As Companies Seek Tax Deals, Governments Pay High Price

December 10, 2012

State and local governments are paying a high price to try and keep companies from shutting down various factories and plants. Politicians have turned to providing incentives to these companies in an effort to save jobs in their local communities. However, the taxpayer funded incentives end up getting pocketed as companies decide to close factories anyway, says the New York Times.

  • Nationwide, states, counties and cities are giving more than $80 billion each year to companies as an incentive to stay in their locale.
  • Overall, the federal and state governments provided $170 billion in incentives.
  • The incentives are offered to all industries, ranging from entertainment to banking.
  • The manufacturing industry has received the most in incentives, about $25.5 billion a year.

Starting in the late 1980s and early 1990s as a way to get auto companies to move to their state, politicians have become very reliant on using incentives to show their constituents they are trying to bring jobs into their local economy. Now, incentives have become the new way by which local governments conduct business with other businesses. Regardless of whether the company is big or small, profiting or experiencing losses, nearly all companies from all industries receive some sort of financial award.

Politicians provide these incentives in hopes that the overall net impact on the economy is positive because of all the jobs provided. However, in many cases the incentives come at the expense of jobs.

  • In New York, the cost of providing film credits every year equals the cost of hiring 5,000 new public school teachers.
  • In Kansas, AMC Entertainment was awarded a $36 million shortly after the state cut its education budget by $104 million.
  • Nationwide, states cut public services and raised taxes by a collective $156 billion.

Because of offering incentives for companies to stay in one region or relocate to another, there is intense competition among states. The zero-sum nature of attracting companies has caused companies to increase their demands and states to respond to those demands with more incentives.

Once the auto industry started to falter due to the economic slowdown, General Motors, for example, sought to use their influence to get more incentives.

  • The company received at least $1.7 billion in exchange from mayors and governors that were anxious about losing thousands of local jobs.
  • In the end, companies still shut down factories at the cost of scarce government funds.
  • The city of Ypsilanti, for example, has sued General Motors because it had shut down factories that had received taxpayer money to remain open.

Source: "As Companies Seek Tax Deals, Governments Pay High Price," New York Times, December 1, 2012.

 

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