In a potential bombshell for the ways states and cities subsidize corporations in the name of jobs, the Supreme Court announced in late September that it will hear the case of DaimlerChrysler v. Cuno. A year ago the US Court of Appeals for the Sixth Circuit ruled that a huge investment tax credit given by the State of Ohio for a new Jeep plant in Toledo violated the commerce clause of the Constitution. If the Supremes uphold the decision many job subsidies are likely to be invalidated. In the world of “economic development,” where states and cities spend at least $50 billion a year, such a ruling would be huge news.
The DaimlerChrysler episode is a classic case of “job blackmail,” in which the automaker threatened to move Toledo’s longstanding Jeep production, playing Ohio against Michigan. Ohio “won” with a package valued at about $281 million.
Such episodes have become epidemic: state versus state or more commonly suburb versus suburb. Boeing did it to Washington State for the Dreamliner project. Dell did it to North Carolina. Dozens have done it to New York City. Raytheon and Fidelity did it to Massachusetts. Cabela’s does it and so does Wal-Mart. The average state now subsidizes jobs in more than thirty ways. Individual deals routinely involve eight or ten giveaways: property tax abatements, corporate income tax credits, tax increment financing, low-interest loans, free land–and just plain cash. Such packages often exceed $100,000 per job.
The trouble is, the system is rigged. State auditors, investigative journalists and tax watchdogs have repeatedly found that companies fail to create or retain as many jobs as they promise. Others are paying poverty wages or failing to provide healthcare. Some don’t create any new jobs or actually lay people off. Subsidized companies are even outsourcing jobs offshore. The other promised benefit–higher tax revenue–often proves false or exaggerated as well. That’s the great American jobs scam: a system that enables corporations to exact huge taxpayer subsidies by promising a stronger economy–and then lets them fail to deliver.
In the same quarter-century that states and cities have larded on these wasteful giveaways, they have had to cut corners on their budgets, deferring maintenance on infrastructure. New Orleans’s shattered levees are a tragic example, but the American Society of Civil Engineers warns of a cumulative physical deficit of $1.6 trillion that threatens everything from water quality and reliable electricity to highway safety and mass transit.
With roots in the Great Depression, this rigged system matured by the 1970s, with secretive site-location consultants (like Fantus), “business climate” experts (like Grant Thornton) and a corporate network orchestrating attacks on state tax codes. Today it includes consultants who help companies avoid leaving money on the table–and even an embryonic industry buying and selling unused economic development tax credits.
Consider Dell’s recent deal for a new computer assembly plant in Winston-Salem, North Carolina. The company secretly negotiated state subsidies worth $200 million to $225 million, which were then presented by Governor Mike Easley to the legislature for one day of debate–up or down, no amendments allowed. Then Dell played three localities against one another and won an additional $37.2 million from Forsyth County and Winston-Salem. All this for a facility that will cost a projected $100 million to $115 million–less than half the value of the subsidies!
Increasingly, however, taxpayers are fighting back. A wide rainbow–including social service advocates, community groups, unions and labor federations, tax and budget watchdogs, and environmentalists–are rewriting jobs policy from the grassroots up. They’re winning “disclosure” laws requiring annual, company-specific reporting on costs and benefits (twelve states and counting); “clawbacks,” which allow taxpayers to get some or all of their money back if a company falls short on jobs or other promised benefits; and job-quality standards, or wage and healthcare requirements (in forty-three states and forty-six localities).
Coalitions are also demanding budget reforms to make hidden corporate entitlements fully visible when states make tough budget choices. School boards are becoming aware that they deserve more say when property tax abatements hurt public education funding. Activists against sprawl and Wal-Mart are increasingly using the leverage of subsidies in big-box fights.
Of course, the Bush Administration’s post-Katrina plans–the Gulf Opportunity Zone, which promises a windfall for oil companies and casinos–are swimming against this tide of progress. But community groups and unions are resisting, informed by New York City watchdogs about the many scams in the $20 billion package for the post-9/11 rebuilding of Lower Manhattan [see David Dyssegaard Kallick, “Building a New Table,” October 24].
Against this roaring backdrop–and related lawsuits in North Carolina and Minnesota–DaimlerChrysler v. Cuno goes to the Supreme Court. No matter how the case is decided, the issue can only grow hotter. Money is being wasted on secret corporate giveaways when it is needed to rebuild our infrastructure, and the costs are becoming clearer by the day.