Utah

Tax credits can be like a drug. From the Salt Lake Tribune:

A proposed wind farm could be in jeopardy because Utah no longer offers a renewable energy tax credit that Wasatch Winds officials say is needed for the project to be successful.

Tax credits for renewable energy were removed during this year's legislative session. They have been in place since 1980, but must be renewed every five years. This year, the Legislature ran out of time to renew the credits before the session ended March 1.

Tracy Livingston, Wasatch Winds' president, met with legislators last week to try to persuade them to reinstate the credits.

''I told them that incentives are necessary to promote wind energy and that our neighboring states have provided incentives and that wind energy has accelerated in those states,'' he said. ''There's a direct correlation in the adoption of state incentives and the wind energy produced in the state.''

Livingston said he needs to know within six months whether legislators will reinstate the tax credit. He said he needs to have the wind farm operating by next year to fulfill contractual obligations.

Livingston said he already has spent $500,000 on the farm and he would like the credits to help him this year. He said he will need the credits next year in order to be profitable.

Before he entered into contractual obligations, it might have been a good idea for Mr. Livingston to consider that he might not receive tax credits.

central Ohio

There appears to be a tax break battle brewing amongst central Ohio locales. From the Columbus Dispatch:

Gahanna city officials lost their fight to keep a credit-card company and its 529 jobs from moving to Columbus.

Bruce Johnson, director of the Ohio Department of Development, cleared the way yesterday for Alliance Data Systems Inc. to accept tax breaks from Columbus.

Johnson found that Alliance Data Systems didn’t have enough office space and that the company could move to Texas without Columbus’ incentives, said Maria Smith, a department spokeswoman. . . .

Gahanna is still smarting over last year’s loss of EMH&T, an engineering firm that moved more than 300 employees to the Northeast Side.

Columbus has lost some smaller businesses to Gahanna such as Amerigraph in 2004 and Sort & Pack, which recently announced it would move to Gahanna. White insists that Gahanna doesn’t try to recruit businesses away from Columbus or its suburban neighbors.

Stinchcomb said Gahanna will have to move on and try to recruit new business.

While Gahanna was trying to keep Alliance Data Systems from moving, Stinchcomb received an e-mail on July 10 from Steve Campbell, the senior adviser on regional affairs for Columbus Mayor Michael B. Coleman.

In Campbell’s message, he calls for all the region’s mayors and city managers to meet and talk about a pact "that focuses on growing our region’s economy and discourages moving jobs between jurisdictions within our region."

No one should need the permission of the director of the Ohio Department of Development to offer lower taxes, regardless of whether the lower taxes are implemented uniformly or come in the form of a preferential tax break.

I also find Mayor Coleman's policy amusing: give away an individual tax break and then call for a plan that prevents other municipalities from doing the same thing.

On another note, there is very good news today from Ohio.

St. Louis

Development will occur on properties located in the Saint Louis University vicinity. According to the St. Louis Business Journal, two "St. Louis companies will receive about $324,954 in state tax credits to help spur $2.2 million in redevelopment" to properties located at 3229 Washington Avenue and 4239 Lindell Boulevard (for those keeping score, that is close to the infamous Phillips 66 gas station).

The Missouri Department of Economic Development approved the tax credits throught the Brownfield Redevelopment Program, which "provides financial incentives for the redevelopment of publicly owned commercial or industrial sites that were abandoned because of contamination caused by hazardous substances."

I will not be as critical of these incentives because I think there is a difference between this program and the incentives that usually occur, where businesses get a break to move to an area that has no environmental problems. That being said, I'm still a bit skeptical. If two properties are otherwise equal except that one is environmentally unsound, that difference should be reflected in the property value.

I am willing to bet that it would cost less than the $120,977 received in tax credits to clean up the property at 4239 Lindell Blvd. If this indeed is the case, is the Missouri Department of Economic Development going to refuse to give the credits that are over the clean up costs?

the Hollywood tax break epidemic reaches Michigan

From the Detroit News:

Officials at the Detroit Metro Convention and Visitors Bureau plan to fund and staff a regional film office if the state approves tax breaks for studios to shoot here. Ohio, Indiana, Wisconsin and Canada already offer such breaks and reap hundreds of millions of dollars in business, said Chris Baum, senior vice president of the bureau.

