Home Advantage

I’m not ready to move on from the subject of yesterday’s post, which was triggered by the efforts of numerous cities to lure Amazon’s second headquarters.

Let me just share two additional observations, one from a recent study reported in Governing, and one emerging from a recent argument in Indianapolis’ City-County Council.

The Governing article shared a study done by the Urban Institute.

In choosing New York and D.C., Amazon opted for two cities that have led the economic expansion since the end of the last recession in 2009, far outpacing the rest of the nation in job growth. The decision drew the ire of politicians at the state and federal levels, along with others who had called on the tech giant to place its second headquarters in a city where it could play a more transformative role in the economy.

Yet a new study from the Urban Institute suggests that landing such a large corporation isn’t actually the best way to build a local economy and spur job growth.

If give-aways massive enough to “steal” large employers–to lure them from City A to City B (in what certainly seems to be a national zero-sum game) isn’t a sound growth strategy, what is?

Instead, the report says, cities should focus on growing existing local firms, not trying to lure out-of-town companies and poaching firms from other cities. “Most job expansion and contractions come from birth and deaths of homegrown businesses or expansion or contractions of existing home-based businesses,” says Megan Randall, a research analyst with the Urban-Brookings Tax Policy Center and a co-author of the report.

According to Randall, when so-called “marquee companies” locate in a new city, they tend to displace existing businesses, especially mom-and-pop stores. Supporting and expanding homegrown enterprises has been a more successful strategy for adding job growth.

Worse, giving up tax revenues to lure a new company puts a strain on local services, particularly schools.

As New York University business professor Scott Galloway put it in an email to Barron’s on Tuesday, the tax incentives from New York amount to “an elegant transfer of funds from municipal school/fire/police districts to Amazon shareholders.”

Cutting into services and school budgets makes the local workforce less attractive in the long run, and the location less alluring, the Urban Institute report notes….

Cities would be better served, according to Randall and other economic policy analysts, by improving schools and public services, and focusing on nurturing their existing network of businesses.

When a city offers tax giveaways to lure a company, the government goes into the negotiation with a marked disadvantage because of what economists call “information asymmetry.” The city doesn’t have all the information about what the company is looking for. In some cases, a company may choose a city it would have moved to anyway, pocketing the tax incentives even though they weren’t a deciding factor.

“Firms are in a advantageous position,” Randall says. “They know cities want to attract jobs and create opportunities for their residents. They know they are in the position to leverage a public benefit from what they have to offer.”

What the article calls “negotiation” is more often–and more accurately–described as extortion. And that brings me to a recent dispute in Indianapolis’ City-County Council.

Corteva is a company formed last year, as part of Dow Chemical’s mega-merger with DuPont. Delaware-based Corteva—which includes the local operations of Dow AgroSciences—is set to be spun off as a public company in June 2019, and it employs about 1,400 workers in Indianapolis.

The City-County Council approved 30 million dollars to “incentivize” the company to maintain operations in Indianapolis.  Most Councilors weren’t happy about it.

The incentive deal authorizes the issuance of $30 million in economic development revenue notes to Corteva from the city of Indianapolis, which would be paid back with about $5 million annually in tax increment financing funds that the city had been passing through to government units such as schools, libraries, parks, police and fire protection. Those entities would no longer receive those funds while the notes are being paid off.

The council voted 18-7 to approve the deal. Democrats Zach Adamson and Stephen Clay voted against the plan as did Republicans Jeff Coats, Danielle Coulter, Janice McHenry, Jefferson Shreve and John Wesseler.

Even council members voting yes weren’t happy.

“It’s not the best deal; I’m not excited about it,” said Democrat Jared Evans. But he said the long-term benefit of keeping the jobs in the community outweighed the short-term harm to the taxing units.

Zach Adamson characterized the incentives as “nothing short of extortion;” he was exactly right. Far too much of what passes for “economic development” is better described as bribery and/or blackmail. “What will you pay us to come?” and “What will you pay us to stay?”

These deals steal money that would otherwise be used to improve the local quality of life. And as the Urban Institute study reaffirmed, the quality of life–good schools, good parks, convenient transportation, effective public safety, etc.–is what really drives job growth and economic development.

When you rob Peter to pay Paul, you just make both of them poorer.

 

14 thoughts on “Home Advantage

  1. As the government is starved, the argument that it is failing and services should be privatized becomes more compelling, thus enriching the very corporations who have demanded tax incentives to come/stay in the city or state.
    The beneficiaries of this con game are not the city’s residents who get jobs, but the shareholders who likely have no skin in the game other than investment. The employees who get those jobs are the ones who ultimately have to make up for the city/state’s lost revenue but endure the lack of services no longer available as a result.
    Having a job should not mean a lesser quality of life but a better one. Roads, bridges, police, fire, schools, parks, transportation and libraries suffer the loss while the employed workers complain about having to pay all their income to taxes.

