The Petition to End Corporate Welfare As We Know It-- and End the Economic War Among the States sign now

Do you think that Congress should delay no longer in passing the Distorting Subsidies Limitation Act (first introduced in 1999 by Rep.'s Dennis Kucinich, Bernie Sanders, Barney Frank, Earl Pomeroy, and David Minge)-- legislation to enact a 100\% tax on any subsidy provided by a state or local government to a corporation to locate into or remain within a government's jurisdiction-- effectively rendering such subsidies ineffective and unneeded (thereby saving billions annually for NYS taxpayers, for example)?

If you do, sign on to this petition and pass it along to all you know.

For years the Fiscal Policy Institute and Federal Reserve Bank of Minneapolis (since 1994) have long endorsed such a law as crucial in the effort towards "state and local governments thus laying down their arms in this escalating economic war, the resulting truce to benefit all of society" (see FiscalPolicy.org, GoodJobsFirst.org, GreatAmericanJobsScam.com, FiscalPolicy.org/HR1060.htm).

Corporations like IBM as it is now already pay half the taxes to Albany that it did in the early 70's under G.O.P. Gov. Nelson Rockefeller. [see Fiscal Policy Institute information on this:
FiscalPolicy.org/publications2008/20082009BriefingBookJanuary18.pdf]

For example, just this June the Dutchess County Industrial Development Agency approved an agreement to extend an existing abatement of the state's 4 percent sales tax on internal transfers of computers-- by offering additional reductions to portions of Dutchess County's 3.75 percent sales tax-- but as the Poughkeepsie Journal reported May 31st, "the proposed deal would not require any increase in jobs to get some break and could even allow a drop of 84 jobs in 2009" (to his credit, Co. Leg. Dan Kuffner voted against this deal).

Fact: IBM let go 265 employees last year-- while increasing their profits by over a billion dollars, according to Mike Salvia, treasurer for the Hudson Valley Area Labor Federation in his letter to the editor in the Poughkeepsie Journal June 1st. It's no wonder that by a 272-to-121 margin (more than two-to-one), the vast majority of Poughkeepsie Journal readers answered "no" to the May 31st "Speak Up" question that day-- "Will renewing a county sales tax break to IBM Corp. encourage job retention and plant investment?

Fact: IBM had about 11,600 employees in Dutchess County as of the end of 2007; only 11,517 people would need to be on the payroll as of April 28, 2009, to qualify for the first level of tax break, which would cut the county portion of sales tax to 3.125 percent from the usual 3.75 percent, and only 11,546 would need to be working at IBM for the corporation to get the biggest break, cutting the tax to 1.875 percent.

Enough-- the buck stops here-- the small businesses and taxpayers of Dutchess County, New York, and the U.S. deserve no less.

Contact Congress at (800) 828-0498, our governor and state legislature at (877) 255-9417, and the Dutchess County Legislature on this at [email protected] (documentation has been submitted by yours truly to Co. Leg. offices for passage of resolution on this).

Perhaps most importantly-- again-- sign this petition to end corporate welfare as we know it-- and pass it along to all you know.

Joel Tyner
Dutchess County Legislature Environmental Committee Chair
County Legislator (Clinton/Rhinebeck)
324 Browns Pond Road
Staatsburg, NY 12580
[email protected]
(845) 876-2488

[for dozens of examples across the country of corporate welfare similar to what IBM has received here in NY, see: GoodJobsFirst.org/corporate_subsidy/reference_material.cfm-- and check out the 1994 Annual Report Essay that started all of this off-- "Congress Should End the Economic War Among the States" by Melvin L. Burstein and Arthur J. Rolnick of the Federal Reserve Bank of Minneapolis here: http://woodrow.mpls.frb.fed.us/pubs/ar/ar1994.cfm; also see these four:
http://www.fiscalpolicy.org/EndingTheEcoWarAmongTheStates.pdf;
http://www.fiscalpolicy.org/publications2008/FPI_EconDevtBrief_Feb2008.pdf;
http://www.minneapolisfed.org/Research/studies/econwar/HR1060.cfm;
http://oversight.house.gov/documents/20070329144749-35526.pdf]

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From the July 27th Albany Times-Union and Times Herald Record-- these two articles from Christine Young...

"Does Giving Big Green to Big Blue Pay Off? States Throw Money at IBM, But Company Shifts Jobs Around the Globe"
http://timesunion.com/AspStories/story.asp?storyID=706921&TextPage=2

"Across the Nation, IBM Leaves a Trail of Broken Promises"
http://www.recordonline.com/apps/pbcs.dll/article?AID=/20080727/BIZ21/80725017

It was December 2004, and Tulsa, Okla., was abuzz with excitement.

IBM, which already employed more than 1,200 in Tulsa, had made a deal with Oklahoma to add another 1,000 jobs by 2009. In return, Big Blue would get $35.2 million in rebates over 10 years.

Calling it "great news for Tulsa and for all of Oklahoma," Gov. Brad Henry praised IBM as "a vital and valuable corporate citizen." He said the deal "signifies good things for both IBM and Tulsa."

He was only half right.

Since the 2004 agreement, the Oklahoma Tax Commission has sent Big Blue more than $4.4 million in rebates. Yet state figures show the company's job count is the same today as it was before the deal was signed.

This raises questions for the state of New York and Albany, where the ink is still drying on an agreement with IBM that will cost taxpayers $140 million for promises of job creation and economic development.