"Right now, we are in a deep hole," he said. "We need the Legislature to pass a competitive tax incentive."

The article fails to mention exactly how the regional film office will be funded and staffed. Someone is going to have to pay, and it likely won't be the tax breaks or the Visitors Bureau's budget (remember, they are in a deep hole).

Here are my two favorite parts of the article:

1) "Tourism officials want to turn Motown into Showtown." Journalism at its finest.

2) "'It's absolutely essential that Michigan have some type of incentive package that will be competitive,' said Emery King, a former TV news anchor who leads the Michigan Film Advisory Commission." Read, "'It's absolutely essential that Michigan have some type of incentive package that will keep my job relevant,' said Emery King, a former TV news anchor who leads the Michigan Film Advisory Commission."

update on United

Earlier this month I posted on the competition between Denver, San Francisco, and Chicago to win the relocation of United Airlines' corporate headquarters. The game appears now to be over, as the Chicago Tribune (subscription req'd) reports that last week "the company announced it would move into the former R.R. Donnelley & Sons Co. building at 77 W. Wacker Drive [in Chicago]. The company will get $5.25 million in tax increment financing from the city and $1.35 million on top of that in infrastructure improvement and job-training funds from the state."

In addition, Illinois state lawmakers are willing to give United a break on the highest jet-fuel taxes in the country. Don't expect other carriers to stand idle while United receives a major expense reduction from a state government.

American Airlines and Southwest Airlines say they want the same fuel-tax breaks the City of Chicago and State of Illinois pledged to work out for United.

"We think the presumption is it would be unfair, and probably discriminatory, to affect the jet-fuel taxes of one carrier and not another," said Mary Frances Fagan, spokeswoman for American Airlines, United's largest competitor at O'Hare International Airport.

"I'm sure you'll find other carriers lining up, saying we want to be part of this too."

Southwest Airlines, the largest carrier at Midway Airport and United's primary competition in several markets, including Denver, also is interested.

"We would certainly want to look at the incentive package to see how we could participate in the savings," said Whitney Eichinger, spokeswoman for the Dallas-based discount carrier.

"A pledge to seek fuel-tax relief was among the promises state and local leaders made to UAL Corp., United's parent company, in exchange for the airline agreeing to keep its headquarters in Illinois." At issue is whether there will be a level playing field for all major carriers or, instead, a fuel-tax break in favor of a single company.

How many large users of fuel could be helped by a cap in Illinois would depend on the way the law is written.

If Illinois lawmakers wanted to, they likely could fashion a bill that would benefit only United Airlines, even if the new law never mentioned the airline by name, said Daniel Hamilton, a professor with expertise in legislative issues at Chicago Kent College of Law.

"It happens all the time. Legislation is written with earmarks for very specific projects," he said.

Such laws have withstood legal challenges arguing they unfairly benefit one group over another, Hamilton said.

"I would never say never, but my impression is competitors would not have a constitutional claim to challenge a narrowly tailored set of benefits for a company," he said. "It may be the most effective court would be the court of public opinion. At some point the legislature's generosity can draw negative criticism."

Professor Hamilton is probably right. The Fourteenth Amendment provides that no state shall "deny to any person within its jurisdiction the equal protection of the laws." As an economic policy decision, state tax breaks are presumed consitutional and "must be upheld against equal protection challenge if there is any reasonably conceiveable state of facts that could provide a rational basis for the classification." FCC v. Beach Commc'ns, Inc., 508 U.S. 307, 313 (1993).

In other words, if Southwest and American do not receive the break that ends up being given to United and they bring suit on an equal protection claim, they will have an extremely difficult time in convincing a court that Illinois did not act rationally in favoring United: "[T]he burden is one the one attacking the legislative arrangement to negative every conceivable basis which might supoprt it, whether or not the basis has a foundation in the record." Heller v. Doe, 509 U.S. 312, 320 (1993).

