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The Great American Jobs Scam

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For the past 20 years, corporations have been receiving huge tax breaks and subsidies in the name of "jobs, jobs, jobs." But, as Greg LeRoy demonstrates in this important new book, it's become a costly scam.
Playing states and communities off against each other in a bidding war for jobs, corporations reduce their taxes to next-to-nothing and win subsidy packages that routinely exceed $100,000 per job. But the subsidies come with few strings attached. So companies feel free to provide fewer jobs, or none at all, or even outsource and lay people off. They are also free to pay poverty wages without health care or other benefits.
All too often, communities lose twice. They lose jobs--or gain jobs so low-paying they do nothing to help the community--and lose revenue due to the huge corporate tax breaks. That means fewer resources for maintaining schools, public services, and infrastructure. In the end, the local governments that were hoping for economic revitalization are actually worse off. They're forced to raise taxes on struggling small businesses and working families, or reduce services, or both.
Greg LeRoy uses up-to-the-minute examples, naming names--including Wal-Mart, Raytheon, Fidelity, Bank of America, Dell, and Boeing--to reveal how the process works. He shows how carefully corporations orchestrate the bidding wars between states and communities. He exposes shadowy "site location consultants" who play both sides against the middle, and he dissects government and corporate mumbo-jumbo with plain talk. The book concludes by offering common-sense reforms that will give taxpayers powerful new tools to deter future abuses and redirect taxpayer investments in ways that will really pay off.

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Chapter One: The Tax Dodgers Are Coming! the Tax Dodgers Are Coming!

ePub

The Great American Jobs Scam is actually a collection of scams that have evolved over the past half-century and especially over the past three decades. These scams both rely upon—and reinforce—several factors. They rely on taxpayer confusion about the causes and effects of job creation. These scams thrive when the purported benefits—especially jobs benefits—of tax cuts and other subsidies are played up, so companies must exaggerate the positive impact while the business basics of location behavior are played down. They rely on taxpayer costs being kept vague, understated, or hidden. They need program rules to stay loose and unaccountable so that when a company fails to deliver, it suffers no consequences. They flourish when governments fail to monitor the real outcomes on jobs, wages, and other benefits. And most of all, these scams are built upon a corporate-controlled definition of “competition” that prevents government officials from cooperating in taxpayers’ best interests.

A textbook chapter in the Great American Jobs Scam unfolded in 1995 in Massachusetts. All the characters from Central Casting were there: the high-profile company that threatens to leave unless it gets big tax breaks; the business lobby; the business lobby’s “rented economist” whose dire prediction or rosy forecast gets far more attention than the sober findings of a government commission; the former gubernatorial aide-turned-lobbyist; and even a union of workers convinced—for the moment at least—that a big tax break will secure their jobs. And oh yes: lots of rhetoric about jobs, jobs, jobs, with loopholes hidden in the fine print.10

 

Chapter Two: Site Location 101: How Companies Decide Where to Expand or Relocate

ePub

[As a businessman] I never made an investment decision based on the Tax Code… [I]f you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements, they do it because they can see that they are going to be able to earn the cost of capital out of their own intelligence and organization of resources.

—Paul O’Neill, former CEO of Alcoa
and President George W. Bush’s first Secretary of the Treasury
1

How companies decide where to expand or relocate is not rocket science. Their decision-making process is driven by business basics; subsidies rarely make a difference. The trouble is, the way the system is rigged, companies are getting huge subsidies to go where they would go anyway.

Here’s a typical search process. A company of substantial size will usually hire a site location consultant to perform the research on new locations. If the company doesn’t use a consultant, it will assign lead duties to one of its divisions, usually real estate or finance. In either case, a management team will coordinate with the consultant or internal lead, providing input about what the company needs, from operations, sales, and other departments.

 

Chapter Three: Fantus and the Rise of the Economic War Among the States

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We’re familiar with the needs of industry. We have a wealth of information on what particular industries want. We know the real reasons they move, not the phony baloney reasons they sometimes give out.

—Maurice Fulton, manager, Fantus Company, Chicago
(the long-dominant site location consulting firm)
1

Site consultants think about states the way 17-year-old boys think about 17-year-old girls.

—Jay Hancock, Baltimore Sun2

In the depths of the Great Depression, a young Chicago industrial real estate salesman named Leonard Yaseen grew impatient with his father-in-law and boss, Felix Fantus. The old man was doing a lot more for his corporate clients than helping them buy and sell real estate. He was giving companies that sought to relocate their factories information not just about land and buildings, but also about transportation and utilities, local wages and taxes. He had been doing this since 1919, when he performed his own site location search to move his chair-manufacturing plant from Chicago to Indiana. Fantus was giving all this valuable information away for free, and Yaseen thought they should be charging for it.

 

Chapter Four: “Single Sales Factor” and the Corporate Assault On the Income Tax

ePub

Suppose you’re a manufacturing comexecutive and you pany don’t like paying corporate income tax to your home base state. How’d you like to get an 80 or 90 percent tax cut? All you have to do is file your tax return, using a special new formula. No conditions, no strings attached. Just file your return and pay a tiny fraction of what you used to pay. Oh, just one more thing: be sure your state manufacturers’ association keeps saying over and over again that this gigantic tax cut will create jobs, jobs, jobs. Maybe have it rent an economist to issue a rosy study. Remember, you’re for jobs, so anyone who opposes this giveaway scheme must be against jobs.

Welcome to the magical world of “Single Sales Factor” (SSF), in which manufacturing lobbyists have gotten some state legislatures to radically rewrite their corporate income tax codes, considered SSF in the past decade rsometimes under the threat of losing a major employer. The fact that several states have considered SSF in the past decade reflects the mutation of subsidies from their originally stated purpose—of job attraction and multistate competitions for specific projects—to job retention and multistate rewriting of entire corporate tax codes.

