State Tax Breaks to Attract Jobs: States Getting Stingier

April 26, 2011 -- At first glance, it might not seem extraordinary that New Jersey is offering Panasonic $102 million in tax breaks to relocate its corporate headquarters to Newark. Even today, at a time of tight budgets and taxpayer fury over government spending, state economic development departments spend lavishly to lure companies from other states, the idea being that the influx of jobs will justify the cost. Kenneth Thomas, associate professor of political science at the University of Missouri at St. Louis, says states collectively spend more than $70 billion a year on such wooing.

What's unusual in New Jersey's case, though, is that Panasonic isn't in another state. It's in New Jersey, headquartered in Secaucus, nine miles from Newark. Taxpayers, in effect, will be giving Panasonic carfare of $10.6 million per mile to make the same trip they could make for under 49 cents a mile, assuming that they drove a Honda Civic. That's according to the American Automobile Association of New Jersey.

The millions will come from a Garden State development program called the Urban Transit Hub Tax Credit, intended to promote use of public transit by giving companies an incentive to relocate facilities to any one of nine New Jersey cities designated a public transit hub. Newark qualifies; Secaucus does not.

Secaucus stands to lose 850 jobs when the electronics firm leaves, and Secaucus deputy mayor John Bueckner isn't happy: "We're saying, basically, this is crazy! Panasonic is our largest tax-generator. Now they're moving 10 miles down the road, and the state's paying them $102 million to do it.

"We don't think that was the intent of the Hub program. It wasn't set up to help somebody move from one community to another within the state, for Newark to make a gain that costs Secaucus." It was meant, he argues, to get out-of-state companies to move jobs into the state.

Bidding War

A Panasonic spokesman says his company had given New Jersey notice that it was planning to relocate, and that it had received between 35 and 40 offers, including attractive ones from other states. When the deal with Newark was announced, Panasonic and the governor's office both toasted it for keeping jobs in-state.

Asks Bueckner, unimpressed, "What's to prevent another company, now, from saying the same thing: I'll move out of state unless you give me the same deal? It's something the state is going to have to take a look at, moving forward -- something that will cost us millions of dollars."

Exactly so, say critics of economic development incentives. They contend the programs don't pay off, even when designed to win jobs from out of state. As Prof. Thomas writes in an as yet unpublished op-ed piece, "At a time when state and local governments are cutting programs and collectively laying off hundreds of thousands of workers, it's time to rethink…economic development. Recent research shows that these subsidies have little net effect on…jobs."

He and others fault the programs for their lack of transparency: All a company has to do to get states to bow down and offer them the moon is to let it be known they've received an offer to relocate. They don't have to say from whom; nor do they have to prove the offer is legit.

Bidding for Jobs: Too Many State Tax Breaks?

The internecine conflict that results can impose a higher collective cost on the competing states than the benefit that accrues to the winner. Thomas cites the example of the bidding war that Boeing sparked in 2001 between Chicago, Dallas and Denver, when it announced it was looking to relocate its headquarters from Seattle. The result, he says, was that Chicago, the winner, got 500 jobs at a cost of $52 million in tax breaks. The losers incurred substantial administrative costs. In another example he cites, Yahoo and Verizon each got in excess of $2 million per job from New York State in 2010 relocate data centers.

The price of course increases when a company takes the tax breaks and subsidies, but fails to deliver on some or all of the promised jobs. That was Wyoming's experience, says state Treasurer Joseph Meyer. In the early '90s, the state offered generous incentives to some 30 companies to relocate. A few years later, they had either moved again or gone bust. "We had to ask ourselves, were we getting anything out of this?" he says.

Today, Wyoming's attitude is different. It makes fewer offers and attaches more strings to the offers that it makes. "We build in a lot more safeguards," says Meyer. "A company has to pay at least 25 percent of the cost of any infrastructure improvement," such as a rail spur or a highway off-ramp. "Plus, any loan they get has to be fully collateralized. If they've already bounced around several other states, we don't even look at them."

Fighting Back With Clawbacks

Other corrective remedies now used by states include so-called clawbacks: provisions in contracts that allow the state to take back some or all of its money or tax breaks if the recipient fails to hold up its part of the bargain. So says Greg LeRoy, executive director of Good Jobs First, an organization that rides herd on economic development subsidies.

His organization lists a number of similar innovations, which include recalibrations (where an employer that falls short of its employment promise gets a proportionally reduced tax break) and rescission (where the incentives are canceled altogether).

"Generally," says LeRoy, "States and cities today are running tighter ships. You hear a lot more now about incentives being performance-based."

Asked if he's heard about the Panasonic deal, he replies, "Heard about it? I'm rolling my eyes." LeRoy says he questions whether Panasonic ever really had the offers it claims it had from other states. He calls the Newark deal "a poster child" for why public officials need to have more information if they're going to play "a tougher poker game" with corporations.

Panasonic, Newark, and the lieutenant governor's office all pronounce themselves delighted with the deal. Panasonic's spokesman says that today about 800 of the company's headquarter employees commute by car, since Secaucus has no train service and only limited bus service. By moving to Newark, he says, they will be adjacent to several bus and rail alternatives. He expects 80 percent will commute by public transit, reducing Panasonic's carbon footprint by some 4,000 tons of CO2 per year.