If you want to call in, the number is 347-326-9690.
Showing posts with label state subsidies. Show all posts
Showing posts with label state subsidies. Show all posts
Sunday, December 9, 2012
Appearing on National Progressive Talk Radio Tonight
Sorry for the short notice, but I will be on Lane Prophet's live call-in show on National Progressive Talk Radio at 9pm Eastern/6pm Pacific for one hour. I'll be talking about the so-called "fiscal cliff" and, probably subsidies as well. Here is the announcement from NPTR: http://www.blogtalkradio.com/national-progressive-talk-radio/2012/12/10/the-fiscal-cliff--kenneth-thomas--nptr-29
If you want to call in, the number is 347-326-9690.
If you want to call in, the number is 347-326-9690.
NYT Series Illuminates -- And Confuses -- The State of the Subsidy Wars
Louise Story's series in the New York Times this week has created a substantial buzz about the issue of economic development subsidies.This is a welcome development, because it's an issue that doesn't get nearly enough attention in the highest profile media. Story has, in addition, appeared on shows such as MSNBC's "Morning Joe" and NPR's "Fresh Air," bringing subsidies to an even wider audience.
She crafted a number of stories that highlighted the big picture issues: imbalance in bargaining power between city governments and giant multinational corporations, the blatant conflicts of interest on display in Texas subsidy procurement, and a border war between Kansas and Missouri involving multimillion dollar incentives to move existing facilities across the state line, with no net benefit for the Kansas City metropolitan area, let alone for the U.S. as a whole.
The last few days have given me time to absorb the articles and the database Story created, as well as surveying the commentary on the web from well-known experts on subsidies. Several tentative conclusions seem in order.
First, as I pointed out in my last post, and backed up by Timothy Bartik's detailed analysis of Michigan, 5/8 of the national total is in the form of sales tax breaks, and probably the overwhelming majority of those sales tax reductions should not be considered subsidies. Here is what Bartik says about Michigan:
For those keeping score at home, that means that $4.80 billion of the $4.83 billion in sales tax breaks should not be considered subsidies, unless you consider manufacturing "specific" enough that this aid constitutes a subsidy, in which case only 80% of the sales tax breaks should be excluded from the subsidy tally.
Second, changes of this magnitude mean that the Times estimates are not sufficiently accurate to use in a statistical analysis, as Richard Florida attempts in The Atlantic Cities. Finding out if incentives affect outcomes like wages, employment, or poverty is precisely the type of analysis we would like to do, but the fragility of the data makes this premature. The good news is that since the data on these state programs are all in one place, it should be possible to get a better handle on state incentives by cutting out those programs which should not be considered subsidies. Different analysts will no doubt have different judgments about what should be counted as a subsidy, but since the database is so inclusive, it should be useful no matter what your definition of subsidy is.
Third, there are some smaller errors in the program database as well. The one I have identified so far is that it counts net operating loss (NOL) tax provisions as subsidies in Illinois and New Hampshire, but not in other states, even though all states with a corporate income tax will have an NOL provision. In any event, this should not be considered a subsidy at all, but a part of a state's basic macroeconomic framework. In addition, Timothy Bartik pointed out to me in correspondence that the program database does not include single sales factor apportionment (only counting what percentage of a multi-state firm's sales take place in a given state, rather than standard three-factor apportionment that uses percentages of payroll and property as well) as a subsidy, which it should.
Fourth, the program database does not distinguish between investment incentives (subsidies to affect the location of investment) and subsidies more generally, which may or may not require an investment to obtain them. This is an important distinction I have tried to make clear by providing separate estimates in Investment Incentives and the Global Competition for Capital: $46.8 billion in incentives, and $65 or $70 billion in subsidies, depending on whether or not you count non-specific accelerated depreciation as a subsidy.
Finally, as Phil Mattera at Good Jobs First points out, the deals database misses a number of large awards, leaving out Tennessee's $450 million (present value) subsidy to Volkswagen and an even bigger package for ThyssenKrupp in Alabama. It also underestimates other awards, including Apple in North Carolina and Boeing in South Carolina. I also found that it underestimated subsidies to Dell and Google in North Carolina by omitting the local subsidy portion of the awards, a problem Ms. Story is aware of, as I noted in my last post.
