U.S. states and localities spend an estimated $70 billion per year on economic development subsidies, despite decades of evidence that most are wasted. Many are long-term—10-year property tax abatements, 23-year tax increment financing (TIF) districts, open-ended corporate income tax credits, and permanent sales tax exemptions—so they leave governments less resilient to cope with extraordinary events like the coronavirus-induced depression we are entering.
For some states—such as Louisiana, New Jersey, and Michigan—the collateral damage of over-spending on corporate giveaways has long been evident: lower credit ratings, underfunded schools, distressed infrastructure—and now wheezy public health systems.
We’re in a war to save lives. And we’re entering a war to save public services that every family and employer depends on. It’s time to clean house on these giveaways.
Our 10 suggestions:
#1: De-couple from the Federal Opportunity Zone Capital Gains Giveaway
For those states that tax corporate profits and/or personal income, all but a few use the federal definition of taxable income. That means they are passively losing revenue to the notorious Opportunity Zone program that was slipped into the Trump tax-cut bill of 2017. Only North Carolina and Maryland have so far de-coupled from this opaque, unaccountable giveaway that will otherwise harm state budgets for a decade. The program’s costs will ramp up over seven to 10 years, yet Wisconsin would have already gained $10 million in fiscal year 2019 and Oregon would be gaining $15.9 million for fiscal year 2019-2020.
#2: Cap the Pre-computer ‘Vendor Discount’
There was a time, before computerized cash registers, when merchants needed some time to compute how much sales tax they had collected and thus owed to state treasuries. So some states (starting in the 1930s) enacted “vendor discounts,” allowing retailers to keep a share of those sales taxes as sort of a servicing fee. But as we revealed 12 years ago, this long-obsolescent giveaway is still on the books in half the states and costs them more than $1 billion per year! Three states with uncapped rates of up to 4 percent of the taxes collected—Illinois, Colorado, and Missouri—each now lose more than $100 million each per year! The solution: cap the “discount” at $300 per retailer per year, which some states do, so that large retailers like Walmart, Amazon, Target don’t have open-ended entitlements.
#3: Stop Paying Taxes to the Boss
In about one third of the states, thousands of corporations are keeping some of their employees’ state personal income taxes! Yes, you read that correctly: some workers’ pay stubs say $X were deducted as state income tax, but the money doesn’t end up in the state treasury. It is ultimately kept by their employer—without the workers’ knowledge or consent! It’s an outrageous example of how subsidies have metastasized. And because income taxes are an especially “elastic” revenue source (i.e., they track the cost of public services far better than sales or property taxes), losing them makes state budgets less resilient. In Kentucky, the Business Investment program will cost about $31 million in fiscal year 2022, and Indiana’s Economic Development for a Growing Economy Tax Credit cost Hoosiers $85 million last year.
#4: Terminate Subsidies to E-commerce, Including Amazon
We’ve been urging governments to quit subsidizing Amazon.com, Inc. for years, because the company’s business plan requires it to build lots of warehouses and data centers. (Amazon is about half of U.S. e-commerce and the world’s biggest cloud-computing provider.) Now, the Covid-19 pandemic is creating a huge windfall for the online retailer. E-commerce biggies like Walmart, Target, Apple, Best Buy, and Wayfair also don’t deserve subsidies. Government shouldn’t be favoring big companies over small, especially in a low value-added economic activity like retailing that was already being convulsed by the internet. Amazon has been awarded $2.9 billion across the country, and Apple’s total take so far is $820 million.
#5: End Subsidies to Data Centers
Also known as “server farms,” these cloud-computing centers create very few permanent jobs. Their greatest expense is electricity—they consume an estimated 2% of all U.S. kilowatts. Yet about half the states have enacted special subsidies for them, usually consisting of utility tax exemptions which often hurt state treasuries as well as local-government budgets. For Washington, that would boost state and local revenue by $61 million, and Virginia’s gain would be $92 million.
#6: Abandon ‘Single Sales Factor’
This is a costly, unproductive windfall for a small number of big corporations. About half the states say to multistate corporations: we will only tax that share of your 50-state profits equal to your share of sales in our state (i.e., a single factor). For certain companies—those with a lot of property and/or payroll in a state—this means those factors are no longer weighted. That’s incredibly unfair: If a company has a large factory or headquarters in a state, that means the company is getting big benefits from that state: public health, K-12 public education and state university graduates, police and fire protection, legal defense through the court system, roads and infrastructure, cultural amenities and so on. The solution? Go back to the traditional three-factor system. It would generate $132 million for Arizona and $1.1 billion for California.
#7: Hold Schools Harmless from Giveaways
State rules usually give cities or counties the power to grant property tax abatements, create tax increment financing (TIF) districts or give away local sales tax revenues—even though school districts are typically the biggest losers. As in previous recessions, many states will soon cut back on aid to school districts, making those local tax breaks even more harmful to kids. The answer? Hold schools harmless. Simply rewrite the state rules so that the K-12 share of local property and sales taxes cannot be abated, diverted, or rebated. It’s the best way to protect America’s bedrock economic development investment: our future skilled workforce. Schools in South Carolina would gain $318 million, and those in New York would benefit from $332 million.
#8: Repeal ‘Transferable’ Tax Credits
Many states grant tax credits that are so lavish, the companies that receive them cannot possibly use them. Why? Because the credits greatly exceed the companies’ tax bills, sometimes for many years to come. So the states allow the companies to “transfer” the credits (i.e., sell for cash) to other companies that really do have big income tax bills. Tesla, awarded $195 million in Nevada tax credits (part of a $1.3 billion subsidy package) for its battery factory near Reno, has sold some to a casino. Some film production tax credits are transferable, including those in Georgia that cost the state $545 million annually. There is even a market for such transactions, complete with middle-men companies. The very existence of transferable tax credits is evidence of how outrageously overgrown subsidies have become.
#9: Join the Movement Against Interstate Job Piracy (and Intrastate, too)
A bi-partisan mix of legislators in 13 states has recently introduced bills to create a multi-state compact. Its goal: end zero-sum interstate job piracy and build a system for states to cooperate instead of remaining prey to the corporate-dominated “economic war among the states.” Already, Missouri and Kansas have signed the first legally binding “cease-fire” agreement in Greater Kansas City, a terrific precedent where labor markets straddle state lines. And while they’re at it, states should finish the job of banning intrastate job piracy. Since states write the incentive laws that govern local government powers, states should impose a blanket ban on subsidies to relocate a workplace from one municipality to another. Already, at least 40 states do that for one or more state programs. Let’s finish the job. Let’s not pay Walmart to jump down the avenue to a different suburb!
#10: Mandate that All Localities be GAAP-Compliant
Generally accepted accounting principles (GAAP) are the rules on how governments should keep their books, as prescribed the Governmental Accounting Standards Board (GASB). Governments that comply with GAAP get lower interest rates when they borrow money to do things like build schools, roads, or sewer systems. Currently, about three-fourths of the nation’s cities, counties, and school districts are required—by state law or administrative code—to comply with GAAP. So should the rest. The rules now also require localities to finally disclose—for the first time ever—how much revenue they lose to economic development tax break programs (Statement 77 on Tax Abatement Disclosures). Taxpayers deserve full transparency on the costs as well as the benefits of these giveaways, to make fully informed decisions.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Greg LeRoy directs Good Jobs First, a non-profit research group on economic development incentives.