Nonetheless, I would like to see another airline bring suit if United is given preferential treatment. Further, these circumstances are interesting to consider in light of a recent decision by a federal judge in Maryland.

The case concerned the Maryland Fair Share Health Care Fund Act, also known as the Wal-Mart law. The Wal-Mart law, as the Baltimore Sun reported, "requires that companies with more than 10,000 workers spend at least 8 percent of their payroll for employee health care or make up the difference in an equivalent payment to [Maryland]. Of the four companies that size operating in the state, only Wal-Mart matched the criteria set out in the law, leading the company to charge that it had been singled out unfairly."

Because of this unfair treatment, the Retail Industry Leaders Association, on behalf of Wal-Mart, sued the Maryland Secretary of Labor to prevent him from enforcing the law. Besides a state law claim, RILA claimed, first, that the Maryland law was pre-empted by federal employment law and, second, that the Maryland law violated the Equal Protection Clause.

Wal-Mart won, but not on an Equal Protection basis. The federal, Employment Retirement Income Security Act of 1974 (ERISA) preempt "any and all State laws insofar as they may now or hereafter relate to any emlpoyee benefit plan" covered by ERISA (the judge in the Wal-Mart ruling seems to have justifiably assumed that Wal-Mart's plan is covered by ERISA). 29 U.S.C. sec. 1144(a). Noting that the "main objective of ERISA's preemption clause is 'to avoid a multiplicity of regulation in order to permit the nationally uniform administration of employee benefit plans,'" New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 657, Judge Frederick Motz found that the Wal-Mart law "is preempted . . . in accordance with long established Supreme Court law that state laws which impose employee health or welfare mandates on employers are invalid under ERISA."

That is far too brief of a summary of ERISA and its application to this case, but I am more concerned with equal protection anyways. In this Wal-Mart case, a scenario in which a company has been hurt by a legislatively enacted competitive disadvantage, the court found no equal protection violation. Because of this, in situations like what may occur in Illinois, those situations where one receives a legislatively enacted competitive advantage are that much less likely to be in violation of theEqual Protection Clause. If it's okay to single out Wal-Mart for burdensome regulations, it should be okay, under the Constitution, to single out United for a tax break.

This thought process is consistent with Judge Motz's citation of Supreme Court equal protection precedent. Quoting the Beach Commc'ns case, he suggested that "equal protection is not a license for courts to judge the wisdom, fairness, or logic of legislative choices" and that "the Constitution presumes that . . . even improvident decisions will eventually rectified by the democratic process and that judicial intervention is generally unwarranted no matter how unwisely a political branch has acted." Beach Commc'ns, 508 U.S. at 313-14.

Not that I agree with current Supreme Court equal protection analysis. When you have companies that use the "democratic process" to actively campaign for legislation that directly and adversely affects their competition on an individual basis (Judge Motz noted that Giant Food "actively lobbied for enactment" of the Wal-Mart law), isn't it time for the judiciary to play a stronger role when it comes to equal protection?

For an interesting analysis on the Wal-Mart/Maryland saga, go here.

last week

My apologies on the lack of posts last week. Here are two stories that I had been planning to discuss:

"MG assembly plant planned for Oklahoma," The Miami Herald

"$8 Million tax break for company close to Rowland," Connecticut's Journal Inquirer

I'm beginning to realize that it would take more time than I have to analyze and criticize every bit of news on state tax incentives. So sometimes I will just have to let the story speak for itself.

Nevada

Local officials in northern Nevada have voted to support a tax incentive program for two businesses with operations in the region, according to the Reno-Gazette Journal. The next step is statewide approval from the all-powerful Nevada Commission on Economic Development.

Lyon County Board of Commissioners Chairman Bob Milz justified his support for an incentive program by stating "You have to give to get."

