Is That a Good State/Local Economic Development Deal? A Checklist

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Yves here. This post addresses an important but oft-neglected topic: that of the stealth subsidies to the rich and connected that take place via economic development projects. For instance, while the left-leaning media will comment with some frequency corporate welfare queens like Wal-Mart, who get large hidden subsidies for their rock-bottom wages via having workers rely on social safety nets, they ignore local development project subsidies at the state and local level. As Barry Ritholtz noted:

Wal-Mart, the nation’s largest private sector employer, is also the biggest consumer of taxpayer supported aid. According to Florida Congressman Alan Grayson, in many states, Wal-Mart employees are the largest group of Medicaid recipients. They are also the single biggest group of food stamp recipients. Wal-mart’s “associates” are paid so little, according to Grayson, that they receive $1,000 on average in public assistance. These amount to massive taxpayer subsidies for private companies.

But Wal-Mart gets more breaks than that. Any time Wal-Mart (and the same goes for many big box retailers) sets out to open a new store, local communities are pitted against each other to see who can offer the most in the way of tax breaks and other goodies to get the Wal-Mart in their town and have it wipe out local retailers, who in many cases pay their workers better. The magnitude of these state and local subsidies to large corporations isn’t well known, in large measure because gathering the information and analyzing it would be a Herculean task.

But the flip side is that it is much more viable to effect change on the state and local level than on the national level. Kenneth Thomas provides the important service of providing a checklist to help citizens make sure that their officials are not being taken for a ride by economic development parasites. To his list of “deals that can be assumed to be losers” I’d add sports facilities. There are just about no instances where they’ve recouped their costs. Those projects should be regarded as pork for the local construction industry.

By Kenneth Thomas, political scientist at the University of Missouri-St. Louis. Originally published at Middle Class Economist

In my last post, I discussed one of the most important sets of questions regarding any proposed economic development subsidy: How much does it cost? Is that too much? The answer, assuming that we are not going to overhaul our broken subsidy system overnight, was that we see if we’re paying too much by looking at what other states and cities have paid for similar projects.

This presumes, of course, that we know how much the incentive package costs in the first place. There are, unfortunately, far too many cases where total incentives were far higher than what was originally announced to the press. Two noteworthy examples are Nissan in Mississippi and Electrolux in Tennessee. It may take sustained political effort just to keep politicians and economic development officials from trying to pass off this kind of balderdash.

Once we know the cost, we need to ask questions about the benefits of the project and the administration of the project by the relevant government(s). Without further ado, let’s jump right in:

1) Is this a new project, or is the subsidy simply being given to move an existing facility from one location to another? If this is a relocation subsidy, just say no. It does the country no good to give subsidies to create no new jobs. Many times, such moves take place within a single metropolitan area (Kansas City, for example). One state’s temporary gain creates an incentive for later retaliation. The Job Creation Shell Game< has many more examples of these outrages, and points out that states already know how to write legislative language to prevent within-state relocations from being subsidized.

However, just because a project doesn’t directly move an existing facility, that doesn’t mean the jobs created will all be net new jobs for the national economy; indeed, they may displace existing jobs in the same state or same city. The automobile industry in the U.S. and Canada has shown this dynamic for decades, and the St. Louis retail study mentioned below provides another well-documented example.

2) Is this a retail project? This, too, is an automatic disqualifier. As Greg LeRoy of Good Jobs First like to say, retail is not economic development; it’s what happens after you have economic development. Egregious cases like the wealthy St. Louis suburb of Des Peres (median household income of $90,000 in 1990), which in 1997 gave a $29 million subsidy to a local mall to attract a Nordstrom’s, are legendary. But in the most comprehensive regional study of its kind, the East-West Gateway Council of Governments, the regional planning organization for metropolitan St. Louis, documented that from 1990 to 2007, local governments gave $2 billion in subsidies to retail. In that time period, retail employment grew by only 5400, which can probably be fully explained by income growth in the metropolitan area. In any event, these jobs vanished with the Great Recession.

Possible exception: Good Jobs First lists one possible exception: “Except in the rare instance where there is a true dearth (a low-income neighborhood without a grocery store, for instance), retail should be built without taxpayer aid.” Amen to that.