IBM employs hundreds at the University at Albany's College of Nanoscale Science and Engineering on Fuller Road, site of much of the company's cutting-edge computer chip research. It also has a big office in downtown Albany on State Street, devoted largely to serving state government clients.

And while Big Blue is one of New York's largest employers, with 11,600 workers in Dutchess County and 20,000 across the Hudson Valley, Oklahoma's experience offers a cautionary note and reason to wonder if New York's investment is money well spent.

Economic development packages are great for politicians. Jobs are promised, deals are signed, happy headlines are made.

But what happens after the hoopla?

Since the Oklahoma celebration, there appears to have been no follow-up or oversight by the state.

Last week, the marketing director for the Oklahoma Department of Commerce had no idea if IBM had kept its end of the bargain.

"I would imagine that they had," Beth Schmidt said. "It's performance based -- if they meet the requirements and add those jobs."

Yet a January report from Schmidt's agency shows IBM Tulsa's payroll remains near 1,200, the same as it was before the agreement.

And in May, IBM announced 350 Tulsa accounting and finance positions were going to Argentina...

Exuberance over IBM's presence, be it in Oklahoma or New York, is not unusual.

In Boulder, Colo., the city doled out a $100,000 tax rebate to IBM on top of state incentives worth $632,000 to get Big Blue to put a "green" data center there.

"The city's money was really an indication to IBM corporate that Boulder really cares about having this company here," Frances Draper of the Boulder Economic Council told reporters.

"That was an incredibly important part of their decision."

This year, IBM has slashed 400 jobs in Boulder.

And the dirty secret is no one wants to take on IBM for fear of losing jobs and hurting the local economy, especially in areas such as Dutchess County, where IBM is such a vital player.

"Nobody wants to throw the baby out with the bath water," Dutchess County Legislator Joel Tyner said.

And so New York went ahead with a pact with IBM, requiring a hefty donation from taxpayers, announcing it one day before Big Blue's second-quarter profit jumped a dizzying 22 percent to $2.77 billion, defying even Wall Street's expectations.

The agreement with the Westchester County-based technology giant, announced by Gov. David Paterson on July 15, calls for a $1.5 billion investment by IBM and $140 million by the state.

It includes $75 million from taxpayers for 1,000 new jobs-- 325 at UAlbany's NanoCollege and another 675 at an upstate facility that has yet to be sited.

The remaining $65 million will help finance the expansion and upgrade of IBM's East Fishkill plant, in return for IBM's pledge to retain 1,400 semiconductor jobs at the Dutchess County site.

Paterson said the arrangement is "what we are going to need to reignite the engine of the state's economy."

But to Frank Mauro of the Fiscal Policy Institute, a nonpartisan research and education organization in Latham, it brings a sense of deja vu.

Mauro recalls in 2000, then-Gov. George Pataki announced New York was bankrolling IBM with $660 million in state and local incentives. In return, the company would invest $2.5 billion in East Fishkill to create the world's most advanced computer chip plant and 1,000 "permanent" jobs.

Eight years later, 1,400 people work at the East Fishkill plant. But Mauro wonders why the state suddenly has to pay another $65 million to keep them there.

It "seems like double billing, since New York state and local taxpayers already paid an estimated $660 million for those 1,000 jobs," he said. "It would be good to know ... how long IBM was required to maintain those 1,000 jobs"...

Dutchess County, where IBM has invested more than $5 billion over the past 10 years, recently gave Big Blue a tax break for a possible $36 million upgrade of its Poughkeepsie plant.

The upgrade would give Poughkeepsie a competitive edge against IBM sites elsewhere, such as North Carolina and Colorado, said Michael Tomkovich, chairman of the Dutchess County Industrial Development Agency.

Tyner, the county legislator, called the breaks a "bad deal" for local taxpayers.

"It's time to end this economic battle between the states," he said. "We need to remove the ability of these companies to hold us over a barrel."

In fact, Big Blue scored big in North Carolina by leveraging competition among states.

IBM is the largest private employer in Durham's Research Triangle Park, where 11,000 workers are on its payroll. Last month, the company asked Durham County for $750,000 in up-front incentives to construct a "leadership data center."

The project would convert unused warehouse space on IBM's campus into a customer briefing center with support services, creating 10 new jobs.

After being told by a local IBM representative that Durham was competing with sites in New York and Colorado for the $362 million project, county commissioners unanimously approved the deal.

Asked where in New York state the data center might be built, an IBM spokesman said no such thing had been discussed.

"We have discussed the potential expansion of an existing data center at our Poughkeepsie site," Jeff Couture said, "but this is a separate project."

Asked why Durham was told it was competing against New York, he changed his answer.

"We're not disclosing the possible location in New York at this time," Couture said.

Two weeks after Durham commissioners approved the incentives, IBM laid off 30 workers in Durham.

Despite the tax breaks, Tyner says the number has steadily decreased over the years, and he fears the bleeding won't stop.

"I get frustrated, because people forget, if they ever knew, that corporations like IBM are paying half the taxes they used to," he said. "And who's going to pay for it? You and I."

Financial promises

GOV. PATERSON'S 2008 DEAL Will create up to 1,000 jobs upstate and help retain more than 1,000 jobs IBM to invest $1.5 billion State to invest $140 million Supports IBM's nanotechnology chip computer activities Expands IBM's operations at the College of Nanoscale Science and Engineering at the University at Albany Creates a 120,000-square-foot semiconductor packaging research and development center somewhere upstate Upgrades East Fishkill semiconductor plant

GOV. PATAKI'S 2000 DEAL Created East Fishkill semiconductor plant Created 1,000 jobs and Retained 5,048 jobs (Goal not met) IBM invested $2.5 billion State invested $475 million in tax breaks and incentives (Not paid because goal not met) State pledged $28.75 million in grants and loans State pledged $156 million in sales tax exemptions and local benefits and tax breaks

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From http://www.ctj.org/html/corp0402.htm ...