There's another misleading statement by a local government official. If the incentive program does end up getting through the NCED, Milz and friends are not giving but simply taking less and doing so in an inefficient manner.

Florida

It's been a busy week and unfortunately I am leaving in a few minutes for DC, so I have not had enough time to keep this blog up to my standard. I apologize to all you readers out there.

Today I'll leave you with a link to the Miami Herald's article on the incentive package Palm Beach County gave to Office Depot. In the article, an Office Depot spokesman said "Our current facility is obsolete. The new headquarters is really a vehicle for improved business performance and an enabler of profitable growth." Does that mean when other factories become obselete they will be eligible for a sweet deal from the local government? Très unlikely.

follow-up

Last week I posted on an Heartland Institute analysis on state development organizations and tax breaks. The author the analysis, Michael D. LaFaive of the Mackinac Center for Public Policy, was kind enough to respond to this post by sending me some work he has done over the past six years on these organizations and incentives.

Discussing Ludwig von Mises and Friedrich Hayek, he noted in 2001 quite rightly that it "simply isn't possible to know and understand the myriad pieces of data, the ever-changing preferences of consumers, or the total impact of competition and technology in a vibrant, healthy economy." State economic developlment authorities brush this logic aside when they give tax breaks and credits to individual industries and companies.

LaFaive also provided me with a story he did in February 2000 on an "economic development package," which included tax breaks, given to a New York meat products company by the Michigan government. The story is one of the better illustrations of the unfairness of tax breaks and incentives that I have seen. Therefore, I am putting it in full below:

Last November, when Governor Engler vetoed a bill to exempt certain politically favored groups from a particular tax, he wisely declared, "Tax policy is best which is simple and uniform, and which treats similarly situated activities in the same manner." He was precisely right. It is poor economics and fundamentally unfair for government to pick winners and losers by providing special breaks, favors, or subsidies to certain firms and not their competitors. The only problem is, others within state government are doing exactly that.

Consider the case of Boar's Head Provision Company—a meat products company headquartered in Brooklyn, New York. In exchange for the company's promise to invest $14 million and create 450 new jobs in Michigan over the next three years, the Michigan Jobs Commission arranged in 1998 to give Boar's Head an "economic development package" worth up to $5.1 million in federal, state, and local resources. It includes up to $3 million for equipment leasing, an abatement of the 6-mill state education tax of up to $212,590, and as much as $1,000 per worker for training. Armed with these "incentives," the company opened a processing plant near Holland, Michigan, on December 13, 1999.

The successor agency to the old Michigan Jobs Commission is now known as the Michigan Economic Development Corporation (MEDC). Its highly paid bureaucrats will count 450 "new" jobs as the agency's contribution to the Michigan economy through the Boar's Head deal. What its press releases will not reveal is the impact of the deal on other Michigan businesses, such as Koegel Meats, Inc., in Flint.

Like Boar's Head, Koegel makes meat products. A Michigan-based family business for three generations, it produces an extensive line of cold cuts and the popular "Koegel's Vienna Frankfurters" that get grilled by the millions in Michigan back yards every summer. Its meat products still use recipes devised by Albert Koegel when he emigrated from Germany to Michigan and started the company in 1916. The firm sells 99 percent of its product in Michigan and employs 110 people at its Flint facility.

Al Koegel, son of the founder, is not one to make a big fuss about unfair competition. Like his dad before him and his son John who will carry on after him, Al would rather run the business than spend time lobbying politicians. He cannot help but point out when asked, however, that for all of its 84 years, Koegel Meats always paid its taxes and never took a dime of taxpayer money: no abatements, no subsidies. The company always trained its own employees with its own funds. In fact, when the company was once offered federal money for job training, Al turned it down because he did not want the hassle of red tape and paperwork.

So we have here the classic American Dream story: A German immigrant comes to America seeking opportunity, settles in Michigan, starts a company, works hard, and succeeds. His family keeps the business here through thick and thin in one of the most high-tax, economically distressed areas of the state. They focus on customers, not government, and grow the business—taking no public money and paying full freight in taxes year in and year out. Now along come the wizards at the MEDC who, in the name of "economic development," take money from taxpayers including the Koegel family business and give it to a New York competitor.

