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.

The American Legislative Exchange Council recently issued a response to our November study Selling Snake Oil to the States. But as Dr. Peter Fisher, primary author of our study, says in a retort published by the Iowa Fiscal Partnership, ALEC scored no points.

In a press conference we held this week with five other groups, Fisher said ALEC only dug itself deeper in a hole—none of its claims altered our findings that ALEC policies failed to deliver stronger state economies. He concludes:

In fact the authors’ misinterpretation of our use of economic structure variables and misuse of the state coincident indices serve only to further confirm the shoddiness of the research sponsored by ALEC.

The press conference was staged to also feature two more terrific studies:

ALEC Tax and Budget Proposals Would Slash Public Services and Jeopardize Economic Growth, by the Center on Budget and Policy Priorities,  concludes that deep tax cuts for corporations, investors, and the wealthy, and a corresponding shift of taxes to middle- and low-income households would hurt state budgets, families and communities.

Profiting from Public Dollars: How ALEC and Its Members Promote Privatization of Government Services and Assets, by In the Public Interest, identifies ALEC model bills that promote privatization, matches the bills with related state legislation, and discusses the benefits that ALEC’s corporate members received from the passage of the laws.

When we released our study “Job-Creation Shell Game” last week, we knew we would meet some skepticism. We could hear a few hackneyed questions coming, like: “What state would unilaterally disarm?”

But actually, we got very few such questions—because we isolated an aspect of the economic war among the states that is just so outrageous no one can credibly defend it. I am referring to what we called “interstate job fraud,” or the dishonest relabeling of existing jobs as “new” just because they have been moved across a state line—even if that move was literally across the street.

Joining us on our press conference call was Bill Hall, Assistant to the Chairman of Hallmark Cards, in Kansas City, Missouri. Almost two years ago, a fellow Hallmark executive joined leaders of 16 other Kansas City-area businesses in a public letter to Missouri Gov. Jay Nixon and Kansas Gov. Sam Brownback, urging them to stop paying businesses to jump the state line for eight-figure subsidy packages for “new” jobs.

During the press conference, Hall revealed new research: the two states have spent at least $192 million in recent years pirating jobs from each other:

Through the PEAK (Promoting Employment Across Kansas) income tax abatement program, Kansas will rebate $132 million for entities moving from Jackson County, MO to Johnson or Wyandotte Counties in KS.  A total of 3,109 jobs moved from east to west over the state line.  On the Missouri side, the Missouri Quality Jobs program will spend $60 million in subsidies to move 2,514 jobs from west to east.  The net job gain to Kansas of this job shuffle was 595 jobs, at a staggering cost of $323,000 per job.

Alarmingly he added:

The numbers are dynamic.  Each month new companies apply for and receive benefits.  In Kansas, many of the firms receiving incentives are small to medium sized service firms such as law offices, accounting firms, architecture and engineering firms …even catering companies.  These types of companies would not leave the region, but are relocating for the generous incentive packages available.  Most relocations are 10 to 15 minutes from the original location.   Employees don’t move to new homes or change schools, they just change their commute.

 The pace of incentive use continues to accelerate, with new announcements each month.  In total, since 2009, Kansas has abated $324 million in state income taxes and Missouri’s Quality Jobs program has cost $365 million in general tax revenue since the program began in 2005.

In our study, we detailed three other metro multi-state areas with similar interstate job fraud: Memphis (pirated by Mississippi); Charlotte (spanning 16 counties in North and South Carolina); and New York City (often pirated by New Jersey). We also cited Rhode Island for a tragic episode of job piracy from the Boston area.

We have received many private back-slaps for the study, including some from business groups and economic development staffers. Public reactions in the news media, including the business press, have hardly been skeptical:

In a biting editorial, the Columbia (Mo.) Daily Tribune warned:  “This idea of chasing Kansas over the [tax-cutting] cliff is ludicrous.” “Maybe we should quit funding public education and give the money instead to a few companies operating on the state line,” it bitterly concluded.

The Bergen County (N.J.) Record headlined: “N.J. job incentives blasted; advocacy group sees ‘fraud’ in relocation subsidies.” When the New Jersey Economic Development Administration failed to comment on our findings, the paper quoted us at length, as well as a conservative think-tank study we cited that also found minimal impact from costly interstate relocations.

Kansas City Business Journal columnist Steve Vockrodt wryly noted that at least “Kansas City hasn’t had a company like Sears Roebuck & Co., which went to Illinois in 1989 and again in 2012 for a combined $440 million in retention subsidies.”

State Tax Notes, the weekly of record on state tax policy, reported that an economist at the conservative Tax Foundation “told Tax Analysts that generally she agrees with the report’s findings and that providing incentives to some companies is not good policy.”

Philadelphia Inquirer columnist Mike Armstrong wrote: “Paying to retain jobs [what we called ‘job blackmail’] is an all-too-frequent practice, and it drives all sorts of diligent, taxpaying business people nuts.”

The Jefferson City (Mo.) News Tribune editorialized “Do we follow Kansas off tax-credit cliff?”: “The sparring between the states is reminiscent of the stereotypical mother’s admonition to a child’s rationale in the following exchange. Child: ‘Well, my friend Joey is allowed to do it.’ Mom: ‘If Joey jumped off a cliff, would you jump off a cliff?’”

