Politicians Focus Business Incentives on Catching the Big Fish

Most states are low on cash, but they’re still willing to spend to attract top-shelf companies like Tesla.
by | July 2016
(FlickrCC/Dave Pinter)

Some areas of economic activity still haven’t recovered from the recession -- tax incentives to employers among them. The number of such deals is still well off its peak. But big packages -- those involving tax breaks worth $50 million or more -- continue to climb.

It’s simple supply and demand: Scarcity creates value. So governors and other political actors are eager to land companies and create jobs. They don’t want to be told that there are potential employers out there that they can’t pull in. “Oftentimes these deals are driven more by politicians than they are by economic developers,” says Jeff Finkle, president of the International Economic Development Council. “A number of our members are not as enthusiastic about some of these incentive packages as the politicians who get to do the announcement.”

The total number of companies expanding or relocating is only about half of what it was 15 years ago, according to Conway, a corporate expansion consulting firm. Rather than moving within the U.S., many are seeking lower-cost workers in foreign markets, although there are signs that this trend is starting to reverse. But even when companies stay within the U.S., mechanization often means employers will be hiring fewer workers.

For governors who have been reduced to celebrating new jobs a few dozen at a time, this has made the prospect of landing a big fish that much more mouth-watering. “There are fewer big location decisions going on,” says Timothy Bartik, an economist with the Upjohn Institute for Employment Research. “It wouldn’t surprise me if that would lead to more of a premium on attracting them.”

It seems to be happening. When Elon Musk of Tesla decided to open an enormous battery plant, four states entered the final round of negotiations. Musk started out by demanding a subsidy of $500 million in cash, up front. That didn’t happen, but he ended up with an incentive package from Nevada totaling $1.3 billion over 20 years. Dollars down the road aren’t worth as much as money in hand, but still it was a huge commitment.

“Tesla, et al., are in the catbird seat and they know it,” says Greg LeRoy, executive director of Good Jobs First, a policy center that is critical of tax incentives. “Supply has been depressed while demand, in the form of public officials anxious to appear aggressive on jobs, has been elevated.”

Some states are becoming ever more creative about how they can offer enticing amounts of money to businesses. Some are willing to give companies not only a break on the taxes they would otherwise owe, but also credits against the personal income taxes they withhold from workers’ paychecks. “In theory, you could have negative tax rates, with the state actually writing a check to the company,” Bartik says. “In some cases, you do.”

When there are fewer deals to be done, it’s all about outbidding the community next door. “The trophy deals have more power than ever,” says LeRoy.