The Times series has been great for the spotlight it has put on state and local subsidies and the sometimes vulgar politics surrounding the process of awarding them, and for compiling a great database of programs all in one place. However, its interpretation of the sales tax breaks, which are 5/8 of the national total but largely not subsidies, confuses the issue of total impact on state and local budgets and makes statistical analysis premature. This will require some work to fix, but it appears like most of the raw material is there to do it.
Cross-posted at Angry Bear.
She crafted a number of stories that highlighted the big picture issues: imbalance in bargaining power between city governments and giant multinational corporations, the blatant conflicts of interest on display in Texas subsidy procurement, and a border war between Kansas and Missouri involving multimillion dollar incentives to move existing facilities across the state line, with no net benefit for the Kansas City metropolitan area, let alone for the U.S. as a whole.
The last few days have given me time to absorb the articles and the database Story created, as well as surveying the commentary on the web from well-known experts on subsidies. Several tentative conclusions seem in order.
First, as I pointed out in my last post, and backed up by Timothy Bartik's detailed analysis of Michigan, 5/8 of the national total is in the form of sales tax breaks, and probably the overwhelming majority of those sales tax reductions should not be considered subsidies. Here is what Bartik says about Michigan:
For example, in my own state of Michigan, the New York Times database
identifies $6.65 billion in annual state and local business incentives.
Of this total, $4.83 billion is in “sales tax refund, exemptions, or
other sales tax discounts”. Of this $4.83 billion, almost all of these
refunds come from two provisions of Michigan tax law. First, Michigan
does not apply the sales tax to most services, including business
services, which saves businesses $3.88 billion annually. Second, for
manufacturing, Michigan does not apply the sales tax to goods used as
inputs to the manufacturing process, which saves manufacturers about
$0.92 billion in sales tax.
For those keeping score at home, that means that $4.80 billion of the $4.83 billion in sales tax breaks should not be considered subsidies, unless you consider manufacturing "specific" enough that this aid constitutes a subsidy, in which case only 80% of the sales tax breaks should be excluded from the subsidy tally.
Second, changes of this magnitude mean that the Times estimates are not sufficiently accurate to use in a statistical analysis, as Richard Florida attempts in The Atlantic Cities. Finding out if incentives affect outcomes like wages, employment, or poverty is precisely the type of analysis we would like to do, but the fragility of the data makes this premature. The good news is that since the data on these state programs are all in one place, it should be possible to get a better handle on state incentives by cutting out those programs which should not be considered subsidies. Different analysts will no doubt have different judgments about what should be counted as a subsidy, but since the database is so inclusive, it should be useful no matter what your definition of subsidy is.
Third, there are some smaller errors in the program database as well. The one I have identified so far is that it counts net operating loss (NOL) tax provisions as subsidies in Illinois and New Hampshire, but not in other states, even though all states with a corporate income tax will have an NOL provision. In any event, this should not be considered a subsidy at all, but a part of a state's basic macroeconomic framework. In addition, Timothy Bartik pointed out to me in correspondence that the program database does not include single sales factor apportionment (only counting what percentage of a multi-state firm's sales take place in a given state, rather than standard three-factor apportionment that uses percentages of payroll and property as well) as a subsidy, which it should.
Fourth, the program database does not distinguish between investment incentives (subsidies to affect the location of investment) and subsidies more generally, which may or may not require an investment to obtain them. This is an important distinction I have tried to make clear by providing separate estimates in Investment Incentives and the Global Competition for Capital: $46.8 billion in incentives, and $65 or $70 billion in subsidies, depending on whether or not you count non-specific accelerated depreciation as a subsidy.
Finally, as Phil Mattera at Good Jobs First points out, the deals database misses a number of large awards, leaving out Tennessee's $450 million (present value) subsidy to Volkswagen and an even bigger package for ThyssenKrupp in Alabama. It also underestimates other awards, including Apple in North Carolina and Boeing in South Carolina. I also found that it underestimated subsidies to Dell and Google in North Carolina by omitting the local subsidy portion of the awards, a problem Ms. Story is aware of, as I noted in my last post.
