As many as a dozen states are considering a non-aggression pact to halt the kind of tax-incentive bidding wars that permitted Amazon.com Inc. to squeeze nearly $600 million in subsidies out of Virginia for its second world headquarters.
A bipartisan group of state lawmakers from across the country have united as the Coalition to Phase out Corporate Tax Giveaways. Supporters say the pact would prevent expensive bidding wars for projects that frequently fail to produce the investments, jobs, and economic punch that the promoters promised.
Lawmakers in Illinois joined the campaign on Tuesday, introducing legislation (H.B. 4138 and S.B. 2502) creating the Phase Out Corporate Giveaways Interstate Compact. Parallel legislation got a hearing the same day in the New Hampshire House Ways and Means Committee. Similar measures have been introduced over the last year in Arizona, Florida, Hawaii, Iowa, Maryland, Missouri, New York, and West Virginia.
“This is wasteful. Studies have shown the money used for poaching businesses from other states doesn’t contribute to creating jobs or improving the economic environment of the state,” Rep. Bob Morgan (D), sponsor of the Illinois bill, told Bloomberg Tax. “This is an effort to turn back that tide so we can use those tax dollars for the things we need most.”
Dan Johnson, a lobbyist working on behalf of the coalition, predicted bills would be introduced in several more states. Johnson said he has been contacted by lawmakers in Connecticut, Oregon, Pennsylvania, Virginia, and Washington.
Fed Up With Status Quo
The concept bridges several long-standing ideological divides, drawing support from liberals, conservatives, and libertarians. Illinois’s bill was sponsored by two progressive Democrats, but it enjoys support from the conservative Americans for Prosperity and the Mackinac Center for Public Policy, a Michigan-based libertarian think tank.
“It’s hard to find anyone who likes the status quo,” Johnson said.
The Illinois bill would permit the state to enter into an agreement with other states barring members from offering company-specific tax incentives for corporate headquarters, manufacturing facilities, and other real estate developments. The measure contains certain carve-outs, permitting Illinois to continue offering workforce-development grants and incentives targeting businesses already located in the state.
Timothy Bartik, who studies state and local tax incentive programs, said the idea would be a good first step in a longer process aimed at more effective tax incentive models. But he expressed doubts about the proposed compact’s ability to ensure compliance, cautioning that previous “anti-poaching” structures had failed.
“I think it would be tempting to cheat for some governors, and it might be hard to enforce. In the past that’s what’s happened,” said Bartik, a senior economist at the W.E. Upjohn Institute. “That said, I think it’s a good thing, and maybe it would be a confidence-building exercise for the states.”
Amazon and Foxconn
Some of the bipartisan enthusiasm for a tax credit disarmament pact stems from frustration with two high-profile bidding wars—Amazon’s HQ2 campaign, which drew bids from 20 cities, and Foxconn Technology Group’s plan to build a massive technology campus, which drew bids from numerous other states.
“The recent news about Foxconn and Amazon has gotten more people agitated on these issues,” said James M. Hohman, director of fiscal policy at the Mackinac Center. “You’ve seen some skepticism from both the right and the left that corporate handouts are an effective way to compete.”
Neither the Amazon nor the Foxconn deals have blossomed as the winning bidders expected.
In November 2018 Amazon broke its HQ2 proposal into two bundles, choosing to base parts of its headquarters in Northern Virginia in return for nearly $600 million in tax breaks and other incentives, and in New York in return for approximately $1.5 billion in incentives. Progressives sharply criticized the New York component owing to the large subsidies. Amazon pulled the plug on that location four months later.
Foxconn, the operating arm of Taiwan-based Hon Hai Precision Industry Co., had promised to invest $10 billion on a facility in southeastern Wisconsin to produce liquid crystal display panels and create 13,000 jobs. Lawmakers passed special legislation authorizing $2.85 billion in income and franchise tax credits and $150 million in sales and use tax exemptions.
But the company’s performance has been disappointing since it broke ground in June 2018 in a ceremony attended by President Donald Trump. Progress on the project has been slow, and Foxconn now plans a much less ambitious facility with fewer jobs. During the first year of the project, the company missed its job-creation targets and failed to qualify for state tax credits.