Alabama and Louisiana, two of the poorest states in the nation, recently battled to host a new ThyssenKrupp steel mill. Alabama "won," but getting the mill cost the state $734 million in tax breaks -- or $272,000 for each of the 2,700 jobs the steelmaker will create.
Federal tax giveaways to industries ranging from energy to agriculture have received much criticism, but the relocation incentives offered by states for corporations to move their facilities from one to another may be the most counterproductive of all corporate subsidies.
How the Game Is Played
Companies know that states are willing to award generous packages for minor job additions and pit the governments against each other in bidding wars that essentially amount to blackmail.
One political scientist estimates these state and local giveaways to corporations at $70 billion or more.
Consider these recent deals companies bartered for their business:
Sears (SHLD) recently broached the idea of relocating its Illinois headquarters and 6,000 jobs with it. A company rep said about one-third of the states had sent in proposals to entice the retailer, including Ohio, which offered $400 million in incentives, leading Illinois to counter with $371 million to stay put. Those expenditures work out to more than $60,000 per job.
After considering offers from a number of states, manufacturing giant Caterpillar (CAT) recently won $45 million from Georgia -- and $75 million from others sources in the state -- to relocate a Japanese plant to the Peach State, bringing with it an estimated 1,400 jobs.
One of the biggest offenders in the corporate giveaway bonanza may be New Jersey Gov. Chris Christie. In just two short years, Christie has given away more than $1.5 billion to recipients including Panasonic (PC), Goya Foods, Campbell Soup (CPB), and Prudential Financial (PRU). The rewarded companies have promised to add just 2,364 jobs over the next decade, equivalent to a cost of $387,537 per job.
Commenting on the surge in spending, one policy advocate said, "Christie has taken it to a whole different level; it's becoming a feeding trough." The Christie administration has also offered about $300 million for select New York businesses to move across the Hudson, moves that have sparked the ire of New York City Mayor Michael Bloomberg, among others.
Good for One and Bad for All
Such overtures highlight the greater problems with state tax giveaways. At best the tax breaks are a zero-sum game and at worst a lose-lose situation as corporations bleed states for subsidies. Like a ball-hogging basketball player who pads his stats to the detriment of the team, this system has led states to put their interests ahead of the country as a whole, diverting more tax dollars toward corporate welfare and damaging the nation in the process.
While these policies may seem like an inevitable race to the bottom, other countries may have found solutions. Canada has had some success in preventing competition between its provinces, and in Europe the sweetheart deals happen much less frequently because relocation subsidies must be approved by the European Commission and there are spending limits.
Local communities nationwide have also been fighting back by signing noncompete agreements, but many have failed because there is no enforcement structure. The National Governors Association has also consistently opposed any steps to deter the job-poaching practice.
Two Better Ways to Promote Job Creation
Instead of a system where states steal jobs from each other, governments would be better off encouraging job creation from the bottom up. Two easy ways to facilitate this would be by removing some of the most unnecessary business expenses: employer payroll taxes and health care costs.
A direct tax on hiring would appear to be the clearest government obstacle toward boosting employment. Employers pay 7.65% of wage expenses up to $110,100 for an individual to support Social Security and Medicare, plus any extra charges for federal and state unemployment taxes. Employer contribution from payroll taxes total about $450 billion a year. A reduction in that tax burden would surely incentivize more hiring. One estimate concluded that a one-year 3.1 percentage point decrease in employer payroll taxes (based on a proposal made by President Obama last fall) would create 1 million jobs. A permanent decrease would likely provide a more favorable employment climate and continue to boost job creation.
Like payroll taxes, health care payments represent another heavy burden on employers. Though the health care system has been at the center of national debate, its costs to employers and entrepreneurship are often overlooked. Many countries subsidize health care directly through the government, making it easier for businesses to compete. Eliminating the practice of giving group discounts would be one way to encourage individual health insurance purchasing and move the responsibility away from employers. Furthermore, attaching individuals to their employer's health care plan discourages entrepreneurship since people are often reluctant to lose their employer-paid health insurance.
State budget deficits have recovered somewhat since revenues bottomed out in 2010, but with 30 states projecting shortfalls totaling $49 billion over the next year, they are still a serious concern. If the earlier estimate of $70 billion being awarded for business relocation is accurate, it seems like the time has come to address these lavish corporate subsidies being awarded at the expense of the taxpayer. Eliminating relocation incentives would help fill state coffers and end a pernicious distortion of the market.
Motley Fool contributor Jeremy Bowman holds no positions in the companies in this article.
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