Citizens for Tax Justice April 17, 2002

Surge in Corporate Tax Welfare Drives Corporate Tax Payments Down to Near Record Low
A startling surge in corporate tax welfare is expected to drive corporate income taxes over the next two years down to only 1.3 percent of the gross domestic product. That will be the lowest level since the early 1980sand the second lowest level in at least six decades.

IBM reported $5.7 billion in U.S. profits in 2000, but paid only 3.4 percent of that in federal income taxes. In 1997, IBM reported $3.1 billion in U.S. profits, and instead of paying taxes, got an outright tax rebate. Over the past five years, IBM enjoyed a total of $4.7 billion in corporate tax welfare.

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From http://www.syracuse.com/news/index.ssf?/base/news-0/1215939359223980.xml&coll=1 ...

"Little done to fix Empire Zone tax program: Legislature fails to approve reforms. Tax Department denied benefits only to 7."
[Syracuse Post-Standard 7/13/08]
By Mike McAndrew

A year after a consultant to the governor called the Empire Zone tax breaks ineffective, New York has made little progress in fixing the nearly $600 million-per-year program.

A state Tax Department crackdown on businesses that took advantage of the program's loopholes resulted in benefits being denied to seven businesses.

The state agency that runs the Empire Zones has had minimal success in weeding out businesses that haven't created jobs.

And the Legislature recessed last month without approving Empire Zone reforms. For the second consecutive year, the Assembly in June passed a sweeping Empire Zone reform bill, but the Senate ignored it.

That allows NRG Energy, a company that owns electric generating plants in Oswego, Tonawanda and Dunkirk, to hire a handful of workers and continue to claim Empire Zone tax credits worth $20 million per year.

"The people who cared deeply about Empire Zone reform still do. But it's not the subject of widespread attention from a lot of legislators," said Frank Mauro, executive director of the liberal Fiscal Policy Institute.

The Legislature created the Empire Zone program in 2001 to spur job growth and attract new companies to economically depressed areas.

But existing companies took advantage of loopholes in the Empire Zone law. They discovered they could change their corporate name, claim all of their old employees were "new" workers, and qualify for Empire Zone tax breaks for 13 years.

The cost of the program jumped from $30 million in 2001 to nearly $600 million last year.
Sen. James Alesi, R-East Rochester, who chairs the Senate's commerce and economic development committee, said the Empire Zone program's benefits do not justify their cost.

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From Clawback.org...

"Out of theZone" by Allison Lack
[July 15, 2008]

New York States widely criticized Empire Zone program (known as Enterprise Zones in most states) is in a state of disorder. This past weekend, the Syracuse Post-Standard reported on the lack of progress by government officials and state agencies in making the program more effective. The article points to mild reform legislation that didnt pass, and efforts by the state to kick out only a handful of the ineligible companies registered with the program (a subject on which weve previously blogged). But as critics call for the state to do more to rein in Empire Zone tax credits, New York City has been expanding them.

In recent months, the city has taken steps to bring some previously ineligible companies into the program by granting them the status of regionally significant projects (RSPs). Empire Zones were established to subsidize companies creating jobs in economically stressed communities, but RSPs dont even need to be in an Empire Zone in order to receive the multitude of tax credits available to companies that are. The concept of RSPs was created in 2005 by the New York State legislature, but until late last year all NYC companies receiving Empire Zone credits were physically located with a Zone.

Last December the city approved designation of its first RSP, and last month it held a hearing on another (which has not yet been approved). Good Jobs New York testified at hearings for both projects (first and second), arguing that while these two companies seem to be responsible employers creating good manufacturing jobs, New York City must be very careful in opening the door for more companies to take advantage of a program that has been described as perhaps the best example of good economic development intentions gone wrong.

The Empire Zone program was created to bring jobs and investment into impoverished communities, but it has strayed far from its initial intent. Clearly, the program is broken (a number of lawmakers think its beyond repair). And if something is broken, fix it - dont add to it.

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From "Getting Our Money's Worth: The Case for IDA Reform in New York State"
[New York Jobs With Justice May 2007 ( http://www.nyjwj.org/docs/GO$W.pdf)]

IDA's in New York provided $385 million in tax exemptions in 2005, and a total of $1.1 billion in tax exemptions between 2003 and 2005. The $385 million in tax exemptions resulted in a net loss of $266 million in property taxes to local governments An additional $119 million was lost to the state government and local governments through sales and mortgage recording tax breaks. Most businesses subsidized by IDA's are not creating the The total number of jobs promised by subsidized companies was 217,000 in 2005; the total number of jobs actually created was 79,000. 62 IDA's, or 69\%, subsidized companies that actually cut jobs, 13 IDA's experienced overall job loss in 2005. Nearly half of all IDA-subsidized projects in 2005 were failed projects: IDA's do not collect the required reporting data from more than half of the projects they subsidize-- only 52\% of data. 60\% of IDA's did not provide data for more than half of the projects they subsidize. 21 IDA's, or 19\%, did not provide any data for analysis of job creation performance. In 2003, New Jersey established a Business Employment Incentive Program, which stipulates that companies using state aid must provide full-time jobs with health benefits. Under this program, companies can also qualify for higher benefits based on paying prevailing and living wages to their workers. In a study of 119 officials in municipalities across the nation with standards on development subsidies, 103 reported that 'job quality standards do not adversely affect business climates...In fact, all ten of the top-ranking 'pro-business states''-- Virginia, South Carolina, Florida, North Carolina, Utah, Wyoming, South Dakota, Alabama, Georgia, and Nebraska-- have enacted wage standards on development subsidies...New York IDAs with wage standards include Ulster County, Nassau County, Oswego County, Rockland County, Suffolk County, and Babylon and Hempstead IDA's; New York IDAs with regional hiring policies include the Ulster IDA, Rockland IDA, Monroe IDA, Onondaga IDA, Oswego IDA, Clinton IDA, and Hempstead IDA.

