Corporate giveaways make it more expensive for cities to service debt.
This is Boondoggle, the newsletter about corporations ripping off our states and cities. If you are not currently a subscriber, please click the green button below to sign up. Thanks!
Loads of studies have shown the ways in which corporate tax subsidies are underwhelming — to say the least — when it comes to producing their promised outcomes. They don’t increase, jobs, incomes, or economic growth for the cities and states handing them out.
However, according to a new study by three researchers at Georgia Tech, those corporate giveaways do increase something: The cost of debt for local governments.
Sudheer Chava, Baridhi Malakar, and Manpreet Singh looked at $38 billion in subsidies given by local governments between 2005-2018. They found the local governments that “won” the right to pay corporations to relocate or retain jobs subsequently paid higher interest rates on their debt in the next few years than did the second-choice locations that “lost” the competition to bring in a new company.
The additional borrowing costs totaled 7.5 percent of the subsidies. So the $38 billion shelled out by local governments came with an additional $2.8 billion tacked on to what would have been the towns’ normal debt service costs.
To be clear, it’s not just that debt went up for places that are increasing expenditures in order to woo corporations — it’s that the interest rate for that debt increased relative to the places that didn’t end up engaging in such wheeling and dealing. The numbers were worse for counties that had lower capacity to absorb debt, and were mitigated when the companies that received subsidies were more innovative. (So Amazon warehouses, not so helpful.)
The paper doesn’t get into why this all might be, but reading it reminded me of another paper I perused recently in which towns that lose their local newspaper see higher borrowing costs, under the theory that a lack of local journalists means local officials will be more profligate with tax dollars. Do investors, seeing a locale is doling out corporate subsidies and knowing that such subsidies rarely pay off, demand higher interest rates? Maybe! (If any finance folks have thoughts, leave ‘em in the comments or email me.)
My main takeaway is that this is one more thing that doesn’t get factored into local decisions to dole out corporate subsidies. Local officials and local press often sell deals as a simple equation in which some taxpayer money flows out, but more revenue flows in via job creation and corporate investment.
But it’s actually nowhere near that simple: There are opportunity costs for the community via services or programs that go unfunded, there are extraneous costs from negative things corporations create, such as pollution and traffic, and there can be, apparently, costs via higher debt service payments.
Local officials should be factoring all of these downsides in, and many others, when deciding whether or not to provide a new giveaway — especially during a pandemic that is hammering local budgets.
One more thing:
Thanks for reading this edition of Boondoggle. If you liked it, please take a moment to click the little heart under the headline or below. And forward it around to friends, family, or neighbors using the green buttons. Every click and share really helps.
If you don’t subscribe already and you’d like to sign up, just click below.
Finally, if you’d like to pick up a copy of my book, The Billionaire Boondoggle, go here.
— Pat Garofalo