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Beginning of the end for corporate incentives?

by Frank Cagle

Is it time to stop the madness?

All across America cities, counties and states are opening up the public coffers to pay business and industry to bring jobs. It doesn’t really matter if the local or state governments want to play or not—that’s the game and you can get in it or sit on the sidelines.

Playing one community against another is standard practice and while some communities get a net gain in the short run, we all lose in the long run. Many times a company decides where it wants to go and then negotiates giveaways from the state and local government. Why wouldn’t you get all you can? Some communities offer generous incentives only to see the company jump to another locale when the tax breaks run out. From a national perspective, it is a zero-sum game. The net number of jobs in the economy does not change, it is just locals being played off one against the other for the best deal.

There are signs that this may change, going forward. A Tennessee judge, on the Sixth U.S. Circuit Court of Appeals, recently wrote an opinion declaring an Ohio sweetheart deal unconstitutional. (The Sixth Circuit includes Tennessee, Ohio, Kentucky, and Michigan.) The city of Toledo, in an effort to keep DaimlerChrysler from moving a Jeep plant, offered $281 million in tax incentives to keep the plant in town. Ralph Nader sued on behalf of three small businesses displaced by the plant and a dozen Ohio taxpayers. They argued that these tax breaks for DaimlerChrysler increased the tax burden on everyone else.

Justice Martha Craig Daughtrey (a former member of the Tennessee Supreme Court, wife of Tennessean columnist Larry Daughtrey, and appointed to the federal court at the behest of former Vice President Al Gore) wrote a unanimous opinion for a three-judge panel of the court saying an investment tax credit in the package was unconstitutional.

“In short, while we may be sympathetic to efforts by the City of Toledo to attract industry into its economically depressed areas, we conclude that Ohio’s investment tax credit cannot be upheld,” Justice Daughtrey wrote. The rationale used by the court is that to provide a tax credit only within the state of Ohio is to violate the interstate commerce clause of the U.S. Constitution and “hinder free trade among the states.”

Ohio will appeal the opinion to the full Sixth Circuit and then to the U.S. Supreme Court. Also, the opinion did not strike down all the tax incentives, most notably the 10-year property tax abatements on machinery and equipment. Property tax abatements are one of the most widely used incentives around the country.

It isn’t likely that the nation’s governors can get together and agree not to engage in corporate welfare. As sure as they do, someone will jump in and break the pledge to locate an auto plant or a parts manufacturer. Indeed, the Nissan plant in Smyrna got tax breaks to locate in Tennessee. Despite extensive capital investment and there being little likelihood of the plant moving out of state, when the tax breaks ran out the legislature routinely extended the tax breaks for another 15 years. Supporters would point out that the plant has since expanded its operations.

What if Congress enacted legislation that would forbid these tax breaks to corporations? That would put every community and state on a level playing field—on financial incentives anyway. (For a discussion of this issue, see an article by James Surowiecki in the Dec. 13 New Yorker magazine.)

As a free-enterprise capitalist I oppose unreasonable burdens on business, but equally oppose corporate welfare. But a few problems arise when you outlaw financial incentives. The lack of incentives puts further pressure on companies to relocate overseas, reducing jobs in this country. Over the last 30 years, Southern states like Tennessee have used financial incentives to transform a poor agrarian economy into an industrial economy. But you could argue that it was reduced labor costs rather than tax incentives that moved industrial concerns to the South. The tax incentives have more likely been used to play one poor non-union Southern state off against another.

It will take years for the Sixth Circuit decision to move through the courts. But it may be the beginning of a movement. It may be that the nation’s governors will ask Congress for legislation creating uniformity. But given the temperament of majority House Republicans, I can’t imagine them voting for an end to corporate welfare.

Conservatives like to talk about welfare queens wasting government money. But they seem to be focused on someone in a housing project getting a $200 check, rather than a corporate welfare queen getting $218 million not to go to Mexico.

Frank Cagle is the host of Sound Off on WIVK FM107.7, WNOX AM990, FM99.1 and FM99.3 each Sunday 8-9:30 a.m.

December 23, 2004 • Vol. 14, No. 52 © 2004 Metro Pulse