There is something seriously wrong with this picture. Lansing bureaucrats, most of whom probably do not know how to run a business, will take credit for their vision and thoughtfulness when they should be scolded for corrupting Michigan's economy. A state agency will claim it "created" 450 jobs without perhaps even a single reporter asking tough questions like, "How many jobs may be lost or may never come into being at other Michigan meat product companies like Koegel in Flint or Kowalski in Hamtramck?" or, "Where will Boar's Head's workers come from in the tightest labor market in 30 years, and who will pay the bill for their previous employers to go out and find replacement workers?"

The Boar's Head handout may be "economic development" in Lansing, but in the real world, it is just another example of robbing Peter to pay Paul.

Florida

You may recall my post a few weeks ago on Florida's spring training tax incentives. Events discussed in yesterday's Sarasota Herald-Tribune demonstrate once again that lawmakers have no business in crediting tax breaks and credits with job creation or any sort of economic development.

Local goverment officials

used fresh renderings to sell legislators on a bill that would give tax breaks for spring training facilities in Sarasota and four other cities. The lobby worked, and Bush signed the bill late last month.

That gave the city and the Reds just a few months to come up with a complete financial plan for the stadium.

It was a daunting task, especially as city and Reds officials had expended so much energy selling their vision in Tallahassee.

"We'd been working on on the big picture for so many years," said Palmer, who made a handful of visits to the state capital this year. "And now it was on to the details."

Coming up with the rest of the money for the stadium would be incredibly difficult, just as Clearwater's Dunbar had predicted.

Isn't it sad that government officials throughout the Sunshine State spent so much time on the building of stadium that may never even happen?

When local lawmakers credit the tax incentives they approved as the reason for investment, ask two things: First, were the incentives the actual reason for the investment? Second, how did the lawmakers choose to favor a certain entity over others in the form of tax breaks?

United

United Airlines is looking to move its world headquarters from its current location near Chicago's O'Hare airport. Possible locations include downtown Chicago, Denver, and San Francisco.

But for some reason, according to the Chicago Tribune (subscription req'd), United

has not requested formal proposals from any of the three cities of what they would offer to lure the nation's second-largest carrier. . . .

The lack of a formal request for possible tax breaks and other incentives doesn't mean United isn't interested in the communities, said Dennis Conaghan, executive director of the San Francisco Center for Economic Development. The airline may have adopted a wait-and-see approach, he said.

Could it also have something to do with United not really caring too much about incentive offering because that would mean wasting more time with bureaucratic government officials? That's just one man's question. You can bet that when United does make a decision the development organization for the winner will take far more credit than they deserve and neglect to point to other circumstances that are beyond their control.



Side note: Many of the articles that I cite come from the Chicago Tribune. While you will not be able to access the hyperlinked article without a subscription, you should be able to get to it through news.google.com and using an exact phrase from a quote that I have provided.

Missouri

Sports teams are again benefitting from state tax incentives. Last week the Missouri Development Finance Board approved a plan to aid renovations to the Kansas City Chiefs and Royals stadiums.

Preferential treatment for sports teams is nothing new. I'm more interested in the wording of the AP article that describes the state effort. Apparently, the "stadium deal calls for the Royals and Chiefs to come up with a total of $100 million themselves, plus $425 million from Jackson County and $50 million from the state." This gives the impression that somehow Missouri is actually giving the teams $50 million to help with renovation.

Don't be so sure, however. "The $50 million in tax credits can be spread out over up to four years, starting with the state fiscal year that begins Saturday. The Chiefs will get $37.5 million of the tax breaks and the Royals the remainder." It turns out then that Missouri, rather than directly contributing $50 million to the cause, the state government there is just taking in less money. Thus, if the teams' total state tax bill is $60 million, the credit reduces this burden to $10 million. I don't think it is appropriate to label this type of policy as a subsidy or government goodwill when the government took the money in the first place.