The Times series has been great for the spotlight it has put on state and local subsidies and the sometimes vulgar politics surrounding the process of awarding them, and for compiling a great database of programs all in one place. However, its interpretation of the sales tax breaks, which are 5/8 of the national total but largely not subsidies, confuses the issue of total impact on state and local budgets and makes statistical analysis premature. This will require some work to fix, but it appears like most of the raw material is there to do it.
Cross-posted at Angry Bear.
Sunday, December 2, 2012
NYT: $80 Billion in State and Local Subsidies Annually (Updated)
In today's New York Times, Louise Story begins a series, "The United States of Subsidies," ten months in the making, with a story focusing on General Motors closures, the border war for investments between Kansas and Missouri in the Kansas City metropolitan area, and a new estimate of state and local incentives to business, $80 billion a year. Backing this up, and no doubt contributing to the long lead time, is a database of 150,000 state and local subsidy deals going back at least 20 years. Given its appearance in the country's newspaper of record, the series is sure to elevate the issue of state and local subsidies to a prominence it has never known before.
Since my 2011 estimate was $70 billion per year in total subsidies to business, and $46.8 billion in location incentives, the Times figure represents a substantial increase if accurate. Ever since David Cay Johnston reviewed my book when it first came out, he has argued that my $70 billion figure was probably an underestimate, and the new report would seem to back him up. Nevertheless, I will certainly be spending some time analyzing the database to see just what is in it. According to the story, $18 billion per year is accounted for by corporate income tax breaks, a whopping $52 billion by "sales tax relief," and the other $10 billion unspecified but most likely property tax breaks. I have some questions about these numbers, however.
First, it seems to me that property tax breaks likely exceed $10 billion a year. When California axed tax increment financing earlier this year, it was generating $8 billion in tax increment all by itself. Although California cities were by far the biggest user of TIF, municipalities in almost every other state still use it, as well as myriads of property tax abatements offered at the local level. Story is well aware of this. She writes:
Thousands of local governments give subsidies, and these are overwhelmingly related to property tax. In my most recent estimate,there were several states in Missouriwhich local subsidies exceeded state subsidies, including Missouri and Michigan, so my default assumption was that they were equal if I did not have adequate information on local incentives, as is usually the case due to the huge number of governments involved.
On the other hand, there is some chance that the $52 billion in sales tax subsidies could be an overestimate; it all depends on what The Times includes in this category. My own thinking about sales tax has changed since I first created the subsidy estimates in my 2000 book, Competing for Capital. My estimate for Minnesota, for example, included many hundreds of millions per year in sales tax exemptions for business services. Now, I tend to think of these tax breaks as methods to avoid tax cascading (paying the sales tax on a good more than once, by taxing the full value of every intermediate good) and not a subsidy at all. They have been removed from my estimate of total subsidies in my more recent work, which did not prevent my estimate for 2005 (published in 2011) from being $20 billion higher than that for 1995 (published in 2000). I do still count some sales tax breaks as subsidies, particularly those on plant and equipment, which apply to the initial investment rather than ongoing operations.
While this may seem like a sterile academic argument, in fact it makes a big difference whether incentives are $50 billion a year or $80 billion a year, approximately 600,000 public sector jobs paying $50,000 annually. The larger the true figure, the more pressing is the case for subsidy reform. The inauguration of this new series of articles, plus the database, will help us put a better number on the value, a critical first step toward galvanizing public opinion to force politicians to rein in subsidies.
I will be commenting more on this series over the course of this week.
UPDATE: Text corrected to reflect that although I had specific data for local incentives in Michigan, the total of local incentives was somewhat lower than that of state incentives. In addition, it is clearly true that TIF in California exceeded state subsidies, so obviously so did the total of local subsidies. However, I did not know this at the time I made the estimate.
Cross-posted at Angry Bear.
Since my 2011 estimate was $70 billion per year in total subsidies to business, and $46.8 billion in location incentives, the Times figure represents a substantial increase if accurate. Ever since David Cay Johnston reviewed my book when it first came out, he has argued that my $70 billion figure was probably an underestimate, and the new report would seem to back him up. Nevertheless, I will certainly be spending some time analyzing the database to see just what is in it. According to the story, $18 billion per year is accounted for by corporate income tax breaks, a whopping $52 billion by "sales tax relief," and the other $10 billion unspecified but most likely property tax breaks. I have some questions about these numbers, however.