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From http://www.fiscalpolicy.org/syracuseAug2000speech.htm ...

"De-escalating the 'Economic War Among the States' and Reforming the Development Subsidy Game"
Presentation by Frank J. Mauro, Executive Director, Fiscal Policy Institute
At the Syracuse University Continuing Education Program's Summer Lecture Series on "The Role of Financial Incentives in State and Local Economic Development"
Maxwell Auditorium Syracuse, New York
August 2, 2000

From a national economic perspective, not much good comes from the use of governmental subsidies to convince a firm to move from one part of the country to another. The use of public resources to convince a firm to stay put helps to avoid the problems associated with dislocated workers and abandoned buildings. But in the end, regardless of who wins, such bidding wars do not increase the overall size of the economy nor are they an efficient way to use governmental resources to increase industrial productivity.

The political realities of our decentralized system of government, however, require Governors, Mayors and County Executives to, in effect, "compete" with other Governors, Mayors and County Executives. In terms of practical politics, no Mayor or Governor or County Executive can not risk the political fallout that could come from unilaterally disarming in the current environment.

The Minneapolis Fed's proposal would resolve this "prisoner's dilemma." As the title of their 1995 essay, "Congress Should End the Economic War Among the States," indicates, Burstein and Rolnick believe that Congress should exercise its powers under the commerce clause to save the states and cities from themselves. Their specific proposal, which has been introduced in the House of Representatives by Minnesota Congressman David Minge, is for the federal government to tax away the value of subsidies provided to businesses by state and local governments. This would eliminate the rationale for either providing or accepting such subsidies.

In a 1979 book entitled The Last Entrepreneurs: America's Regional Wars for Jobs and Dollars, Professor Robert Goodman of Hampshire College argued that the American economy was characterized by decreasing competition among businesses but increasing competition among state and local governments for businesses to locate in their jurisdictions. Goodman said that this new form of entrepreneurship was really a zero sum game, the net effect of which was to simply shift jobs around, not to increase the size of the pie.

Since Goodman's book was published, the competition that he described has become more intense and more destructive. Over the last seven years, the Federal Reserve Bank of Minneapolis has taken the lead in calling for a concerted effort to address what it describes as "the economic war among the states." In an influential 1995 essay, two of the Minneapolis Fed's senior officers - Mel Burstein, its general counsel, and Art Rolnick, its Director of Research - went a step further than Goodman, arguing that the escalating competition among the states is really worse than a zero-sum game because it reduces the amount of money available to do the things that government must do if our economy is to grow and prosper. Their view is that the business incentives game results in a misallocation of public resources, with money that should be spent on schools, roads and police protection going instead to individual business in a process that is inconsistent with the workings of a free market economy.

No state has a greater stake than New York in ending the destructive "economic War Among the States." Over the years, many of the biggest battles in this war have been fought out in New York City. The unusual geography of the New York metropolitan area makes it easier to reach mid-town Manhattan from many New Jersey locations than from most parts of the city itself. And, as a major center of economic activity with a reputation as an expensive place to do business, economic developers from around the country have, for decades, set their sights on the Big Apple. In response, New York State and New York City pump millions of dollars annually into so-called "retention deals" - thus diverting important resources from the public services and infrastructure investments that represent their primary responsibilities in regard to the fostering of private-sector economic development. To end this misallocation of resources, New York State should join with the Minneapolis Fed in seeking a national solution to this problem.

Throughout our nation's history, state and local governments have done much to facilitate the growth and development of the American economy. They built an impressive physical infrastructure and developed the nation's human capital without which our private sector economy could not have prospered. In fact, almost everything that state and local governments did over the last 200-plus years served, either directly or indirectly, to make the development of the private-sector economy possible. But we did not call these activities "economic development." We called them internal improvements or public works or education or public safety, but economic development is what they accomplished.

In contrast, most government activities undertaken in the last 30 years in the name of "economic development" have little to do with the development of the economy. Rather, they involve, in one way or another, the use of public resources to either convince businesses to move from where they were located to someplace else OR, in response to such entreaties - either real or purported, to convince them to stay where they are. Economic developers persist in referring to the first of those two activities as job creation, even though the jobs already existed somewhere else. Critics originally referred to this shell game as "smokestack chasing," but it certainly has not been limited to manufacturing as evidenced by the efforts of various states and localities to "recruit" corporate headquarters' and financial services' "back office" operations from New York City.

Increased accountability in the economic development game is important but, in the end, it amounts to a classic example of rearranging the deck chairs on the Titanic. The real problem is the very existence of the wasteful competition in which states and cities are currently engaged. It's a bad game for the states and cities to be playing -- a manifestation of the dark side of our federal system. Many Americans know that Justice Brandeis referred to the states as the laboratories of democracy, but few remember his warning that our federal system can also create a competition in laxity. New York should join the Minnesota Fed and others in the emerging effort to have the Congress place some limits on this destructive competition.