3) How many jobs will be created? This is obviously the most common justification for incentives that government officials give. Once we know how many jobs are supposed to be created, we can calculate cost per job, an important comparison metric. It also gives us a clear benchmark to see if the proposed investor is living up to its commitments. But beware: Job numbers can be manipulated. Not only is indirect displacement possible, but the rosy numbers the company, consultants, and government throw around can be misleading. Only be concerned with what the company will be held responsible for, which almost(?) always means direct jobs. Consultants will bandy about model-based predictions of “indirect” and “induced” jobs, but if a company’s subsidy won’t be cancelled or cut for failure to meet those predictions, don’t get distracted by them.

4) What are the pay and benefits for this job? The higher the better, obviously, and one more reason that retail should almost never be subsidized, since its job quality is usually substandard. Worker training is another positive characteristic an economic development can provide.

5) Does the project require the use of eminent domain? This is usually a disguised subsidy, since the possibility of a court deciding the value of a person’s property gives the buyer more leverage in negotiating with property owners. Not to mention that the trauma of forced relocations is a highly disturbing one.

6) Does the area that will host the project have objective evidence of economic deprivation, such as high unemployment or low per-capita income? If not, the subsidy probably isn’t needed, and just raises the subsidies that genuinely deprived areas will have to pay to land investments.

7) What is the track record of the company involved? Is it known for bad labor, environmental, or other practices? Demerits for problems here.

7a) Is the company’s identity hidden by a site location consultant? It’s worth saying “no” to this pernicious practice. Information asymmetries are bad enough already in the site location process without having taxpayers being deprived any way to evaluate the company involved.

8) What taxpayer protections are built in? Does the city or state have strong requirements on job quality and other best practices, and will it enforce them through clawbacks of the subsidies (requiring repayment) if necessary? This should be second nature to states, but in the past few years, Tennessee has negotiated at least three megadeals (Electrolux, Wacker Chemie, and Hemlock Semiconductor) that specifically excluded clawbacks from the agreement, even though clawbacks are on the books in Tennessee.

9) Would the investment go forward even without the subsidy? If so, obviously you don’t want to give the subsidy. In practice, of course, you’ll never really know. Did I mention information asymmetries?

10) Does the project connect to the public transportation grid? Alternatively, is it contributing to urban sprawl?

11) What is the opportunity cost to government? The total amount of state and local subsidies is more than enough to hire every public-sector worker laid off since the beginning of the Great Recession. Could the money going to the subsidy be better spent on education, health, or infrastructure?

To summarize: Just say no to subsidized relocations, subsidies to retail, anonymous investors, and subsidies in rich locations. Calculate the cost per job and aid intensity of the proposed project and compare them with those of similar projects. Then comes the more difficult task of estimating the benefits of the project (jobs, training, wages, etc.), where it is necessary to carefully examine claims made by proponents, which will always err on the side of overpromising. Dig into the proposed investor’s track record. Companies rarely change their spots, with British Petroleum being a egregious example. And always ask if the money could get more economic development bang for the buck if spent on things like infrastructure, education, and health.

Good luck!

By the way, if you’ve got disagreements or suggestions, I’d love to hear them.

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  1. FluffytheObeseCat

    Good topic.

    Suggestion: don’t post at midnight. This excellent discussion is marred by typos and grammatical errors – the kind that exhausted writers make.

    1. Yves Smith Post author

      It might help if you familiarized yourself with a site’s operations before making criticisms.

      1. This site has long been on a night production schedule. Virtually all our posts appear between midnight and 7 AM.

      2. Typos are also sadly normal because we cannot afford a copy editor and I assign higher priority to getting more content out than the perfection of posts.

      3. Bitching as opposed to hitting the tip jar to pay for copy editing or pointing to specific typos so we can fix them is simultaneously unhelpful and demotivating.

      1. FluffytheObeseCat

        I’ve been reading you for +5 years; I rarely comment because your work is way outside my area of expertise. However, apologies, you are right; I should have identified errors if I found them and used the tip jar.

  2. David Cay Johnston

    In my columns, and lectures, I note that if an investment is sound the market will finance it — and if it is not sound then why should taxpayers be forced to pay into it, especially if they are not getting an equity stake?

