Despite Crippling Budget Crisis, Local Governments Still Love Corporate Incentive Packages
After years of local and state politicians doling out billions in tax incentive packages to private companies, those leaders’ governments are suddenly faced with critical budget deficits as revenues dry up.
States, counties and cities have spent upward of $95B a year on corporate incentives and subsidies by some estimates. But despite the holes those incentives leave in municipal budgets, and an increasing nationwide pushback against them, politicians aren’t likely to stop offering tax breaks to private companies as they try to lead the recovery from a deep economic recession.
“I think that as local residents demand a faster local economic recovery, the way the politicians are going to respond is by offering a signal to their voters that they're trying to do something. The clear signal politicians typically offer is by offering subsidies,” said Michael Farren, a research fellow at the Mercatus Center at George Mason University, who has studied the effects of corporate incentives.
“Unfortunately, I would anticipate based on history that we would see as many subsidies as previous, if not more.”
State and municipal budgets are facing an average 13% shortfall this year, according to a study by the National League of Cities, and conditions are only expected to worsen in 2021. Some 87% of municipal financial officers across the country expect their city budgets to be less able to meet the fiscal needs of their populations, according to a recent NLC survey.
Budgets are being hit by declines in sales and income taxes. Longer-term, property tax revenues will shrink as the value of real estate — especially retail, hotel and office properties — declines, according to the NLC.
Already, a host of legislators in a handful of states want to call an end to the incentive arms race. Budget cuts will make other governments turn away from pursuing expensive projects, according to Bruce McDonald, North Carolina State University associate professor of public budgeting and finance.
“I think it's putting kind of a really big hold on governments engaging incentives,” McDonald said. “I think part of this is happening … because people don't have the resources to engage in that kind of competition. You want to have the resources there. You don't want to give them away.”
But economic development professionals around the country told Bisnow they are still prepared to offer tax breaks and incentive packages if it means new jobs, especially in communities hit hard by the coronavirus pandemic.
“At a point in time when our economy is ailing, should we in fact be doing less to grow the economy?” said Reid Dulberger, the head of economic development for Memphis and Shelby County, Tennessee. “My answer, and I think the mayor and city council’s answer, is no. But we need to be doing it smartly. We need the impact that economic development can do now more than ever.”
Companies choose where to locate projects for a variety of reasons — geography, access to workforce and availability of sites. Incentives are typically not the main driver in where a company decides to locate a project, but that reality is lost on many economic development agencies, Farren said.
“Almost 90% of subsidies are a waste of public money. You're paying for a company to do what it would have done anyway,” Farren said. “It's sort of like going to the grocery store and handing the person who gave you a free sample $5.”
‘The Harm To The Budget Plays Out For Years’
The pandemic has wreaked havoc on state budgets, and many have proposed drastic cuts to their spending levels next year. Some of those states have been generous givers of corporate incentives, and see holes in their budgets where tax revenues could have been.
Facing a nearly $6B budget shortfall in 2021, New Jersey Gov. Phil Murphy authorized borrowing $9.9B to help cover the deficit. The state is eyeing sweeping budget cuts as well as seeking different methods to raise revenue, including a tax on all income over $1M a year and extending a 2.5% corporate surtax through 2023.
Last year, between state and local economic development packages, New Jersey lost more than $330M of possible tax revenue, according to data compiled by Good Jobs First, a progressive nonprofit policy group that tracks incentive spending nationwide.
Among the incentive packages New Jersey has doled out over the years was a $390M tax credit and subsidy program in 2013 for Canadian developer Triple Five Worldwide to take over development of what is now called the American Dream mall in East Rutherford. The New Jersey Economic Development Authority authorized the deal in exchange for more than 11,500 new jobs and a capital investment of $2.5B, according to Good Jobs First.
Ohio officials cut spending by more than $775M during the final two months of its 2020 fiscal year, including cuts to education spending and Medicaid. The state also is aiming to save $138M by docking state employees’ pay by 10 days next year. Ohio lost out on more than $316M in combined state and local tax breaks last year, according to Good Jobs First.
New York Gov. Andrew Cuomo is calling for federal aid to help the state fill its $8B budget shortfall next year. New York had a combined revenue loss of more than $5B from state and local incentives in 2019, Good Jobs First found, second only to Louisiana. Those revenue losses include $758M from the state’s film and television production tax credit program, $143M for its Empire Zones tax credit program and $168M for the state’s job creation program.