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"Congress Should End the Economic WarAmong the States: Testimony"
http://woodrow.mpls.frb.fed.us/research/studies/econwar/rolnick_testimony_2007.cfm

by Arthur J. Rolnick, Senior Vice President & Director of Research, Federal Reserve Bank of Minneapolis, Domestic Policy Subcommittee, Oversight and Government Reform
2154 Rayburn HOB 2:00 p.m. October 10, 2007

[The Constitution] was framed upon the theory that the peoples of the several states must sink or swim together, and that in the long run prosperity and salvation are in union and not division.

Justice Benjamin Cardozo
U.S. Supreme Court, 1934

There is likely no major metropolitan area in this country that has not been held hostage at some point by the owner of a sports franchise who threatened to move the team elsewhere if the owner did not receive a new taxpayer-funded sports complex. Indeed, such economic blackmail even affects many of our smaller communities, as minor league sports teams have also learned to play this rent-seeking game.

Being from Minnesota, I can personally attest to this rent-seeking game, as the Minnesota Twinsafter a 10-year campaignfinally persuaded a previously reluctant state Legislature to hand over about $400 million in public financing for a new stadium that is now under construction in downtown Minneapolis. Not to be outdone, the Minnesota Vikings are currently pressing the Legislature for their own share of the public largesse. And who can blame them? As long as governments are willing to hand over limited public resources, these teams would be foolish not to accept them.

But make no mistake, it's not just sports teams that demand public money from cities and states. The state and local funds spent competing for sports franchises, though conspicuous, probably represent only a fraction of the billions of dollars spent by the more than 8,000 state and local economic development agencies competing to retain and attract businesses through the use of preferential taxes and subsidies. Businesses know they can get public funding by threatening to move, forcing state and local governments into competition for businesses that has become economic warfare.

While states spend billions of dollars competing with one another to retain and attract businesses, they struggle to provide such public goods as schools and libraries, police and fire protection, and the roads, bridges and parks that are critical to the success of any community.2 Indeed, we in Minnesota have special cause to speak to the importance of adequate funding for infrastructure following the tragic collapse of the I-35W bridge over the Mississippi River. Surely, something is wrong with this picture. As Justice Cardozo suggested, the framers of the Constitution had something different in mind in granting Congress the power to regulate interstate commerce under the Commerce Clause. The objective was to create an economic union, particularly by ending the trade war among the states that prevailed under the Articles of Confederation. However, it was the Supreme Court, not Congress, that applied the Commerce Clause to end the trade war among the states.

It is now time for Congress to exercise its Commerce Clause power to end another economic war among the states. It is a war in which states are actively competing with one another for businesses by offering subsidies and preferential taxes. Economists find that there is a role for competition among states when it takes the form of a general tax-and-spend policy. Such competition leads states to provide a more efficient allocation of public and private goods. But when that competition takes the form of preferential treatment for specific businesses, not only is it not admirable, it interferes with interstate commerce and undermines the national economic union by misallocating resources and causing states to provide too few public goods. Moreover, the success of a state in attracting and retaining particular businesses is not a mitigating circumstance.

There is another reason businesses will be less productive when states are allowed to compete for individual businesses. States may increase taxes on those firms that are less likely to move to offset the lost revenue from firms that have moved (or have threatened to move)...

State competition for specific businesses involves one additional loss that could make those already mentioned pale by comparison. I have assumed that states have the information to understand the businesses they are courting, that is, their willingness to move, how long they will stay in existence and how much tax revenue they will generate. In practice, states have much less than perfect information. Assuming all states are so handicapped, they will on average end up with fewer jobs and tax revenues than they had anticipated, and at times the competition may not even be worth winning.

For example, Pennsylvania, bidding for a Volkswagen factory in 1978, gave a $71 million incentive package for a factory that was projected to eventually employ 20,000 workers. The factory never employed more than 6,000 and was closed within a decade.

Minnesota's 1991 deal with Northwest Airlines is another example of a Pyrrhic victory. A state agency agreed to provide the company with a $270 million operating loan at a very favorable rate of interest. In return, Northwest agreed to build (with an additional $400 million of state and local government funding) two airplane repair facilities that would eventually employ up to 2,000 highly skilled workers in an economically depressed region of the state. While the operating loan was made in the spring of 1992, the company has yet to fulfill its part of the bargain. Moreover, the commitment to build the two repair facilities that would employ 2,000 workers has been reduced to a commitment to build one very modest facility and an airline reservation center, which together would employ fewer than 1,000 workers.

Despite the fact that state deals have gone sour, some may still be tempted to argue that competition among states for specific businesses will lead to a good outcome for the overall economy. Some may be tempted to make this argument because it seems, as argued earlier in this essay, people can vote with their feet (or vote policymakers out of office). Hence, if people are unhappy with their state's economic development strategy, there is an internal political check. People, however, may not be unhappy with these strategiesthe state is acting in their best interest. Not to compete, while other states are, may be detrimental to a state's economy. Moreover, there may not be a place to go because all states may be competing. For this type of competition there is no invisible hand (or more accurately, no invisible foot) to lead states to do what is best for the country.

How can this war among the states be brought to an end? The states won't end this war, and the courts are not equipped to do so. Only federal legislation can prevent states from using subsidies and preferential taxes to attract and retain businesses...There is anecdotal evidence that some state and local governments recognize they are all losing in this economic war. Nevertheless, as long as a single state engages in this practice, others will feel compelled to compete. New York, New Jersey and Connecticut all recognized that they were losing from this competition, and in 1991 they informally agreed to stop competing with each other. It was not long, however, before New Jersey broke the deal.

