Archive for February, 2013

Record $ for Mega-TIFs in Minnesota and Texas

February 27, 2013

Q:        What could be worse than a TIF costing $585 million?

A:        A $585 million TIF fueled in part by the diversion of workers’ state personal income taxes—and those people work for the state’s largest private employer.

Q:        What could be worse than a TIF costing $803 million?

A:        An $803 million TIF created for one named employer—and that beneficiary is a big-box retailer owned by a mega-billionaire’s company.

Two TIFs proposed in the past three weeks would break the U.S. record for costliest TIF district (currently held by the $500 million TIDD in Albuquerque by Forest City Enterprise’s Mesa del Sol project).

In Minnesota, Land of 10,000 Lakes—and more than 2,000 TIF districts—Mayo Clinic Health System is now before the state legislature seeking a TIF deal on steroids surrounding its flagship headquarters complex in Rochester. The “Destination Medical Center” project refers to Mayo/Rochester being an international medical destination.

The legislation would create a state body to issue bonds backed by four, 20-year revenue streams. One of those streams comes from part of the rise in personal income taxes paid not only by Mayo employees in Rochester, but also by employees of other companies in the Rochester development district—and at Mayo Clinic’s 43 other facilities across the state! (See our “Paying Taxes to the Boss” study for why diverting personal income taxes is such bad policy.)  The body would also apparently capture part of the incremental corporate franchise taxes, commercial-industrial property taxes, and sales taxes from Rochester and Mayor’s other facilities.  Mayo, a non-profit, has assets of $11 billion and an endowment of $2.2 billion. It employs more than 32,000 people in Minnesota.

In Texas, where TIFs are called Tax Increment Reinvestment Zones (or TIRZs), a small, affluent Dallas suburb named The Colony is proposing a massive TIRZ with only one named occupant so far: Nebraska Furniture Mart. NFM Texas broke ground last September on 1.86 million square feet of retail and distribution space within what it calls Grandscape, a 433-acre mixed-use development it plans along the Sam Rayburn Tollway.

This will be NFM’s first store in Texas, and it claims the site will be “destination retail.” It plans a showroom of 560,000 square feet (for context, 200,000 square feet is a large Walmart Super Center). The Dallas Morning News reports that an adjoining warehouse of 1.3 million square feet will use methods learned from the fast food industry to have goods in a customer’s car within seven minutes.

NFM is owned by Berkshire Hathaway, the conglomerate headed by Warren Buffet, the nation’s second-richest person worth $46 billion, according to Forbes.

The proposed TIFs for Mayo Clinic and Nebraska Furniture Mart are evidence of the cruel reality in U.S. economic development today: the big dogs are hogging the trough. It’s the public-sector equivalent of banks lending only to the most credit-worthy borrowers.

Are you big, famous and profitable? Jump to the head of the line! What’s that about “incentives” for workers, communities and businesses that actually need help? Tut, tut. How passé.

ED Officials Agree with Us!

February 18, 2013

A stunning survey issued today by the International Economic Development Council (IEDC) proves that state and local economic development officials overwhelmingly agree with most accountability activists.

That is, hundreds of people who deal with site location consultants, tax-dodging lawyers, and footloose companies every day think there need to be some serious rule changes.

This is a very mainstream sample: IEDC is the nation’s largest professional association of economic development officials: it has about 4,500 members (the vast majority in the U.S., despite its name) and the survey was conducted in January, with a reported 350 respondents. (As well, IEDC has corporate members, including site location consultants; no cross-tabs of responses by type of member are provided.)

Look at what they said (words in quotes come from IEDC’s January 18 summary, which does not reproduce the survey instrument and is member-password restricted):

98.6 percent said “incentives should be structured in such a way that the community receives a tangible return on investment (e.g., employment, capital investment).”

(On that issue, see our Money for Something.)

“96 percent believe that part or all of the granted incentives should be returned if a company does not meet agreed-upon projections [i.e., clawbacks].”

(On that, see our Money-Back Guarantees for Taxpayers.)

67 percent “do not think it is ethical for location consultants to be compensated as a percentage of the incentive package they negotiate…”

(On that, see Chapter 2, Chapter 3 and Chapter 9 of my 2005 book.)

61 percent “believe location consultants’ compensation in a deal should be public information…”

In an open-ended comment section, “[p]erhaps the most frequent comment was that incentives practices are ‘out of control’…”

To be sure, despite these frustrations—and even though 57 percent said the frequency of incentive use is “too many,” the development officials responding generally don’t favor getting rid of subsidies. Instead they asked for help not getting snookered:

78 percent “responded that they approve of the practice of using financial incentives to influence business location decisions.”

But more than “80 percent responded that they or their peers or colleagues would benefit from more training in analyzing incentives deals.” Their most commonly requested new skills were how to calculate Return on Investment (ROI), fiscal impact, and the value of non-cash incentives.

“83 percent responded it would be helpful to have a set of guidelines or best practices for negotiating incentives packages.”

(On that point, see this publication of ours and this one, too.)

Without seeing the survey instrument, I am struck at how the responses all seem to overlook site location business basics: labor, occupancy, logistics, proximity to suppliers and customers, etc. That is, they apparently ignore the more than 98 percent of a typical company’s cost structure that is not state or local taxes and therefore cannot be influenced by subsidies. Clearly, some respondents believe that companies bluff and others said things like (quoted comment): “public monies are needed to provide public services and we shouldn’t be coerced into subsidizing large companies that don’t need the assistance.”

The development staffers also made it clear that politicians are no help. Many said there is a “‘general need in our industry for sharper benefit/cost analysis skills.’ Yet ‘a lot of times, elected officials don’t really care about the details of these numbers.’”

The IEDC survey has a second part, on the uses of subsidies, to be released soon. Clearly, this is a raw issue for Council members, especially those in smaller localities: last April IEDC published a guide on how to deal with site location consultants.

As someone who began training public officials on these issues in the late 1980s, I have seen a sea change in attitudes. Most feel trapped in a game whose rules they would never have written, and this IEDC survey attaches numbers to my takeaways.

So when will elected officials finally heed this consensus and start fixing the rules? If two-thirds of development officials agree it is unethical for site location consultants to pull down commissions on subsidies they negotiate, which state will step up and become the first to register and regulate these secretive, powerful players as lobbyists and thereby deny them success fees, a.k.a. commissions?

ALEC Responds to “Snake Oil” … with More Snake Oil

February 15, 2013

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.

Our “Shell Game” Findings Strike A Chord

February 5, 2013

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.