 

Chapter Five: Property Tax Abatements and Your Local School

ePub

For our clients, education has been found to be the single most important service, greatly exceeding the value of all other services combined.… The single most important factor in site selection today is the quality of the available workforce … in fact, a qualified workforce may be the single most important determinant in the economic development success of any community.

—Robert Ady, longtime Fantus executive,
said to be the nation’s most experienced living site location consultant
1

Companies love to locate in areas with good schools; they just don’t like to pay for them. American families care a lot about their schools, too. They often move and accept higher housing costs to gain access to better schools. And they support bond issues for public schools at a greater rate than they do any other service except healthcare.2 The trouble is, families don’t get a 10-year holiday on their property tax for moving into their preferred school district, but companies often do.

When corporations seek to avoid paying their fair share for schools and other local services, the issue is bigger than who bears the burden. The corporate assumption that businesses are entitled to property tax abatements—or the related subsidy, tax increment financing (TIF)—is threatening our economic future by harming our schools.

 

Chapter Six: Subsidizing Sprawl, Subsidizing Wal-Mart

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Subsidizing economic development in the suburbs is like paying teenagers to think about sex.

—Lyle Wray, Minneapolis Citizens League 1

Does your metro area suffer from suburban sprawl? Here’s a checklist of diagnostic indicators to help you find out.2

As was the case for the proverbial judge who couldn’t define pornography but knew it when he saw it, sprawl means different things to different people. However you define it, sprawl is a very serious problem, a huge drag on our economy and our health. It worsens racial inequality and costs us thousands more acres of natural spaces every day. In most metro areas, our built environment has grown dysfunctional, and it’s getting worse fast.3

As if all that weren’t bad enough, you guessed it: taxpayers are often subsidizing sprawl—in the name of jobs. The economic war among the states is a serious problem, but so is the economic war among the suburbs.

Taxpayers pay for sprawl when they subsidize corporate relocations, many of which go from older core areas to newer fringe areas. Those are the most typical corporate moves—within the same metro area, so firms can retain their workforces and stay close to their suppliers and customers. But when companies move outward, that often means jobs move away from public transit, away from areas of high unemployment, maybe even away from areas with existing infrastructure into “greenfields”; that is, farmlands or natural space.

 

Chapter Seven: Loot, Loot, Loot for the Home Team

ePub

The pride and the presence of a professional football team is far more important than 30 libraries.

—Art Modell, owner of the Cleveland Browns
(later the Baltimore Ravens) football team
1

Americans have a love affair with professional sports, and, as with other types of romance, we like to spend money on the relationship. Total outlays on big-league sports—tickets, advertising, broadcast rights, and so on—are well in excess of $100 billion a year.2

Yet not only private funds are involved. In cities across the country, taxpayer dollars have been used to help finance the construction of expensive new stadiums. Compilations prepared by the National Sports Law Institute of Marquette University Law School show that public funding has, in fact, become the norm. The Institute’s profiles of the stadiums or arenas used by the 92 teams in the three major sports (football, baseball, and basketball) indicate that 83 of them—or more than 90 percent—were built to some degree with public money. Among those, the public paid a majority of the cost in 63 cases, including 32 instances in which taxpayers footed the entire bill.3 The grand total of public money used in building the 83 subsidized stadiums has been roughly $10 billion.4

 

Chapter 8: Shifting the Burden

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There is a mountain of evidence, from national statistics and from individual states, that over the past 25 years corporations—especially big ones—are getting lower tax rates and paying a smaller share of the cost for public services, shifting the burden onto everyone else. The evidence on income taxes is especially disturbing: data from many states now show that a lot of big companies are paying zero state income taxes, or only tiny minimum taxes.

The evidence comes from government studies of state revenue and corporate expenses, from academics creating financial models of subsidized companies, from taxpayer watchdog groups, from studies of large publicly traded companies—even from a few angry governors and state treasurers. Experts analyzing this data conclude that tax breaks enacted in the name of jobs are a major culprit, along with surging corporate use of loopholes like Delaware Passive Investment Companies.

First, the national evidence. The Congressional Research Service (CRS)—a nonpartisan body that works exclusively for members of Congress—tracks the long-term trend in state and local corporate taxes for all domestic companies except banks and other financial institutions. It reports that the effective corporate rate for all state and local taxes—income, property, sales, excise, and utility taxes, and so on—has declined sharply over the past two decades. Specifically, the CRS found that in the 1980s, companies paid an average of 6.93 percent of their profits in all state and local taxes. In the 1990s, the average rate was 5.12 percent, and by 2002, the last year studied, the rate had declined to just 4.99 percent. That’s an overall rate decline of 28 percent.1 169

 

Chapter Nine: Building a New Consensus for Reform

ePub

Given how costly and wasteful this great American jobs scam has become, you’d think that our public officials would be proposing drastic solutions. For the most part, you’d be wrong. Corporate domination of the public dialog on jobs is so complete, the typical debate these days is about cooking up new giveaways—not about fixing the system.

We are, after all, talking about $50 billion a year’s worth of entrenched self-interests tied to business as usual: footloose corporations, site location consultants, accounting firms and tax consultants, corporate real estate brokers, mayors and governors.

Given all those self-interests, there is no silver bullet. Only an organizing approach to the problem will do. By that I mean reforms that bring lots more people into the process. The real heroes moving this issue are the taxpayers: members of unions and community groups, budget watchdog groups and investigative journalists, environmentalists and land-use activists. We need reforms that make it possible for many more taxpayers to get involved. The politicians will surely follow.

 

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