What these states learned about wooing companies with big tax breaks
As Amazon nears a decision on the location for its second headquarters, it’s weighing a number of factors about each city: access to transit systems, the size and makeup of the local workforce, available real estate … and tax breaks.
Among the offers that have become public: Newark, New Jersey, has floated $7 billion in incentives. Chicago would reportedly kick in at least $2 billion. And Maryland has put more than $5 billion on the table for its Montgomery County contender.
All of these governments are doing what they think is necessary to attract an investment that could bring as many as 50,000 high-paying jobs to one location. But they need to be careful. If their tax breaks are too generous they could sacrifice whatever benefits might otherwise accrue to the winner.
Of course, companies don’t simply pick the city dangling the sweetest financial deal. A 2017 survey of corporate executives by Deloitte found that incentives, corporate tax rates and exemptions actually ranked fifth, sixth and seventh, respectively, on their list of priorities.
Still, local governments nearly always offer something, lest they be accused of not trying hard enough to keep the jobs from going somewhere else.
Over the years, there have been a handful of eye-popping incentive packages. Good Jobs First, a nonprofit research group that tracks state and local economic development deals, ranked these “megadeals” by size.
One common theme jumps out: The most valuable incentives generally went toward keeping a company in town and retaining existing jobs, not winning new ones.
So, are these tax breaks cost-effective? It really depends on how much a local government thinks the jobs are worth — and whether the company would have walked away without the extra incentive.
Benefits from these deals haven’t always materialized, prompting many states to think more carefully about them, according to the Pew Charitable Trusts, which rates states on how well they design and implement tax breaks.
Based on Good Jobs First’s rankings, here are some of the largest tax break packages of the past decade and what has happened since.
1. Washington state’s $8.7 billion deal to keep Boeing in 2013
Boeing (BA) has been an economic mainstay in the state of Washington for decades. But over the years, the company has sent some of itsproduction to Southern states with more industry-friendly labor laws.
In 2013, when Boeing threatened to build its new 777x commercial airplane somewhere else, the state rallied to extend the tax breaks it had already granted to the aerospace sector from 2024 to 2040. The deal held an estimated value of $8.7 billion and Boeing would be the primary benefactor, according to the state.
The requirements of the 2013 legislation were vague, however. The preferential tax treatment was contingent on the launch of a “significant commercial airplane manufacturing program” in Washington by June 2017, with no baseline for a total number of jobs.
Boeing ended up building the 777x in Washington, fulfilling its obligation.But its total employment in the state has dropped from 86,397 in January 2013 to 65,829 last month, according to company figures. Boeing has said that reduction was necessary to respond to competition from European rival Airbus.
Washington state legislators proposed measures in 2017 to reduce the tax breaks if Boeing’s employment dropped below 70,000, but the bills went nowhere. The bills haven’t been reintroduced. Boeing is now saying that Washington is “well positioned” to win another production line.
Chelsea Orvella, the legislative director for IFPTE Local 2001, the union that represents Boeing’s engineering staff, said she’s frustrated that the state hasn’t gotten more for its money over the years and believes it should have held Boeing to tighter standards.
“You need to spell out what’s expected to be gained by the tax incentives,” Orvella said. “The consequences of not having accountability are huge for local communities.”
Washington’s aerospace industrysaid last year that the sector paid $363.1 million in taxes in 2015 and supported $21.3 billion in wages. A Boeing spokesman said the company invested $13.5 billion in Washington in 2016, and that nearly half of the company’s global workforce works in the state.
2. New York offers $5.6 billion in cheap hydropower to Alcoa
Alcoa’s (AA) aluminum smelter on the Canadian border in Massena, New York, opened in 1902, making it theoldest continually-operated facility of its kind in the world. In order to keep it and a second nearby smelter open, the state-owned New York Power Authority agreed in 2009 to provide discounted hydropower to the company for 30 years, which The Buffalo News estimated would be worth $5.6 billion over the life of the deal.
In exchange, the company promised to invest $600 million and maintain at least 900 jobs at the site. But in 2015, amid a global slump in commodity prices, Alcoa announced plans to dramatically curtail its operations in Massena, which would have resulted in the loss of nearly 500 jobs.
To shield the town from a huge economic hit, state leaders offered$30 million in cheaper electricity and $43.6 million in cash subsidies to keep one of Alcoa’s smelters open through 2019. It also said it would impose $40 million in financial penalties if employment drops below 600 people.
After March 2019, however, there are no guarantees. Alcoa split into two companies in early 2017. The second company, Arconic, still has some operations in Massena. Alcoa, which retained the larger share of the workers, said it was meeting its commitments with the New York Power Authority and refrained from commenting further on the deal.
“At the policy level, it may not be ideal,” says Jonas Shaende, an economist at New York’s Fiscal Policy Institute. “But of course, dealing with the dire circumstances of the employment situation upstate, it has some kind of saving merit.”
3. Wisconsin woos Foxconn with $4 billion in incentives and other perks
The Taiwanese electronics manufacturer Foxconn, known best for producing iPhones in China, considered several locations for a new plant, including Michigan, Ohio, Pennsylvania, Texas and Indiana.
Wisconsin, offering nearly $3 billion in refundable tax breaks plus exemptions from environmental reviews, was the winner. But it’s too soon to tell how the state will make out.
Announced with great fanfare last July, the deal is expected to generate between 3,000 and 13,000 jobs at an average wage of $54,000. The tax benefits take effect in stages as Foxconn hires more people. In addition, the county and city where the plant is to be built kicked in another $764 million in tax incentives and free land, and the state expects to spend about $400 million on a highway expansion that will serve the facility.
Meanwhile, Governor Scott Walker has asked for $6.8 million to pay for a “talent attraction campaign” across the Midwest, and has already spent $1 million for an ad blitz in Chicago to convince young professionals to move to Wisconsin, which has an unemployment rate of just 3.4%.
All of this sounds promising, but the state government is not expected to break even on the deal until 2043, according to an analysis by the Legislative Fiscal Bureau.
4. Michigan gives the Big Three big tax breaks
As the U.S. auto industry was struggling to survive in 2009 and 2010, Michigan granted Ford (F), Chrysler (FCAU) and General Motors(GM) a total of $3.2 billion in tax breaks in order to save thousands of jobs, according to the state.
Since that time, the automakers have made a full recovery and motor vehicle manufacturing employment in the state is almost back to its pre-recession level.
But since those incentives were tied to wages and investment, they started to create problems for the state budget. According to an analysis by The Detroit News, in 2015 the three companies were entitled to $4.5 billion in refundable credits if they maintained 86,000 jobs in the state through 2032. That year, Ford agreed to cap its tax benefits at $2.3 billion in exchange for $3.1 billion in new investment.
According to the latest available figures from the Michigan Economic Development Corporation, all three companies are fully in compliance with the requirements of their tax agreements. In 2015, they collectively reported about $3.5 billion invested in the state and 95,829 jobs retained.
Still, national tax policy groupscriticized Michigan for failing to accurately forecast the cost of those tax incentives, and the Michigan-based, conservative Mackinac Center for Public Policy has long maintained that they aren’t worth the cost.
“The state should not be taxing our residents and delivering billions of it to private companies,” says James Hohman, the group’s director of fiscal policy. “It’s unfair to residents and other businesses alike, and it’s a strategy that hurts the state.”