Washington, DC—Prominent studies that purport to measure and rank the states’ “business climates” are actually politicized grab-bags of data. They have no predictive value and should not be used to inform public policies.

Those are the main conclusions of a new study published today by Good Jobs First. “Grading Places: What Do the Business Climate Rankings Really Tell Us?” is authored by Dr. Peter Fisher, an economist who has written extensively on economic development.

“When we scrutinized the business climate methodologies, we found profound and elementary errors,” said Fisher. “We found effects presented as causes. We found factors that have no empirically proven relationship to economic growth. And we found scores that ignore major differences among state tax systems.

“Given these underlying flaws, it is no surprise that the rankings wildly contradict each other and fail to predict which states’ economies will thrive,” concluded Fisher. “Instead, we note that the factors often have to do with the advocacy agendas of the groups.”

The study was released today at a national tele-press conference and is available at http://www.goodjobsfirst.  It examines: the Small Business and Entrepreneurship Council’s U.S. Business Policy Index; the Tax Foundation’s State Business Tax Climate Index; the American Legislative Exchange Council’s Rich States, Poor States: the ALEC-Laffer Economic Competitiveness Index; and the Beacon Hill Institute’s State Competitiveness Report.  Also examined are two representative firm models: the Council on State Taxation’s Competitiveness of State and Local Business Taxes on New Investment, prepared by the accounting firm Ernst & Young, and the Tax Foundation’s Location Matters, prepared with the accounting firm KPMG.

“Our study does not try to correct these rankings or present a new rating,” said Greg LeRoy, executive director of Good Jobs First. “Indeed, that is one of our main points: the needs of different businesses and facilities vary so much—and conditions vary so much between metro areas even in the same state—that the whole concept of a state ‘business climate’ is nonsensical. For only the third time in 27 years, the pseudo-social science of ‘business climate’ ratings has been debunked. We should lay aside these useless reports and debate the real issue: how to build a tax system that is fair, modern and relevant.”

Good Jobs First is a non-profit, non-partisan resource center promoting accountability in economic development. Founded 15 years ago and headquartered in Washington, it includes Good Jobs New York.

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April 22, 2013

TO:     Journalists Covering Gov. Perry’s Job-Piracy Trip to Illinois

FR:      Greg LeRoy, Good Jobs First (and a Chicago ex-pat)

RE:      A Background Primer and Questions to Ask

Texas Gov. Rick Perry is again trying to pirate jobs from another state, and again we are getting media calls.  Here is a primer on key Texas and Illinois issues to expedite the conversations.

1. Get the Hard Texas Jobs Numbers. They reveal that interstate job piracy is a costly fool’s errand. We issued a national study on this very topic in January, and it has passages devoted to Texas on pages 4-5 and 16-20. We document that Texas under Perry in his first seven years netted a microscopic 0.03 percent (three hundredths of one percent) of its jobs base annually from corporate migrations—at great expense given to a tiny share of footloose companies.

What is Perry doing to help existing Texas firms expand and new firms to start up? (Not to mention operate safely.)  Does he know that more than 9,500 business establishments with more than 110,000 jobs moved out of Texas during his first eight years in office? Where did they go and why?

2. Master the Texas Subsidy-Industrial Complex. Learn how private dollars (TexasOne)—some of them from site location consultants who profit from corporate relocations—bankroll Perry’s job-piracy forays. Learn about the Texas Enterprise Fund, where two-thirds of subsidized companies have fallen short on jobs, and where a fourth of recipient companies have given money to Perry’s campaigns or political proxies. The Wall Street Journal [8/13/11] summed it up as “Rick Perry’s Crony Capitalism Problem.” And the New York Times wrote at length about tax consultant (and big Perry backer) G. Brint Ryan.     

Which consultants are accompanying Perry to Illinois? How much do they get paid when consulting for footloose companies? How much money have they given to Perry’s campaigns and proxies?

3. Bone up on “Single Sales Factor.” When you hear large corporations in Illinois complain about the state’s decision to raise its corporate income tax rate in 2011, take it with a big grain of salt. That’s because chances are those companies pay tax to Illinois on tiny shares of their profits—thanks to a loophole named “Single Sales Factor.”

Prior to 1999, Illinois used the traditional formula for multi-state companies to determine how much of their income to apportion to Illinois. It had three equal factors: the share of the company’s payroll, the share of its property, and the share of its sales inside Illinois.

Take a hypothetical national company headquartered in Illinois (certain construction equipment, farm machinery, pharmaceutical, corn-syrup, cell phone and food companies come to mind). Say it has 40 percent of its payroll and 40 percent of its property in the state, but only does 4 percent of its sales there (because Illinois has 4 percent of the nation’s consumers). Averaging those three factors meant that such a company used to apportion 28 percent of its domestic U.S. profits to Illinois.

