State and local governments grant tax credits and incentives to large corporations for choosing to setup shop in their cities. The lure of creating new jobs and boosting the local economy spells success for state and local government officials. Elected officials, in particular, can fuel their campaigns with success stories of job creation and economic development. But does the average citizen really understand how these deals work?
With such an upside, governments seem foolish not to grant these benefits. When large corporations come to town, they can provide a boost to the local economy in many ways. Whether it’s a new corporate office, distribution center, manufacturing facility, or combination thereof, this often requires the construction of a new building or the renovation of an existing one. The effort typically employs architects, developers, general contractors, and interior designers along the way. Shiny new jobs for the operation are then created, thus giving local constituents the opportunity for employment. As more people are employed, more taxes are paid at both the corporate and individual levels which generates more funds for taxing authorities to deploy. Local businesses like restaurants and boutique stores also benefit when these companies come to town. With more citizens who have disposable income, local businesses see an uptick in their sales and governments see their coffers grow through increased income tax, sales tax, and/or property tax.
However, here are a few things to note about the mechanics of these incentives. In most cases, they must be earned by the company through performance. In other words, a company has to invest capital and employ people in order to receive them. These incentives do not equate to money sitting in a bank account or a general fund that’s diverted, rather they typically are earned. In the case of Amazon and their proposed $2.6 billion tax credit in New York:
Excelsior Program would provide $1.2 billion in refundable tax credits if Amazon created 25,000 net, new jobs by 2028.
Capital grant of $505 million as a reimbursement for the cost of building their new headquarters.
$900 million through the city’s REAP program, if they meet the city’s requirements. (Note: this program is available to any business that meets the REAP requirements).
As with some things in life, tax incentives do have a downside. They can be wildly unpopular since most of these negotiations are shrouded in secrecy. Given the lack of transparency, the average taxpayer has no insight into the return on investment due to the complexities of these deals. To make matters worse, most jurisdictions do not have adequate oversight to ensure incentive requirements are actually being met. Though in some cases where controls are in place, companies that fall out of compliance can be forced to repay the jurisdictions under clawback clauses built into the agreements.
In 2012 a New York Times study estimated that a combined total of $80 billion of tax credits and incentives are granted by state and local governments in the United States each year to foster economic development and create new jobs. By all accounts, this number has ballooned and many estimate that number to be north of $100 billion today. What is unclear, however, is how much tax revenue is generated from these savings. Equally unclear is how to derive the true cost. Case in point, the State of Wisconsin recently offered $3 billion in tax credits and incentives to Foxconn to bring its new facility to the City of Racine. While an estimated 13,000 new jobs were expected to be provided, the cost to the state and its residents are estimated to run approximately $230,000 for each new position created. The state is not expected to recover its investment until 2043, potentially impacting the level of public service and education that it can provide. And now Foxconn has changed its original estimates and no one really knows if those jobs will ever happen.
Large corporations are eager to take advantage of these incentives. Whether driven by altruism, greed, or just good business sense, there is very little downside to taking advantage of these incentives if a company can meet its objectives. According to Good Jobs First, Amazon has received over $2.3 billion in tax incentives over the past two decades. Even President Trump’s organization in New York received over $123 million in property tax abatements and other incentives. Does the average taxpayer know these details? In most cases, the answer is no. So it’s no wonder that Trump has systematically embraced these incentives. Before he was inaugurated, Trump showed up in Indiana with Vice President Pence to announce the incentives deal with Carrier that was keeping 1,000 jobs in the U.S.
While tax credits and incentives can provide new jobs and foster economic growth, without transparency and adequate controls in place most citizens are left to wonder how these agreements really work. But investors have already pushed the Securities & Exchange Commission (SEC) to create better financial reporting regulations to close these gaps. The resulting good news surrounding this issue lies with a new accounting standard that will require corporations to disclose information on their incentive deals. If you’re interested in more information on that regulation, you can read about it here.
