Every year, states compete for jobs in a corporate giveaway that nobody likes but everyone does. It doesn’t matter if the legislature or governor is Democrat or Republican, free-market or interventionist.
They give companies tax breaks, money for training or infrastructure, sometimes land or buildings. Each state has at least one subsidy to lure companies. The deals create new jobs or save current ones, but they also cost taxpayers billions of dollars a year.
By taking personal charge of a deal to save 800 Indiana jobs, President-elect Donald Trump has raised the prospect that such policies could become a fundamental part of his jobs strategy.
That worries critics, who say that it could further expand practices that the left condemn as “corporate welfare.” But others see a silver lining if Mr. Trump can encourage states to use their subsidies to keep American jobs from moving offshore instead of across state lines.
“There’s a crying need for federal oversight” of state economic incentives, Matthew Gardner, senior fellow at the Institute on Taxation and Economic Policy, writes in an email. “It's basically a harmful exercise in a lot of cases. Policymakers are often giving away money for free.”
How much taxpayer money does it really take to save an American job, and when does the cost outweigh the value of job itself? The difficulty in finding an answer in part explains why it has been hard to find the sweet spot for government giveaways.
“Economic development cost-benefit analysis in America is the statistical Wild West,” writes Greg LeRoy, executive director of Good Jobs First, in an email.
One reason the math is slippery is that corporations use the process to their advantage. They float the idea of moving a plant or a headquarters in order to convince states to hand out subsidies, says Peter Fisher, research director, Iowa Policy Project, nonprofit think tank that focuses on state policy in Iowa. “It's certainly hard to tell the difference between a bluff and a real move.”
So when mayors or governors claim they’ve created or saved many jobs, it’s rarely clear how many jobs would have come or remained had the politicians done nothing, experts say.
Economic development offices also have an incentive to make the deals look good. A decade ago, Minnesota’s Department of Employment and Economic Development estimated that a particular incentive program cost about $5,000 per job. But in 2008, the legislative auditor concluded the real costs were somewhere between $26,900 and $30,800 per job.
The deal that Trump brokered in Indiana, which offers Carrier $7 million in state tax breaks and other incentives, has at least one such discrepancy. The Indiana governor’s office claims the deal will cost 41 percent less, on average, than the state’s current four active job-retention deals. Those claims are based on retaining 1,069 Carrier jobs.
The head of the Steelworkers local union puts the figure at closer to 800 workers, because hundreds of Carrier jobs were not slated to move to Mexico in the first place.
The deal has many critics. Those on the left point out that Carrier’s parent company, United Technologies, will still move 1,300 jobs to Mexico. Free-market conservatives don’t like federal meddling with the economy.
“Republicans oppose this, remember?” former GOP vice presidential candidate Sarah Palin wrote in an op-ed last week. “Instead, we support competition on a level playing field, remember? Because we know special interest crony capitalism is one big fail.”
Economists say the practice works best at the local government level, where incentives can help reinvigorate a city or a rural area. But the bigger the political entity – a state, for example – the greater the danger that politicians can use their power to make special deals with companies or threaten them with regulatory action. Federal involvement would magnify those dangers even more, they say.
Even if the deals are aboveboard, they make the economy less efficient.
“Incentives are either just an added cost to taxpayers without changing the outcome of the firm’s decision, or worse, causing firms to locate where they will be less productive and have higher costs in addition to the tax burden,” writes Peter Calcagno, an economist at the College of Charleston in Charleston, S.C., in an email. “The question to ask is how would the money used to ‘save’ a job have been spent if it had not been taxed away from the private sector? What new jobs or products would have been created?”
How much is too much?
On average, state and local governments spend $2,400 per job on economic development incentives, according to Tim Bartik, a senior economist at the W.E. Upjohn Institute, a nonprofit research group based in Kalamazoo, Mich.
Sometimes legislatures spend big bucks to land a new company. Two years ago, Nevada promised $10,000 per job per year to snare Tesla’s new battery factory.
By contrast, the Carrier deal works out to less than $900 per job per year, Mr. Bartik points out.
That looks like a fairly good deal for Indiana. The average full-time worker at the Carrier plant, which makes gas furnaces, earns about $56,000 a year and will pay some $1,800 next year in state income tax. Thus, the state is earning a little over $900 a year in taxes over what it is paying out in incentives to keep each Carrier job.
But what’s in it for Carrier? The company projected it would save $65 million a year, much of it in labor costs, by moving to Mexico. Why would it accept a $700,000 annual subsidy and forgo $65 million?
In a Dec. 1 letter to employees, Carrier attributed its change of heart to the incoming administration’s “commitment to support the business community and create an improved, more competitive U.S. business climate.”
Others, including several Republicans, have attributed the change to Carrier’s United Technologies parent and its desire to keep its $6 billion a year worth of US defense contracts.
“You’re talking here about a company that is trying to be competitive and also wants to keep their business with the government,” former Indiana Lt. Gov. John Mutz told the Indianapolis Business Journal last week.
“You wonder what else was part of the deal,” says Mr. Fisher of the Iowa Policy Project.