New York City alone lost $3.8B in 2019 revenues as a result of various incentive programs, including $1.6B in property tax abatements that would have otherwise been generated through its now-defunct 421-g tax incentive program, which gave developers property tax breaks for converting commercial buildings into housing in certain parts of Manhattan from 1995 to 2006. Good Jobs First also found that the city lost out on nearly $795M in 2019 property tax revenue through its Industrial & Commercial Abatement Program, which abates property taxes for upward of 25 years for new or improved commercial projects. The program goes through March 2022.
The city is facing a budget crunch of more than $7.8B next year.
“Tax incentives, especially things that take the form of corporate tax credits and play out a decade or more … means you create an entitlement. The harm to the budget plays out for years after the award,” Good Jobs First Executive Director Greg LeRoy said. “That can also be true on the local level with property tax abatements.”
The problem is not unique to large cities. Fort Wayne, Indiana — with a population just over 270,000 — is facing budget cuts of $186M. Still, Mayor Tom Henry revived a previously dead deal with a local developer to revitalize a former General Electric factory with $95M in tax incentives from the city.
Called Electric Works, developers RTM and The Model Group propose a $280M redevelopment in the initial phase that will include the global headquarters for the hardware retailer Do it Best Corp., as well as offices for the Fort Wayne Community Schools and Fort Wayne Metals. The developers also received federal and state incentives for the project.
Fort Wayne City Councilman Jason Arp opposed the deal, cautioning that the city can’t afford to give away possible tax revenues.
“That's what I do in opposing a lot of this economic stuff is to avoid the city getting leveraged,” Arp said.
Property tax abatements are cuts made to taxes that companies pay on property. While cutting future taxes on a piece of land that isn’t contributing to the local tax rolls sounds appealing, critics say the ripple effects of deal after deal over the years accumulate and strain budgets.
Tax abatements alone accounted for more than $20B in lost revenue for all 50 states combined in 2019, according to Good Jobs First.
Arp said as the nature of the office and increase in remote work has thrown into question the inherent role and value of commercial real estate, he questions whether abating property taxes for real estate is the best course of action.
“I don't think it's a good idea to have our future tied to the success of future commercial real estate deals,” Arp said.
‘This Is The Way You Do Deals In This Country’
There is no shortage of government officials who are ready to talk about the positive effect of an incentive package.
Officials from Shelby County, Tennessee, approved an $11.2M tax abatement program last June for AutoZone, which is already headquartered in Memphis, to build a new, $145M technology and customer support center in the city.
That project, which will see a string of older Downtown Memphis buildings redeveloped, is expected to produce 130 new jobs, earning an average of $80,400 per year.
Dulberger said the deal made sense to keep AutoZone jobs within the city since the retailer will be paying more in property taxes than if the buildings had been left as they were. The city expects to reap $269,500 a year from the deal, and once the tax abatement wears off in 15 years, it would rise to more than $785,000 a year, Dulberger said.
“We absolutely think this could have gone elsewhere,” he said. "There was no particular reason this had to be in Downtown Memphis, Memphis at all or Shelby County."
The biggest economic development bidding war in American history played out over the course of 13 months when Amazon announced that it was searching for a location for a second headquarters. The announcement spurred a frenzy of proposals from cities and states across the nation, throwing a plethora of incentives at the online retail giant in hopes of capturing the tens of thousands of high-paying jobs it promised to create.
In the end, Amazon decided to split the HQ2 project between Arlington County in Northern Virginia and Queens in New York City. Ultimately, Amazon pulled out of plans to locate in New York after tremendous political backlash against the incentives.
Arlington being selected as the main winner was a shock to Victor Hoskins. At the time, he headed up Arlington County’s economic development efforts, and he said the incentive package his county and the Virginia government offered Amazon paled compared to other of the finalist cities.
“When we heard some of the other bids, we were floored. We could not believe it. We thought we had a very slim chance,” said Hoskins, now the CEO of neighboring Fairfax County’s Economic Development Authority.
The county offered a $23M incentive program that tied those incentives to specific performance targets Amazon has to meet over the next 15 years. Among those incentives is Amazon getting a cut of any growth of tax revenues from hotels in the area. Because of the coronavirus pandemic, that hasn’t happened at all, and Amazon hasn’t received any benefit, Hoskins said.
Incentives built around performance metrics are the best way, Hoskins said, to protect the local government in case of an emergency — for instance, a public health emergency.
“If you do these incentives performance-based, you'll be fine,” Hoskins said. “I know what makes sense here. You don't go outside of your strategy. If you go outside of your strategy, you lose.”