  2. Extortion is the exact term for it and it’s everywhere…the whole system is corrupted. Guess what industry lobbied for Citizens United and who ignores campaign contributions in their commentary today?

    The media.

    The pundits pretend these officials make these decisions on face value. They are made long before public meetings take place. Since good journalists can trace the kickbacks, like the Indiana lottery and casinos, the contributions are made in cash.

    The rules and laws only apply to the fair-minded church going, peoples. The masses need morality so they don’t wake up one day, realize they’re getting screwed, and take it all back. As Bernie would say, it’s rigged.

    Yes, Martha, the game we’ve been forced to play is rigged against us.

    Twitter erupted last week when Alexandria Ocasio-Cortez, a Democratic Socialist elected to Congress from New York wrote, “If you take money from the fossil-fuel industry, you shouldn’t be charged with writing climate change policy.”

    Then later wrote, “If you take money from the healthcare industry, you shouldn’t be in charge of writing healthcare reform.”

    Wait, what????

    How could something as innocent and patriotic like “Citizens United” actually be detrimental to our society? Just ask the media companies who lobbied for it because guess where those extra billions are spent???

    As our smartest posters observe, when we take a look at the simple law of Cause and Effect, we start seeing these amazing gaps and holes in the entire structure of society. The Koch funded GOP friends (including 150 universities) would say the solution is more free market capitalism. Anybody with reasonable sense would question that solution.

    So, let’s blame it on the corrupt politicians. Which side isn’t taking bribes?

    Those in the so-called center blame the “extremists” for all the chaos. This is our media’s favorite scapegoat, or “Russia.”

    The only logical solution is what the far left is offering but it’s actually not that fringe of an idea but when Ocasio made those comments last week, the media and politicians were aghast. MIND BLOWN.

    And Trump has done more for our society in two years than any other POTUS since FDR, just not for the reasons Fox News and Trump himself claim…”On this Thanksgiving, I am thankful for me!”

    Never has one phrase captured the term, Narcissist, better than those uttered by our POTUS, the leader of the “free world.” 😉

  3. Amazon probably had no intention of considering any other location than the finalists. Indianapolis has been through this process before with the Colts – and taxpayers in 10 counties are still paying for two stadiums that benefit who? Oh yes, the waitresses and waiters and parking attendants that “benefit” from the Colts playing football in our stadium. So we drive on substandard roads, we have marginal schools, we can’t afford to pay teachers in order to put millions in Mr. Irsay’s account. We’ll never recover the money spent on developing the proposal to attract Amazon, but at least we dodged the tax give away.

  4. “And as the Urban Institute study reaffirmed, the quality of life–good schools, good parks, convenient transportation, effective public safety, etc.–is what really drives job growth and economic development.” I guess Indy has to pay the extortion, since it has so little of the “quality of life” items. Sadly, some of us remember when it did have good schools, convenient transportation, and adequate public safety. Some of the parks are still pretty good.

  5. “Worse, giving up tax revenues to lure a new company puts a strain on local services, particularly schools.”

    These tax revenues to lure new companies is also used to gentrify older neighborhoods which results in ousting residents; often seniors, disabled and low income as well as the businesses in the areas. The eviction of such residents is the current situation at 222 South Downy Avenue in Irvington which was delayed one year due to intervention of an Irvington organization. The out-of-state developer was unaware of local zoning ordinances but that one year extension time-frame is ending. These residents have no assistance regarding their forced moves from a well-maintained, secure building; they are Indianapolis seniors, disabled and low-income. This has happened repeatedly in this city and others; those being forced out are the local residents whose taxes originally developed these areas and maintained them for decades. I have tried to put this issue before those in a position to help but have never received a response. No one wants to assist local residents; especially senior, disabled and low-income, some of whom may become homeless. There is no money to be made by assisting them.

    Giving away our tax dollars and providing tax abatements, frequently for out-of-state corporations is a major problem, part and parcel of the corporatism at the basis of “These deals steal money that would otherwise be used to improve the local quality of life.” It is in essence stealing from all of us who live in these cities where progress does NOT always mean improvement.

  6. Extortion is indeed the correct word to use in describing this farce. It reminds me of perhaps the first example of this when everyone was so giddy up about building what ended up being called “The Hoosier Dome”, at least for a period of time before it bore a corporate sponsor’s name. Back then a tax was placed on all fast food purchases on top of the 5% sales tax already accrued at least in the downtown area but perhaps through the entire county pay for this thing. I remember many discussions about this with my friends and colleagues that worked with me in Indiana State government at the time how most of the people that bought the fast food and paid the additional tax did not make enough money to go to the various sporting events that would be held in the building and that they would likely never set foot in the building as a result. The city even had a contest of sorts to name the building and solicited input from the general public. The suggestion I sent in was that they name it the “Toilet Bowl”. Of course, I did not win the contest.