First, it seems to me that property tax breaks likely exceed $10 billion a year. When California axed tax increment financing earlier this year, it was generating $8 billion in tax increment all by itself. Although California cities were by far the biggest user of TIF, municipalities in almost every other state still use it, as well as myriads of property tax abatements offered at the local level. Story is well aware of this. She writes:
The cost of the awards is certainly far higher. A full accounting, The
Times discovered, is not possible because the incentives are granted by
thousands of government agencies and officials, and many do not know the
value of all their awards.
Thousands of local governments give subsidies, and these are overwhelmingly related to property tax. In my most recent estimate,
On the other hand, there is some chance that the $52 billion in sales tax subsidies could be an overestimate; it all depends on what The Times includes in this category. My own thinking about sales tax has changed since I first created the subsidy estimates in my 2000 book, Competing for Capital. My estimate for Minnesota, for example, included many hundreds of millions per year in sales tax exemptions for business services. Now, I tend to think of these tax breaks as methods to avoid tax cascading (paying the sales tax on a good more than once, by taxing the full value of every intermediate good) and not a subsidy at all. They have been removed from my estimate of total subsidies in my more recent work, which did not prevent my estimate for 2005 (published in 2011) from being $20 billion higher than that for 1995 (published in 2000). I do still count some sales tax breaks as subsidies, particularly those on plant and equipment, which apply to the initial investment rather than ongoing operations.
While this may seem like a sterile academic argument, in fact it makes a big difference whether incentives are $50 billion a year or $80 billion a year, approximately 600,000 public sector jobs paying $50,000 annually. The larger the true figure, the more pressing is the case for subsidy reform. The inauguration of this new series of articles, plus the database, will help us put a better number on the value, a critical first step toward galvanizing public opinion to force politicians to rein in subsidies.
I will be commenting more on this series over the course of this week.
UPDATE: Text corrected to reflect that although I had specific data for local incentives in Michigan, the total of local incentives was somewhat lower than that of state incentives. In addition, it is clearly true that TIF in California exceeded state subsidies, so obviously so did the total of local subsidies. However, I did not know this at the time I made the estimate.
Cross-posted at Angry Bear.
Saturday, October 27, 2012
McMahon's WWE has taken $36.7 million in Connecticut subsidies
U.S. Senate candidate Linda McMahon's World Wrestling Entertainment (WWE) has received $36.7 million in Connecticut film tax credits in 20 separate deals since 2006, reports CTPost.com (thanks to Karin Richmond on the LinkedIn Public Incentives Forum). As in many states, what historically began as tax credits for motion pictures are now available for TV and online media as well, and it is in these two latter categories that the WWE received its subsidies. Also as is typical of other states, the Connecticut program has no job creation requirements, but is calculated simply as a percentage of "qualified expenditures," with the rate being 30% in Connecticut. In fact, in WWE's case, the company had laid off about 60 workers in 2009, yet continued to receive the credits.
Moreover, according to the Sacramento Bee blog, "Cageside Seats," WWE has so little state tax liability that it sells the vast majority of its tax credits via a broker, including 93% of the tax credits it earned in 2007-9. While selling tax credits is perfectly legal (in David Cay Johnston's memorable phrase), it also increases the subsidies that states give, because they wind up giving subsidies to companies that did nothing to qualify for them under any subsidy program.
Nor is WWE alone in its sale of Connecticut tax credits. According to a 2010 article at the CT Post, "of the 80 productions that received credits, only nine applied them to state taxes." The rest, presumably, sold their credits via brokers. The article also states that the national tax credit market had reached $500 million annually in 2010, from $50 million per year in 2005.
Robert Tannenwald of the Center for Budget and Policy Priorities (CBPP) has analyzed state film subsidies and concluded they provide very little bang for the buck. This should not be surprising. Unlike most subsidies, film/TV/digital media subsidies do not go to an investment, but to operating costs. There is nothing left after the crew packs up. Tannenwald points out that even the early adopters of film subsidies (New Mexico and Louisiana), which appeared to have built up some in-state film capacity, are now finding it difficult to maintain their position as the number of states offering such incentives skyrocketed to over 40 by 2010. The increased competition has led states to bid up their reimbursement percentages, to over 40% in Alaska and Michigan. Moreover, it's hard to have job creation requirements for jobs that are inherently temporary.