The good optics economic development wins give elected officials keep incentives a favored political tool, said Timothy Bartik, a senior economist at Michigan-based labor research nonprofit the Upjohn Institute.
“The reality is I think it's a political decision,” Bartik said. “If a governor wants to get re-elected, offering large incentives to a company is helpful.”
Many local officials say offering lucrative incentives is the only way they can compete in the race for new jobs and new companies.
“A lot of officials are saying when a company is looking to locate in their city, they have to pay for those deals,” Good Jobs First Research Analyst Kasia Tarczynska said. “This is the way you do deals in this country: provide tax abatements. I haven't seen much about local governments rethinking their incentive programs because of the pandemic.”
‘An Antiquated Way Of Doing Business’
A backlash against government incentives has been simmering the past couple of years, especially after Amazon’s nationwide sweepstakes.
Last year, the five cities and six counties that make up Northern Virginia agreed to not compete against each other for company site selection and instead market the area as a region. Now, the organization is hoping to expand with agreements of local governments in Maryland and also Washington, D.C., Hoskins said.
“We are not taking businesses from one another. We don't want to give incentives for them to leave one jurisdiction to another,” he said. “We're as concerned as anybody about this, because we're all taxpayers.”
Illinois state Sen. Bob Morgan is among a group of legislators pushing bills in various states that would eliminate the use of state incentives to lure businesses away from each other.
“I just think it's an antiquated way of doing business,” Morgan said. “Ultimately, there's still a cost to that, even if there's a short-term benefit.”
Morgan said many in Illinois got buyer’s remorse around the embattled retail giant Sears. In 2011, the retailer threatened to move its headquarters out of the Chicago suburb of Hoffman Estates. In response, then-Gov. Pat Quinn extended tax benefits to Sears that were set to expire a year later.
In 2018, the retail giant filed for bankruptcy. It continues to limp along today, but with far fewer stores and under a cloud of question marks as to its future survival — despite the incentives Illinois pumped into it.
“Millions of dollars were thrown at the company because of a threat. So, Illinois spent that money and the company still went bankrupt,” Morgan said, adding that those funds could have been used for other public services. “Instead, it was literally wasted.”
Morgan is one of the members of the Coalition to Phase Out Corporate Tax Giveaways, a bipartisan group of legislators from 14 states, including Arizona, Florida, Maryland, New York, Pennsylvania, Hawaii, West Virginia and Utah. The group is pushing laws that, if enacted, would mean participating states agree to not use taxpayer dollars to lure companies away from other states that are part of the compact. One such bill passed the Utah House of Representatives in February.
“We want to push back and take ownership of the process and not be pitted against each other,” New York Assemblyman Ron Kim told The Hill in February. “These giant corporations should be paying their fair share, just like any other mom-and-pop businesses. The government shouldn’t be in the business of picking winners and losers.”
While those state legislators push back, the bodies in charge of doling out those incentives are increasingly aware that tax incentives might not be the slam-dunk political victory of years past.
During a meeting last month of the board of Atlanta’s economic development arm, Invest Atlanta, board members voted on a half-million-dollar grant to BlackRock for a new IT hub and a tax break worth more than $800K for Invesco to open a new headquarters in Midtown. While both packages were approved, some Invest Atlanta board members expressed concerns about the incentives.
“I think it's still difficult in this time, when the most vulnerable parts of our city are in such great need, the optics of giving half a million dollars to a prosperous company in the midst of a pandemic when it's becoming clear that the kinds of jobs that BlackRock has are somewhat protected and there's other people in this community that are not protected,” Invest Atlanta board member Bill Bozarth said during a Nov. 19 meeting. Bozarth voted against the incentive.
Dulberger acknowledged that packages in the billions of dollars — like the $1.9B Invest Atlanta approved last year for developer CIM Group to build a huge mixed-use project on city-owned land in Downtown Atlanta — don’t always add up.
“It does seem to me that there are certainly packages out there, in particular for the megaprojects as stand-alone, don't seem to make sense,” Dulberger said. “It's tilting more in favor to the companies than the communities.”
While Memphis and Shelby County don't have the budget to pursue Amazon or Apple, Dulberger said even the smaller deals he has done might not pencil out on a pandemic budget.
“We simply don't have the resources. We can't be taking money from police and fire even for a very good long-term investment,” Dulberger said. “In today's environment, even in some of the projects we gave cash incentives to in the past, if they came along again today, that might be difficult to do.”