But with single sales factor, the first two factors go away. Only the 4 percent sales factor matters: the company pays Illinois corporate income taxes on only 4 percent of its profits. In other words, its tax bill just plummeted 86 percent.

And for that windfall that was sold in the name of jobs, jobs, jobs, the company incurs no obligation whatsoever to retain or create any jobs. Indeed, as we documented in a 2012 study, nine Illinois corporations that lobbied for Single Sales Factor or were publicly identified at the time as major SSF beneficiaries have since laid off more than 12,000 Illinois workers.

My advice to reporters interviewing Illinois companies: ask them what share of their U.S. profits are apportioned to Illinois. I’ll be very surprised if they disclose, but for big national companies, chances are the answers are low single digits. Next: ask them the actual dollar amounts they have paid in recent years in Illinois income taxes. (Some big Illinois companies pay nothing or owe so little that they have been unable to claim the income tax credits they are due under the state’s EDGE program.)

For more, here is our 2003 study, Chapter 3 of which recounts Illinois’ enactment of Single Sales Factor.

Bottom Line: There are public policy and business reasons why the efforts of three other governors to pirate jobs from Illinois have failed (Wisconsin’s Scott Walker, Indiana’s Mitch Daniels and New Jersey’s Chris Christie). Perry’s splashy effort is likely to fail, too.

This week, as New Yorkers “celebrated” tax day, Good Jobs New York and The New York World thought it would be appropriate to point out the lingering effects of a property tax break gone wrong. The result is the expose, Night of the Living Tax Break.

The Industrial and Commercial Incentive Program (ICIP), an as-of-right property tax break, was discontinued in 2008 yet property owners who previously qualified continue to rack up big benefits–over $650 million in exemptions for over 7,000 properties last year. Based on data obtained by Good Jobs New York, The New York World investigated the program’s 20 largest recipients, including the Rego Center Mall in Queens, which received over $9 million in benefits, and the Park Avenue headquarters of JP Morgan Chase, which received $8.2 million, reported in the article as 35% of its total property tax bill. (Previously, Good Jobs New York has identified JP Morgan as the largest beneficiary of discretionary benefits, which we also have detailed in our website.). Other malls and office towers are included in The New York World’s top 20 list of ICIP “Bargain Shoppers”.

The data obtained by GJNY reveals the addresses of recipients of the ICIP subsidy, including block and lot. Often, the owners are listed as LLCs or holding firms. The New York World investigated the top recipients to discover what tenants occupy those properties. GJNY has now incorporated the ICIP data into our searchable Database of Deals, encompassing nearly 40,000 subsidies allocated to New York City properties and businesses. Subsidy information can be searched by program name and borough on our website, and all results can be downloaded in a CSV file.

Subsidy run amok

ICIP was designed to incentivize industrial and commercial businesses throughout the city, and began granting tax exemptions and abatements in 1984, at a time the city feared a massive exit of businesses. ICIP is an as-of-right program, meaning businesses qualify for the tax break for simply being in a particular location and conducting a certain type of business. To be eligible, the building owner must make capital improvements. The value of the tax benefit is based on the portion of the assessed value that increased due to the improvements. Many properties benefit for up to 25 years.

Transparency

As the New York World article points out, the obvious critique of this program is that even though ICIP has been discontinued, it continues to cost the city in foregone tax revenue. The city provides little transparency on which properties receive the tax exemption or if jobs were created or retained at the site. The New York City Department of Finance does publish a list of qualified properties on its website in excel format. However, the available data does not provide the name of the building owner nor the value of the tax break–key components needed to ensure the city prioritizes the allocation of its resources.

Of course, the question remains whether those benefiting from ICIP truly needed it. In his 2008 policy report “Senseless Subsidies”, Manhattan Borough President Scott Stringer claimed “Retaining businesses in New York City, encouraging capital investment, and bolstering our tax base are, of course, valid public policy goals. However, tax subsidies provided under ICIP have become badly disconnected from this core policy rationale, and New York City’s taxpayers are paying the price.”

And, of particular concern to GJNY is the lack of accountability mechanisms in place for holding beneficiaries accountable for the tax benefit received. In fact, companies are expected to submit a “certificate of continuing use” to prove that the land or property continues to function under the same designated use that originally got it the subsidy. GJNY could not find this information publicly and was unable to determine if this information is actually integrated into the process of filing for an exemption.

Rebirth?

In 2009 the ICIP program was transitioned into what is now known as ICAP, the Industrial Commercial Abatement Program. However, in this transition it is unfortunate that the city didn’t incorporate land use policies, or other more strategic city planning goals into shaping this program intended to spur development. Without a more community-oriented focus to incentivizing industries, and with only the barest of transparency and no accountability, it’s clear as-of-right programs like ICIP and ICAP present a drain on the city’s resources and an unfair advantage to the top commercial and real estate players in the city.