Tannenwald estimates that the 43 states that gave film tax credits in fiscal 2010 spent $1.5 billion. This is enough to hire back 30,000 state workers laid off since the recession began, at an average of $50,000 per year in salary and benefits.
Although not members of the Forbes 400, Linda and Vince McMahon follow their example in collecting millions in subsidies from government. This is particularly hypocritical since as a Senate candidate McMahon has tried to portray herself as an opponent of "corporate welfare."
Besides having little bang for the buck, film subsidy programs have been rocked by scandal in both Iowa and Louisiana, where the film commissioner was convicted of bribery to accept inflated expense submissions. The Iowa Film Office director was convicted of felonious misconduct, but acquitted on eight other felony charges. A number of credit claimants in Iowa were convicted of felonies as well in other trials.
As I have argued before, investment incentives generally constitute a race to the bottom. However, film and related media subsidies have shown us a high-speed race to the bottom for amazingly little economic benefit. While a few states have cut back on the subsidies due to the recession (and Iowa suspended its program for three years due to the scandal), only federal controls can truly address this problem. My research in Canada (paywalled) found the provinces there similarly unable to control their film subsidy wars. At this point, only transparency in program costs, plus information on the low benefits and frequent scandals, is the only way to generate political pressure for reform.
Moreover, according to the Sacramento Bee blog, "Cageside Seats," WWE has so little state tax liability that it sells the vast majority of its tax credits via a broker, including 93% of the tax credits it earned in 2007-9. While selling tax credits is perfectly legal (in David Cay Johnston's memorable phrase), it also increases the subsidies that states give, because they wind up giving subsidies to companies that did nothing to qualify for them under any subsidy program.
Nor is WWE alone in its sale of Connecticut tax credits. According to a 2010 article at the CT Post, "of the 80 productions that received credits, only nine applied them to state taxes." The rest, presumably, sold their credits via brokers. The article also states that the national tax credit market had reached $500 million annually in 2010, from $50 million per year in 2005.
Robert Tannenwald of the Center for Budget and Policy Priorities (CBPP) has analyzed state film subsidies and concluded they provide very little bang for the buck. This should not be surprising. Unlike most subsidies, film/TV/digital media subsidies do not go to an investment, but to operating costs. There is nothing left after the crew packs up. Tannenwald points out that even the early adopters of film subsidies (New Mexico and Louisiana), which appeared to have built up some in-state film capacity, are now finding it difficult to maintain their position as the number of states offering such incentives skyrocketed to over 40 by 2010. The increased competition has led states to bid up their reimbursement percentages, to over 40% in Alaska and Michigan. Moreover, it's hard to have job creation requirements for jobs that are inherently temporary.
Tannenwald estimates that the 43 states that gave film tax credits in fiscal 2010 spent $1.5 billion. This is enough to hire back 30,000 state workers laid off since the recession began, at an average of $50,000 per year in salary and benefits.
Although not members of the Forbes 400, Linda and Vince McMahon follow their example in collecting millions in subsidies from government. This is particularly hypocritical since as a Senate candidate McMahon has tried to portray herself as an opponent of "corporate welfare."
Besides having little bang for the buck, film subsidy programs have been rocked by scandal in both Iowa and Louisiana, where the film commissioner was convicted of bribery to accept inflated expense submissions. The Iowa Film Office director was convicted of felonious misconduct, but acquitted on eight other felony charges. A number of credit claimants in Iowa were convicted of felonies as well in other trials.
As I have argued before, investment incentives generally constitute a race to the bottom. However, film and related media subsidies have shown us a high-speed race to the bottom for amazingly little economic benefit. While a few states have cut back on the subsidies due to the recession (and Iowa suspended its program for three years due to the scandal), only federal controls can truly address this problem. My research in Canada (paywalled) found the provinces there similarly unable to control their film subsidy wars. At this point, only transparency in program costs, plus information on the low benefits and frequent scandals, is the only way to generate political pressure for reform.
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