Even if a number of states were interested in formally agreeing to stop the practice of competing to attract and retain businesses, it would be a practical impossibility to devise an arrangement that would both cover all the forms of subsidies and preferential taxes the states might devise and provide an effective method of enforcement. Also, such a multistate treaty might run afoul of the Compact Clause of the Constitution, which prohibits a state from entering into a compact with another state, in the absence of the consent of Congress...

Only Congress, with its sweeping constitutional powers, particularly under the Commerce Clause, has the ability to end this economic war among the states. And it is time for Congress to act. There is congressional precedence for such action: In 1999, then-Rep. David Minge, Minn., introduced the Distorting Subsidies Limitation Act. This bill would end these harmful subsidies by, in effect, taxing them out of existence. Under the bill, subsidies provided by a state or local government to a particular businessto locate into or remain within that governments jurisdictionwould be taxed at such a level so as to render the subsidy moot. In other words, if subsidies were taxed at 100 percent, for example, they would be rendered ineffective. State and local governments would thus lay down their arms in this escalating economic war, and the resulting truce would benefit all of society...

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The following three sections of data are from Good Jobs First.org.

[specifically-- www.goodjobsfirst.org/corporate_subsidy/overview.cfm]

Lobbying For Subsidies

As noted in the discussion of site location consultants, many corporate subsidy deals are negotiated in secret and designed to assist a single company in the construction of a specific facility. Yet there are other kinds of subsidies--especially tax breaks--that are available to any company that meets certain criteria; in other words, they are entitlements.

Just as companies are not shy about seeking individual subsidy packages when making a major investment, they also do not hesitate to press for changes in state laws and regulations to create new entitlement-type subsidies. In fact, their lobbying techniques are often quite aggressive, going beyond the usual techniques of persuasion and campaign contributions. Large companies will threaten to move operations (and thus jobs) out of the state if they do not get their way. Rather than castigating business for the use of blackmail, legislators and policymakers usually cave in quickly.

One area in which business bullying has been especially egregious is the issue known as Single Sales Factor (SSF). Corporations generally pay state corporate income tax based on a formula that takes into account the size of their payroll, the value of their assets and the volume of their sales in the state. Large, multi-state companies prefer a situation in which the tax is calculated on sales alone. This results in a windfall savings for a firm that may have lots of property and employees in a given state but whose sales are spread out across the country.

One of the most brazen campaigns for SSF was waged in Massachusetts by military contractor Raytheon Corp.--then the state's biggest private employer--in the mid-1990s. Raytheon threatened to move its defense operations out of Massachusetts unless SSF was adopted (and the company got other tax breaks and utility deals from the state). Raytheon estimated SSF would cut its income tax bill by three fourths, from $28 million a year to $7 million.

A lobbying team headed by John Sasso, who had been a campaign aide to Michael Dukakis, engineered a public relations campaign that turned a corporate tax cut into a jobs program. Suddenly, it wasn't the Raytheon tax cut bill; it was the "defense initiative" to help save 117,000 jobs in the state. And these were well-paying blue-collar jobs that enabled people without a college education to make a decent living. The campaign issued endless statistics about the positive ripple effects of Raytheon's payroll and the state's high cost of doing business. Raytheon's campaign peaked in November 1995, when SSF passed both houses of the legislature by large margins. Defense contractors got the whole break as of 1996; other manufacturers got it phased in over five years.

The assumption that the tax breaks would save all of the Raytheon jobs quickly proved wrong. In May 1996--just five months after SSF took effect--the company reportedly offered buyouts to 4,400 of its hourly employees in Massachusetts. By January 1998--two years after SSF took effect and about three years after it first threatened to leave--the company had reduced its Massachusetts head count by 4,100 people or 21 percent. Efforts by labor unions to get the legislature to enact stricter employment criteria were unsuccessful.

Lobbying records later revealed that the 1995 campaign cost Raytheon $573,539--for a tax break that would save it $21 million a year. This was quite an amazing rate of return on its political investment.

After Raytheon and other defense and manufacturing firms got SSF, mutual fund giant Fidelity Investments began pushing Massachusetts for the same perk. In order to gain leverage, Fidelity got Rhode Island to adopt SSF for mutual fund companies and began moving jobs to that state. That did the trick. In 1996 the Massachusetts legislature adopted SSF for the state's mutual fund companies, which in addition to Fidelity include some of the country's largest investment firms.

The bottom line: in less than one year between 1995 and 1996, under the duress of job threats and intense lobbying, Massachusetts radically rewrote its corporate income tax code in ways that would not assure long-term job creation or even job security, but would cost the state treasury a billion and a half dollars over the next decade and shift the burden for public services away from a few favored industries and onto working families and small businesses.

The Illinois Experience

Illinois is another state that caved in to intense business lobbying on behalf of SSF. The state adopted the change in 1998 at the insistence of the Illinois Manufacturers Association and some of its most powerful corporate members. Ameritech, Abbot Laboratories, Deere & Company, Duchossois Industries, Kraft USA, Nalco Chemical and Quaker Oats were reportedly among the companies strongly backing the tax-formula change.

It was no secret that the deal would heavily favor a small number of the big boys. During the debate on an early version of the bill, the Illinois Department of Revenue estimated that just five companies, unnamed, would receive 63 percent of the tax-cut dollars. That's five companies out of some 133,000 that filed income tax returns in the state.

