shuffling of existing jobs. At a time when governments are cutting programs and collectively laying off hundreds of thousands of workers, he asks if now might not be the time to re-think economic development.
Greg LeRoy, executive director of Good Jobs First, an organization that rides herd on economic development, says if he were given a choice between no development and spending the way it is now, he'd opt for none.
"The better course of action would be not to provide any credits," he says. "It's not that credits cannot have their place," it's that most turn out to be nothing more than "windfalls" to corporations that would have done the same thing they're being incentivized to do, without incentives.
When credits are given, he says, they always should include clawback provisions, so that if the beneficiary fails to provide the hoped-for jobs or otherwise fails to live up to his end of the deal, the state or city isn't left holding the bag.
Any list of the most ill-advised, pernicious or merely odd credits might the following:
-Video games: Electronic Arts, a game developer in Redwood City, California, gets a federal tax credit notwithstanding the fact its best-selling product is 'Dead Space 2," a violent gore-fest in which players advance by obliterating space zombies. Video game production ranks among the most highly subsidized businesses in the U.S., according to the New York Times and to tax professor Calvin Johnson of the University of Texas at Austin--so subsidized, in fact, that even oil companies have questioned why government should support it.
-Corporate relocation: New Jersey earlier this year offered Panasonic $102 million to move its headquarters to Newark. Odd thing was, Panasonic was already in New Jersey, headquartered just nine miles away, in Secaucus. The money will come from the Urban Transit Hub Tax Credit, intended to promote use of public transit by relocating companies to public transit hubs, such as Newark. In September, the same program paid Pearson Education to relocate from Upper Saddle River to Hoboken, at the cost of an $82.5 million tax break.
-Chicken-bedding: The Seattle Times reported in May that tax credits given poultry producers for chicken-bedding (a coop floor covering made of wood shavings, straw and sawdust) are costing Washington State some $1.4 million every two years in lost revenue.
-Jet Refurbishment: In Georgia, in April, according to The Atlanta Journal-Constitution, the state legislature re-approved a tax credit for customers who use such companies as Gulfstream to refurbish their private jets. Cost in lost revenue: up to $12.8 million next year.
-Film production: Iowa, Massachusetts, New Jersey and some 40 other states offer generous tax credits to encourage producers to film in-state, the idea being that the resulting movies will provide jobs and help promote tourism. In a rare instance of state oversight, Michigan turned down a tax-credit request for "The Woman," citing that the horror film's depiction of cannibalism was "unlikely to promote tourism in Michigan."
In Iowa, a state investigation found that movie tax credits had been used by producers to buy themselves luxury vehicles, including a Mercedes and a Land Rover, which later were taken to California for personal use.
Anti-smoking group Smoke Free Movies says more kids are induced to take up smoking by seeing it depicted in movies than by any other influence. In light of that, tax credit watchdog Greg LeRoy says he finds it ironic that states usually spend more on tax breaks to movies than they do on their own states' smoking-cessation programs.