I'd also like to point out another interesting political tidbit from the article. At one point state representative Wes Shoemyer "sponsored failed legislation that would have prohibited the [Missouri Development Finance Board] from authorizing state tax credits at sports stadiums, essentially forcing such aid to be approved by legislators." That's a great idea and it is not a surprise that it failed. Rather than be held accountable for favoring sports teams and big business, state lawmakers are more than happy to pass the buck to an unelected state government organization.

the epidemic of Hollywood tax breaks

Since I started this blog this past May, by far the most common type of tax incentives that I have come across have been those targeted at the film industry. Within the past week, media outlets in Georgia, Indiana, South Carolina, and Texas have touted the alleged benefits of these incentives and issued warnings in case such breaks are not granted. Given the frequency of these types of articles, I have come to the conclusion that Hollywood has a stranglehold on state policymakers.

State-run organizations such as the Texas Film Commission and the South Carolina Film Office sound great. And it is certainly a lot sexier (politically and otherwise) to say you live in a state where Hollywood film execs come to play instead of bragging that your state attracts investment in a variety of industries.

But this favoritism needs to stop. It is unsound way to encourage long-run investment and is completely unfair to those who lack significant political access. Just because your business does not allow a governor to fulfill a childhood dream does not mean you are less deserving of low taxes.

Heartland Institute analysis

The Heartland Institute, a Chicago think-tank, recently published an analysis which neatly summarized the problems that come with state development organizations and the tax breaks and incentves they offer. I highly recommend reading the analysis. Here are my favorite insights from the article:

1) "Many of the corporations state development officers have declared to be winners of tax incentives have turned out to be losers in the market place." When it comes to making investement decisions, always trust the market over the government.

2) Discussion of "a number of fundamental reasons why these development programs often fall short," including opportunity costs and rent-seeking.

3) The cited example of rent-seeking: The John Locke Foundation in North Carolina "obtained a 2004 PowerPoint presentation by Ernst & Young consultants titled, 'Turn Your State Government Relations Department from a Money Pit into a Cash Cow.' The presentation detailed how private-sector businesses could effectively obtain and retain tax incentives from government." I always have and still do refuse to blame corporations for accepting tax breaks that are offered to them. Major corporations are not dumb; they will try to cut costs, including their tax burden, as much as possible. But are you aware of any small business that has a State Government Relations Department?

All in all, an excellent piece from the Heartland Institute. It's good to know that others are aware of the problem.

Indiana

It was announced last week that Indiana has won the battle for Honda, which will build a major plant in Greensburg sometime in the near future. Lawmakers from Ohio and Illinois also sought to attract the Japanese firm to their state, but in the end the Hoosier state won out. Last week's Chicago Tribune (subscription may be required) downplays the significance of tax incentives.

While Indiana officials confirmed promising Honda $141.5 million in incentives, Larry Jutte, a company executive, rejected the idea that handouts were a factor.

"It wasn't a matter of incentives offered; that was never a consideration. It was a matter of logistics, the human factor, the infrastructure and the location," Jutte, senior vice president of manufacturing for American Honda Motor Co., said in a telephone press conference from the winning site.

He said the decision was based on being in close proximity to suppliers of parts, particularly the key component for an automotive assembly plant, a source of 4-cylinder engines from Honda's operation in Anna, Ohio."

The Tribune also did a Q & A (unavailable online) with Indiana Governor Mitch Daniels on his courting of Honda. In dealing with Honda, Daniels mentioned that "[i]ncentives were almost a footnote. It was the last thing Honda brought up. You will always talk incentives, but if you start with incentives, it's a losing hand."

Asked for advice on how states should attract major employers, Daniels suggested to "[b]uild the best sandbox you can--low costs, low taxes, excellent infrastructure."

I don't think that the sandbox analogy is quite appropriate, but the tools he mentions are right on. When lawmakers concentrate too much on offering complicated tax schemes to attract business, they lose sight of the bigger picture.