Of course, given how completely unaccountable SSF is, none of the companies getting the huge windfalls would ever be required to create--or even retain--one single job in Illinois. In fact, many did just the opposite. Since SSF began taking effect there, Abbott, Ameritech, Kraft, Motorola, Nalco, Deere and BP/Amoco have announced layoffs totaling more than 9,900 workers.
Lobbying to Preserve Subsidies

In 2004 the Sixth Circuit Court of Appeals threw the economic development world into turmoil when it ruled, in Cuno v. DaimlerChrysler, that an investment tax credit granted by the state of Ohio to a Jeep plant in Toledo was in violation of the Commerce Clause of the U.S. Constitution. The decision, which was appealed to the U.S. Supreme Court, put into question some of the subsidies mostly commonly used by states to lure investment.

Business interests did not wait to see what the High Court would do. They quickly got members of Congress from the affected states (the Sixth Circuit covers Ohio, Kentucky, Michigan and Tennessee) to introduce legislation that would abrogate Cuno by affirming the legitimacy of state economic development subsidies. The bills (S.1066 and H.R. 2471) are being supported by a growing lobbying effort led by business groups and state development officials. Among the players is the Cuno Coalition, which was created by the Council on State Taxation. The bill is awaiting action by Congress.

If the SSF experience is any guide, the business world will do whatever it takes to reverse Cuno and preserve its tax breaks.

Case Study Of Auto Assembly Plants

As the U.S. automakers have downsized their domestic manufacturing operations over the past two decades, foreign car makers have been opening one U.S. assembly plant after another . And in nearly every case, the Asian and European companies have received financial assistance from state and local governments eager for industrial jobs.

The first foreign automaker to set up shop in the United States was Volkswagen, which opened a plant in Pennsylvania in 1978. That venture, which fell victim to labor unrest, ended in 1988. The real invasion began in the early 1980s, at a time when Japanese producers were winning a steadily increasing share of the U.S. car market. To allay concern about the rising tide of auto imports, the Japanese decided to open production facilities in the U.S. This move was made all the more urgent by efforts in Congress to pass legislation mandating domestic content for cars sold in the U.S. market.

Honda began assembling Accords in Ohio in 1982. Nissan, which started producing trucks at its Smyrna, Tennessee plant in 1983, expanded to automobiles two years later. Toyota got involved in both a joint venture with General Motors in California and an operation of its own in Kentucky. Mazda announced plans in 1984 to build an assembly plant in Michigan, and Mitsubishi said it would produce cars in Illinois in a joint venture with Chrysler called Diamond-Star.

By the time of the Mitsubishi project, governments were lavishing large sums on the facilities, known as transplants. Illinois, hoping that the Diamond-Star plant would create a slew of additional jobs as nearby supplier companies sprang up, provided a package worth $249 million, the biggest in Illinois history and then the biggest package ever given an auto assembly plant in the U.S.
Such assistance was offered, even though many observers pointed out that the Japanese firms, concerned more about import controls than state and local taxes, would certainly proceed with their plans even in the absence of subsidies. Authors Martin and Susan Tolchin noted in their book Buying Into America: "There was nothing secret about these strategies: The Japanese encouraged their companies to invest abroad as enlightened policy, designed to stave off protectionism and save jobs."

By the 1990s the threat of protectionism had passed, yet foreign automakers continued to expand operations in the United States. The reason now was to bolster their ever-rising U.S. market share and to take advantage of what had become relatively inexpensive U.S. labor. The latter motivation prompted companies to shift their focus from the Midwest to "right to work" states in the South. Nonetheless, state and local governments continued to offer up lucrative subsidy packages, including the following:

In 1992 South Carolina ushered in the new wave of investment by foreign carmakers in the South by offering BMW a package that was ultimately worth an estimated $150 million. A decade later, the state put up an additional $80 million in infrastructure aid when BMW decided to expand its operations in the state.

In 1993 officials in Alabama lured a Mercedes-Benz facility, the first foreign auto plant in the state, with a package worth $258 million.

In 1999 Alabama put together a $158 million subsidy deal to land a $400 million, 1.7 million-square-foot Honda plant. In 2002 state and local officials provided an additional package worth $90 million, including $33 million in tax breaks over 20 years, when Honda decided to expand the facility.

In 2000 officials in Mississippi lured a $950 million Nissan plant with a $295 million subsidy deal. While the plant was still under construction, the company announced an expansion of the project that also involved an increase in the subsidy package to $363 million.

When South Korean carmakers Hyundai staged a competition for a $1 billion plant, various states put together bids, but it was Alabama that won the contest in 2002 with a package worth $252 million.

Commentators much made of the fact that when Toyota chose San Antonio, Texas in 2003 as the location for an $800 million assembly plant, the company had not selected the site with the most generous subsidy package. In another example of the fact that subsidies are not the most important factor in investment decisions, Toyota highlighted criteria such as access to the large Texas market for the pickup trucks that would be built at the plant. This is not to say that Toyota passed up all government assistance. The company received a package valued at $133 million, including $47 million in tax phase-ins and waived fees.

By the late 1990s there were signs that the big giveaway to BMW by South Carolina was exacerbating a fiscal crisis in the state. While the carmaker and other companies were enjoying minimal levels of corporate taxation, the state's schools were falling into greater disrepair and educational achievement was worsening. Funds for other government services such as highway maintenance and public safety were also in short supply, leading to tax increases for families. "The foreign companies that come in here don't care that the schools are terrible," one philanthropist told a reporter. "They just want the cheap labor. And the incentives are so extraordinary."