    All of this is irresponsible yet because, as is usually the case with the public not paying attention or looking the other way wherever that direction is, this mode of financing just continues. I remember reading somewhere that extortion was illegal but I guess it the highest levels of government that rule does not apply. It’s no wonder that things are is screwed up as they are when amorality is an ingrained part of governance and is just accepted as just another part of American capitalism at work as well. I don’t know about you but it makes me want to puke.

  7. Let’s face it the key to disrupting a dysfunctional system is to remove what’s energizing or motivating it. In this case it’s political influence.

    At the root of our dysfunction is the need for massive campaign donations to get elected for almost any office. That’s the zero sum or arms race driver that has left voters nearly powerless. The system demands money, the money adds no advantage if it’s met by similar funding of the opposition, so those who donate it end up with power no matter who wins. Everyone is victimized by it except in the end those with the deepest pockets have accumulated the most influence.

    A motivated government could choose to end the whole thing merely by making all campaign funding from the tax payers. Set an amount to be spent for each office. Split it up among those who have a legitimate chance for each office. Specify what’s to be spent on, media vs staff. Supplement it with government sponsored debate for each office.

    It appears it’s also time to make illegal any attempts by any community to attract any business by giving them tax payer money.

    The solutions to our problems are not complicated but they do require politicians in office who are willing to break the egg to make the omelet.

  8. “Worse, giving up tax revenues to lure a new company puts a strain on local services, particularly schools.”

    I copied and past this a second time to bring up another use of our tax revenues to lure new companies and for special tourist attractions; how much did the presentation packages cost to submit to Amazon, et al, such as attempts to bring the Super Bowl here…two attempts, one successful. Didn’t it result in loss of revenues to those businesses in the downtown and near-downtown areas who geared up for the influx of out-of-towners here for the Super Bowl because suburban areas lured so many tourists who came for the game? I remember seeing homemade signs along main streets and roads; some in thousands of dollars to use private homes for the weekend of the Super Bowl.

    These local lures are just lower-level tax giveaways; Trump is spending our tax revenues as if his order to “print more money” was the magic solution to provide a bottomless pit of funds. And he is getting richer as WE pay for the care and feeding of those he takes with him to his Trump developments.

    Just sayin’

  9. This “capitalism” has also wrecked rural America. Trump was their molotov cocktail, as Michael Moore puts it. We must stop seeing each other as the enemy and blaming everything on one election and one very bad man.

  10. Back to the idea of corporatism. Since big corporations virtually own and control the destinies of the legislators who make the rules, how do we accomplish a change of rules that disfavor the rule makers? That seems so unlikely that when avarice fuels the inevitable violent resistance, the system will collapse in on itself. Although capitalism is a powerful system and could, in theory, work for everyone, its most powerful practitioners have taken it in another direction from which recovery may not be possible.

    Capitalism’s fatal flaw is that it contains no self-correction mechanisms. Instead, it seems designed to exacerbate its own problems. From such contradictions, as Marx pointed out, revolutions are born. We have yet to hear from a billionaire (maybe Buffet?) who thinks his life would remain satisfactory if his net worth declined by ten or twenty billion. Greed is the most insatiable appetite humans experience. It may yet be the source of our undoing. Capitalism demands endless growth in a finite, closed world. It sanctions inequality, racism, avarice, instability, war, pestilence and a deplorable set of values. Can it be fixed. Of course. Right after we re-engineer human nature.

  11. Terry,

    So speaketh Karl Marx 150 years ago. Unregulated capitalism will destroy itself from within.

    The patriotic and moral thing for Amazon to do would be to build their second headquarters in Nebraska or Kansas. After Sam Brownback gutted Kansas’ economy, a breath of economic life would have been the right thing to do. But no….

  12. Years ago when the massive new GM plant in Ft. Wayne was under consideration, the community’s taxpayers and the state gave GM millions in incentives including property tax abatements. The GM plant added new jobs and families with hundreds of new students for the schools to educate with a simultaneous loss of funds with which to build new classrooms and hire new teachers. Those new families AND the GM plant also put new demands on police and fire departments and new wear and tear on roads and streets. Taxes from local businesses were used to finance their competitor for employees and customer dollars.

    Other communities in Ohio and Michigan which sacrificed heavily to attract GM plants – displacing local neighborhoods, businesses and churches – are now seeing these massive plants close to move to China. I have to wonder if all those millions in incentives and infrastructure accommodations ever were fully repaid by the company to the taxpayers.

  13. We have all seen the advertising – come to Virginia, New York State is open for business, move to Ohio, etc.

    I keep waiting for the ultimate ad – “Hey business owner – you don’t know what ‘business friendly’ is until you move to Indiana. We don’t just outlaw unions, we shoot union organizers and other troublemakers. Taxes, Schmaxes – that’s for the peasants, not for you fine entrepreneurs. In fact, you will receive a yearly tribute of 5,000 talents of gold and seven sacrificial virgins. Indiana wants your business!”

    Now that I said it, I am worried that it might actually come to pass. Nothing seems too bizarre in the era of Trump.

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