Location, Location, Location
Why tax breaks are such a negligible part of corporate decisions.
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A few weeks ago, Macy’s received a slew of tax breaks from the Ohio Tax Credit Authority to expand a warehouse in Jackson Township. One of the township trustees — which is akin to a city council member — had this to say about the deal: “With the two very large interstates, 76 and 80, that actually criss-cross in our Township boundaries ... I think we're second to none when it comes to location.”
That quote encapsulates a maddening aspect of the corporate incentive scam: State and local officials acknowledge that a particular locale has advantages for the corporation in question that have nothing to do with incentives, and then dish out incentives anyway.
Today, I’m going to dig in on that point: What does it really mean when critics say incentives and other tax shenanigans merely provide public resources to corporations to do what they were going to do anyway?
The most comprehensive look at how often a tax break actually tips a corporate location decision was done by Tim Bartik at the Upjohn Institute. He found that between 2 and 25 percent of incentives make a difference. “The other 75 percent to 98 percent of the time, the same decision would have been made without the incentive,” he wrote.
In other words, the other 75 percent to 98 percent of the time, the incentive was an utter waste to taxpayers, free money to a corporation to do what it intended to do all along. Bartik arrived at those numbers by surveying dozens of studies done on incentives, as well as those on more general levels of corporate taxation.
Why are tax incentives so insignificant in deciding corporate locations? Because many other factors go into location decisions. And I don’t say that based solely on theoretical number-crunching like Bartik did. There are real-world examples all over. Let’s go through some of them.
One thing corporations consider, as evidenced by the quote from the Ohio township official above, is proximity to infrastructure. Macy’s wants to build a warehouse in a place that provides easy access to customers, so an area with a confluence of major highways makes perfect sense, tax credits or no tax credits. Amazon also builds its warehouses in places where it can easily access highways and airports, and ultimately, its customers — the better to move stuff quickly from plane to warehouse to final destination.
Then there are supply chains and resources. North Carolina lost out on a joint Toyota-Mazda plant a few years ago not from hesitation to pay through the nose for it, but because those cars are constructed from parts coming mostly from Appalachia, and were being sold to mostly customers in the Midwest and Great Plains, so it made more sense to build the final manufacturing facility closer to where the parts and the people ultimately buying the cars were. “We can't move North Carolina southwest,” one North Carolina official said. The plant wound up in Alabama.
When Toyota consolidated a bunch of offices in the Dallas suburbs, it was the same story: Corporate officials admitted the move was for logistical and supply chain purposes, having nothing to do with the $40 million it received from the Lone Star State.
A similar situation occurred with Tesla in Nevada, where proximity to minerals, and the cost savings therein, was an overriding factor in the decision to place a factory there. “As the only state in the U.S. to mine lithium, Nevada is the ideal location to host Tesla’s Gigafactory. With close proximity to Nevada’s estimated $9 billion worth of mineral resources including lithium, gold and silver, Tesla expects to simplify their supply chain and reduce costs by up to 30 percent,” a trade association said in a release.
Key words: “the only state,” “ideal location,” “reduce costs by up to 30 percent.”
Then there’s proximity to existing structures the corporation already owns, such as this instance in Memphis, Tennessee, where a developer received incentives to build right by its own building. Or Utah handing Facebook tax breaks to build out its already existing data centers. Expanding an existing site provides a bunch of advantages — knowledge of the permitting process and local contractors, access to an existing workforce, experience with the area’s logistics, etc. — that have nothing to do with incentives.
The above is far from an exhaustive list: Corporations want to be by universities, or near a workforce with particular training, or where land is cheaper, or to be associated with a particular city’s “brand.” I’m willing to bet Amazon choosing the suburbs of Washington, D.C., for it’s HQ2 had little to do with the incentives it received, but was about proximity to: government officials it wanted to lobby, the people deciding on Pentagon contracts it wanted to receive, Jeff Bezos’ newspaper, and Jeff Bezos’ massive D.C. mansion.
So elected officials have lots of levers they can pull to make themselves more attractive to business: They can invest in better schools or roads, ensure fair competition between small and larger businesses, or promote other quality of life measures for workers that will attract people and the corporations they work for, without resorting to handouts and nonsense.
But corporate leaders don’t really want you or me to think about any of that stuff: They want us to believe that incentives are the be-all, end-all of corporate decision making. If they give the appearance that an auction is occurring, then bids will increase.
So they claim every location decision is a free-for-all, with anywhere and everywhere in the running, rather than a calculated decision based on a whole host of cost factors, of which taxes are but one tiny slice. And credulous officials, and oftentimes bamboozled local journalists, repeat those claims.
I always go back to this quote from former Treasury Secretary and Alcoa CEO Paul O’Neill: “If you're giving money away, I'll take it, you know. If you want to give me inducements for something I'm going to do anyway, I'll take it. But good business people don't do things because of inducements.”
Sounds about right.
HAPPY BOOK BIRTHDAY 🥳 🥳 🎂🎂: My book, “The Billionaire Boondoggle: How Our Politicians Let Corporations and Bigwigs Steal Our Money and Jobs,” turns two years old on Friday. If you like the content in this newsletter, you’ll really like the book, and the story it tells is as relevant today as it was the day it came out.
If you want to buy a copy, go here to choose from some good sellers, and also Amazon.
ONE MORE THING: Cleveland.com ran a really good piece this week on how the pandemic should cause a reexamination of publicly-owned hotels. Indeed, while cities getting into the hotel business — which happens more often than you might think — was a bad idea pre-pandemic, the recent drop in tourism has really shown the folly of trying to juice economic development with a bunch of hotel beds.
The best thing to do, at this point, is for cities to dump these properties, rather than employing the typical tactic of doubling- and tripling-down on the bad investment before inevitably selling anyway.
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Thanks again!
— Pat Garofalo