It is only a matter of time before the other states that have given nine-figure subsidy packages to foreign carmakers also begin to wonder if they made the right decision for the long-term prosperity of their citizens. They may also realize that giveaways are ultimately work against future corporate investments. A sign of this came in 2005 when Toyota rejected several subsidy-laden deals from U.S. communities and instead decided to build its next assembly plant in Ontario. The decision was said to be made because of the higher quality of the workforce in Canada.

Case Study Of The Biotech Industry

In the wake of the dot.com bust, cities and states across the country put renewed emphasis on biotechnology as the magic bullet for economic development. By 2002, more than 80 percent of local development agencies were listing biotech as one of their top two priority areas for investment, and some 41 states had created programs to lure biotech facilities. It seemed as if every place in the country was vying to become the next "life sciences cluster."

These efforts almost always, of course, involved the offer of subsidies to individual companies or the use of government funds to build research parks or to create public pools of venture capital. At times it seemed that government officials were simply throwing money at firms, even tiny ones. South Carolina put together a $17 million package to attract the headquarters of a company, Pilot Therapeutics, with only 14 employees. "A lot of communities are betting a farm, if not the farm, on biotechnology," said one consultant to the Wall Street Journal while he was helping eight different development agencies make pitches to the industry at a biotechnology trade show.

For most of the areas seeking biotech riches, the odds of success were not very good. A 2002 study by the Brooking Institution Center on Urban and Metropolitan Policy found that biotech investment was heavily concentrated in nine metropolitan areas: Boston, San Francisco, San Diego, Seattle and North Carolina's Research Triangle--and, to a lesser extent, Los Angeles, New York, Philadelphia and Washington, DC. The first five accounted for three-quarters of all venture capital funding given to biotech start-ups during the previous six years.

The report also found that biotech ventures did not create many jobs. New plants typically employed only 50 to 150 people. Moreover, many of the jobs were not secure, given the precarious position of many biotech firms. A Standard & Poor's survey of the industry in 2005 pointed out that "although about 340 biotech companies have their shares listed on major U.S. stock exchanges, the vast majority of these firms are money losers."

Some communities, especially those close to one of the nine established clusters, have had better success when doing deals with one of the larger, more stable players in the industry. In 2003 Pennsylvania provided $12.75 million in subsidies to Cephalon for a $100 million campus that was expected to create 650 jobs.

Yet it remains unclear that subsidies are what make the difference. During the 1990s, the biggest winners in the biotech sweepstakes were North Carolina and California, two states that tended not to offer much in the way of direct subsidies (though California had a generous R&D tax credit). Articles in publications such as Site Selection pointed out that the availability of skilled workers was the most important consideration when biotech companies chose to invest. That was part of the reason for the concentration found in the Brookings study. In fact, California won the contest for one of the largest investments by the industry--a $600 million Genentech facility in Vacaville, northeast of San Francisco--despite more lucrative offers of assistance from other states.

The fact that location and workforce considerations are what secured these investments did not put much of a dent in the desire of government officials around the country to attract biotech investments with extravagant subsidy deals. The largest of these deals was seen in Florida, where Gov. Jeb Bush diverted more than $300 million in federal funds that were supposed to help with budget shortfalls to subsidies for a large biotech facility that the non-profit Scripps Research Institute agreed to establish in Palm Beach County. The county provided more than $250 million in additional assistance. Ultimately, the aid reached some $800 million--more than $1 million for each of the 545 jobs that Scripps was supposed to create.

Site location consultants and trade publications encouraged such giveaways by arguing that new clusters were bound to emerge and that states and cities had to compete aggressively to achieve that status. A January 2005 article in Site Selection magazine on biotech venture capitalist Steven Burrill quoted him as saying that "the expectations that you will be able to create massive new economies around this industry are probably overstated," yet he immediately went on to say: "But, we will create large numbers of new companies and we will create large number of opportunities."
States such as Illinois and Minnesota have responded to this siren song by creating new pools of public seed money for biotech development. Connecticut allowed biotech firms to cash in tax credits, even when they didn't have revenues. The pitfalls of these strategies were illustrated in a June 2005 article in The Record newspaper of Bergen County, New Jersey. Amid debate over a proposal by the state to spend $380 million to promote research on stem cells--on top of several hundred million in biotech subsidies in the past--the paper found that:

Millions of tax dollars had gone to companies that took valuable research, profits and jobs from New Jersey and strengthened the biotech industry elsewhere.

Millions were being spent on tax breaks and other public subsidies for small biotech firms and big pharmaceutical companies, even as they provided lucrative golden-parachute payouts to their executives and continued to charge eye-popping prices for patented drugs.

Laws written to protect trade secrets shrouded potential conflicts amid the web of financial interests linking biopharmaceutical companies, the state's universities and the three medical schools run by the University of Medicine and Dentistry of New Jersey.

Millions of tax dollars were put in the hands of venture capitalists who invested in privately operated biopharmaceutical companies - without revealing where they are investing.
The article also noted the lack of evidence that biotech investments had done much to create jobs in New Jersey. When Dr. Roger E. Wyse, the internationally recognized plant scientist who was recruited to run the publicly financed Center for Agricultural Molecular Biology at Rutgers University, was asked how many jobs the venture had generated, he responded: "Three. Me and two assistants."

It is unclear whether exposйs such as this have much effect, as government officials continue to try to buy their way to economic growth.

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