Political scientist and subsidy scholar Kenneth Thomas, writing at the Wall Street online daily Business Insider, cited our evidence that 40 states already refuse to subsidize intrastate job piracy. “What is necessary, the report argues and I wholeheartedly agree, is that states need to tweak their program language to stop rewarding interstate job relocation as well. They need to stop efforts to directly poach existing firms, something Texas is heavily engaged in.”

Pulitzer Prize-winning tax reporter David Cay Johnston, in a State Tax Notes column, wrote: “Tax officials, business owners, and others interested in easing state-level tax burdens and protecting state fiscs would do well to spend time not just reading but studying [the] clearly written report…” and “The vast array of new data, including footnotes with hypertext links, makes an overwhelming case against relocation and retention payments to corporations big and small.”

Finally, the Atlanta Journal-Constitution said a Georgia official “chafed” at our relabeling it “the Poach State.”

I suspect that some of the 1,250 people at NCR headquarters, whose jobs had resided in Dayton Ohio for 125 years, had choicer words when their jobs were uprooted and relabeled “new” to help qualify the company for a nine-figure subsidy package.

State and local governments waste billions of dollars annually on economic development subsidies given to companies for moving existing jobs from one state to another—or on “job blackmail” paid to prevent possible relocations. That’s the main conclusion of The Job-Creation Shell Game, Good Jobs First’s new study released today.

What was long ago dubbed a Second War Between the States is, unfortunately, raging again in many parts of the country. The result is a vast waste of taxpayer funds, paying for the geographic reshuffling of existing jobs.

By pretending that existing jobs that are relocated are “new” (or perhaps technically “new to the state”)—and thereby qualifying them for eight- and nine-figure subsidy packages—public officials and the recipient companies engage in what the report calls “interstate job fraud.”

Interstate job piracy is wasteful and unfair. The costs are high and the benefits low, given that a tiny number of companies get huge subsidies for moving a small number of jobs.

The strategy is low impact: detailed studies consistently find that the net impact of interstate job relocations—plus or minus—is microscopic for a given state.

The study includes eight case studies on metropolitan areas such as Kansas City, Charlotte, New York and Memphis, where companies get subsidized to move short distances across state borders. It also profiles states such as Texas, Tennessee, Georgia, New Jersey and Rhode Island that are aggressive users of relocation subsidies as well as states such as Illinois and Ohio, which have given big retention or “job blackmail” packages.

The report recommends that states “de-monetize interstate job fraud” by no longer dishonestly calling existing jobs “new” just because they have been moved across a state line. It further reveals that states already know how to do this: four-fifths of the states already refuse to pay for intrastate job relocations.

The report also recommends that states end their business recruitment activities that are explicitly designed to pirate existing jobs from other states. It also suggests a modest role for the federal government: reserving a small portion of its economic development aid for those states that amend their incentive codes to make existing jobs ineligible for subsidies.

Good Jobs First, sponsor of this Clawback blog, is a non-profit, non-partisan research center based in Washington, DC that promotes corporate and government accountability in economic development and smart growth for working families.

Film production subsidies are already among the most controversial tax breaks in America today. But did you know that many states spend more money subsidizing films that promote smoking to teenagers than they spend on smoking prevention and cessation programs?

The following text is brought to you as a public service from Smoke Free Movies, based on ads in Variety, The Hollywood Reporter and State Legislatures. See the ad here and learn more about the issue here.

– Greg LeRoy, Good Jobs First

For decades, tobacco companies paid Hollywood to push smoking in movies.

Why are state taxpayers doing it now?

In March 2012, based on documentary evidence, the US Surgeon General reported that, for decades, US tobacco companies gave Hollywood valuable incentives to promote smoking in movies.

Today, so do taxpayers.

Through state film production incentives, states hand hundreds of millions of dollars to producers of movies with smoking.

Research indicates that exposure to on-screen smoking accounts for a million current teen smokers in the U.S. Indiscriminate film subsidies undermine states’ own efforts to keep kids from starting to smoke and avert billions in health costs.

No state can afford this deadly, wasteful policy conflict. Fortunately, the fix is straightforward.

As the US Centers for Disease Control and Prevention (CDC) recommended last year, states can simply make future media productions with tobacco imagery ineligible for public subsidy.

There’s no First Amendment issue. After all, state subsidy programs already filter out film projects for a range of other content.

Whether or not you think film subsidies make sense as economic development policy, collateral damage to kids’ health makes them unsupportable.

It’s time to mend state film incentives or end them. Learn more at bit.ly/fixsubsidy.

Sources: US Surgeon General. Preventing Tobacco Use Among Youth and Young Adults: A Report of the Surgeon General (2012), Chapter 5: The tobacco industry’s influences on the use of tobacco among youth. http://1.usa.gov/youthsmoking

US CDC. Morbidity and Mortality Weekly Report. Smoking in top-grossing movies — United States, 2010. July 15, 2011. http://1.usa.gov/mmwr_2011

Smoke Free Movies – smokefreemovies.ucsf.edu

Smoking in movies kills in real life. Smoke Free Movie policies — the R-rating, certification of no payoffs, anti-tobacco spots, and an end to brand display — are endorsed by the World Health Organization, American Medical Association, American Academy of Pediatrics, American Heart Association, Legacy, American Lung Association, Americans for Nonsmokers’ Rights, American Public Health Association, Campaign for Tobacco-Free Kids, Los Angeles County Dept. of Health Services, New York State Department of Health, New York State PTA, and many others. Visit SFM online or contact: Smoke Free Movies, UCSF School of Medicine, San Francisco, CA 94143-1390.