Posts Tagged ‘Subsidies’

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.

Sears: Now Come the (Penalty-Free) Headquarters Layoffs

February 20, 2012

As I foreshadowed on January 5, despite a huge subsidy package enacted by the state of Illinois in December, Sears Holdings Corp. has already announced layoffs at its headquarters in the Chicago suburb of Hoffman Estates. Last week, the retailer announced that 100 HQ staff will be laid off.

This after the chain announced on December 27—just 11 days after the subsidies were signed into law—that it will close as many as 120 stores nationwide.

That December deal, valued at up to $275 million, came after Sears threatened to relocate in headquarters to another state. Its predecessor company, Sears, Roebuck & Co., played the same “job blackmail” game in 1989. The $168 million, 23-year deal it won then was soon to expire when Sears Holdings announced it might again be footloose.

Everything about these two episodes demonstrates what is wrong with economic development in America today. The 1989 subsidy package paid Sears to abandon its famous Tower in Chicago’s transit-rich Loop and relocate 29 miles northwest to an area which then did not even have a transit bus line—one of the most egregious cases of state-sponsored sprawl in U.S. history.

To enable the subsidy, the state had to pervert its tax increment financing (TIF) law to allow “greenfield TIFs,” a tax-revenue problem that plagues the state today, as TIF diverts more than $1.2 billion from public services a year.

Some Chicagoans saw the 1989 exurban flight as symptomatic of Sears losing touch with its historically urban customer base, and little has happened since to contradict that idea. Now controlled by a hedge fund manager, Sears has been losing market share for years, and analysts have noted that it is reinvesting far less in its stores that it is taking in depreciation charges (not to mention costly stock buybacks).

Neither the 1989 nor the 2011 subsidy packages are structured to specifically address the company’s decline. Worse, the 2011 package reportedly allows Sears to shrink by another 1,750 jobs: with 6,000 remaining HQ employees, the deal allows the company to keep collecting the tax breaks as long as 4,250 employees remain.

Like I wrote in a blog last August: when an ailing company asks for a tax break, the wisdom of the plant-closings movement tells us: tax avoidance can be one form of corporate disinvestment, another early warning sign of job loss. Put another way: if a company doesn’t see a future in the community or the state, why should it keep investing in the schools or roads or universities? The alarm bells are loud and clear.

For better or worse, Illinois and Sears are stuck with each other. So what should state leaders do? Most are trying to make light of the Sears layoff news, emphasizing the jobs that remain. But taxpayers would be far better served if public officials said to the company: we demand that you use the subsidies we are giving you to vigorously reinvest in your stores, hire more executives with retail expertise, stabilize your market share and secure Illinois jobs.

With their 1,750-job layoff loophole, Illinois politicians don’t have the formal authority of fine print. But they do have a whole lot of angry taxpayers who would rally behind such a position.

Will North Carolina have Nothing to Show for Its Dell Subsidies?

September 9, 2008

Public officials in North Carolina and several other states are reeling from the revelation that Dell is considering the shutdown or sale of its assembly plants. The news that the computer maker is considering an exit from the manufacturing side of the business came in a front page story in the Wall Street Journal. Dell has not denied the report, which said the company might sell some of the plants to contract manufacturers and shutter the rest, but it has not provided specific details on its intentions.

Anxiety about Dell’s plans is especially intense in North Carolina, which went to great lengths in 2004 to put together a state and local subsidy package worth more than $250 million for an assembly plant in Winston-Salem. The deal was negotiated by the Department of Commerce and pushed through the state legislature in a special session with scant debate or analysis. The incentives package included a computer manufacturing tax credit, job investment grants, tobacco settlement fund grants, training incentives, transportation infrastructure grants, workforce development grants, sales tax refunds, waiver of property tax for 15 years and 200 acres of free land. In 2004, Governor Mike Easley estimated that the Dell plant would employ 8,000 people; so far, however, it has hired only about 1,150.

Along with the Winston-Salem plant, Dell owns 11 other manufacturing and distribution centers in Austin, Miami, Nashville, Brazil, Ireland, China and Poland.

Last March, however, Dell closed its facility in Round Rock, TX eliminating 900 jobs.

According to the Journal, Dell is in talks with manufacturers in Asia, who could either operate the plants on a contract basis or buy them outright. It is unclear whether those contractors would be willing or able to operate plants such as the one in Winston-Salem. A key complication would be the subsidies. There is no apparent precedent in North Carolina for transferring incentives to a new owner, which might not want to take on the job-creation provisions of the deal.

Dell spokesman David Frink has declined to comment on the report, instead stating, “we will continue to evaluate and optimize our global manufacturing and distribution network.” Bob Leak, president of Winston-Salem Business Inc., the local economic development agency, said he was not aware of any changes to Dell’s future in Winston-Salem.

In their negotiations of the Dell deal, North Carolina, Forsyth County and Winston-Salem bent over backwards for the company. They assumed that throwing subsidies, tax breaks and other incentives at a successful corporation was a smart economic development tool. Now they may regret putting so many of their eggs in one corporate basket.

Indiana City Enacts Clawbacks Extending Past Tax Abatement Period

September 4, 2008

A growing number of state and local governments are applying clawback provisions to economic development subsidies to be sure companies live up to their job-creation promises. Unfortunately, these provisions are not always enforced and usually are unenforceable after the subsidy period has expired.

The city of Portage, Indiana (east of Gary) recently took the unusual step of strengthening its clawback provisions relating to business tax abatements so that they remain in effect for five years beyond the duration of the abatements. The Portage City Council approved the new rules after growing frustrated at the number of companies that were leaving town after the abatements expired.

“A lot of times, we made investments, and companies got up and left,” Edward Gottschling, Portage City Council Member told Good Jobs First. “We want businesses that are going to stay here, not ones that will pick up and leave after abatement period ends.”

The new rules also strengthen the ability of the city to seek payment of abated taxes even during the subsidy period. Companies are required to provide an annual report to the City Council with the number of employees and level of wages to ensure that they are following the stipulations of their application. The penalties for infractions include discontinuation of the abatement and repayment of remitted taxes. The current abatements are grandfathered in and are not subject to the new clawbacks. If a company wants to apply for an additional abatement, however, they are required to meet the new requirements. As Donna Pappas, Clerk Treasurer of the City of Portage told me over the phone, “We’re trying to develop a diversified economy within our municipalities and at the same time look out for our residents and this is going to help us.”

A similar clawback provision is on the books in Ohio, where a company receiving state income tax abatements must stay at its original location for at least twice the number of years as the term of the tax credit. Other cities would be wise to follow suit and enact similar provisions to hold companies accountable to communities.