    GE has a deal in Ohio where taxpayers are putting up 92 percent of the capital cost. If GE’s return on investment is 8% its return on equity will be 100%.

    Lots of these deals are laid bare in my books FREE LUNCH and THE FINE PRINT.

    1. bob

      How much is the demand for munis driving these “projects”?

      Real public works projects take time. They can’t spend the money fast enough. GE can roll $80 million off the back of a few trucks in an afternoon.

      On top of that, NYS, your home state, seems to be particularly susceptible to the tax free demand for paper from wall st. They want the munis, NOW, and are inventing projects to be financed.

      SU’s $500 million government financed dome replacement?

  3. Kenneth Thomas

    Yves, I completely agree that subsidizing stadiums is a huge waste of money, but as I don’t research them (a good source is Neil DeMause’s Field of Schemes, I just don’t think about them. I have focused more on attempting to estimate the total of state and local subsidies (Herculean is right!) and on highlighting the technically quite feasible but for now politically infeasible ways of controlling them — this is something the European Union does right.

    David’s comment underlines the economic inefficiency of these subsidies (though I don’t think we should reject all of them, particularly in economically deprived areas) and I certainly recommend his books.

    FYI, I am a political scientist (University of Missouri-St. Louis) rather than an economist.

  4. Elliot

    Thank you for this.

    One thing I’d add (and I AM exhausted, so I may have missed it) is –is there a penalty for the firm leaving as soon as its subsidy expires and taking its jobs with it? We’ve had that happen locally, where a firm shipped off most of its jobs out of state as soon as the initial tax breaks sunsetted.

    And, I wonder if there are many industries that make a habit of following the tax incentive the way the tv/film industry does. Vancouver, Toronto, New York play off each other, and production companies make the rounds following subsidies, which can’t be great for the cities that get left behind after setting out the welcome mat for them to come.

    1. Kenneth Thomas

      Elliot, a good incentives contract will stipulate how long jobs have to be maintained and provide penalties for failure to do so. As I mentioned, not all agreements have such taxpayer protections, although they have gotten more and more common in the U.S. (they are mandatory provisions in the EU), as documented by Good Jobs First.

      Once that period is over, however, no, there is no more penalty. Some companies can be pretty rapacious, others are better corporate citizens. In the former category, Sears has now twice demanded and gotten subsidies from Illinois to not leave the state. Although I didn’t mention it in point 7, this is something you should take a look at when deciding to give an incentive in the first place.

      I should mention that this is a primer for how to think about deals under the current system. It’s also important to know what a proper system would look like, and we have an example in the EU. The EU has centralized decision-making on subsidies for the 28 sovereign countries that are members; a Member State can’t give a subsidy without approval from the European Commission for its incentive program and often Commission approval is needed for individual incentive packages. In addition to ameliorating the coordination problem, it also provides transparency. Every region in the EU has a maximum subsidy allowed (as a percentage of the investment, what the EU calls “aid intensity”), which is highest (though only 40-50%) in the regions with the lowest GDP per capita and 0 in the richest areas. On top of that, large projects over 50 million euros have those caps cut by 50%, and for investments over 100 million euros, the cap on the increment is cut by 66%. Thus megaprojects like auto assembly plants or microchip fabrication facilities will have a hard time getting even 15% of the investment as a subsidy in the poorest regions of the EU.

      But U.S. states don’t want to give up any of their “powers” to a federal body even though it’s costing them a fortune (my last estimate was $70 billion a year for state and local governments combined). It’s not going to change any time soon, which is why I wrote this and the companion post linked at the beginning.

  5. timotheus

    Is not Chris (“Bridgegate”) Christie the champion of this sort of lightly veiled giveaway to one’s corporate buddies accompanied by the hypnotic chant of “jobs, jobs”? It was ironic to read this post just after digesting The Guardian’s detailed outing of his latest scam (

  6. Aaron

    I ran into this issue late year. Geico was moving their Houston claims center to our area, so I called the local economic development council to find out what kind of tax incentive package was offered to the company, of course a wholly owned subsidiary of our most beloved hypocrite investor Mr. Buffet.

    What’s really funny was that the chairman of the economic development council seemed offended that I was actually calling to find out what kind of largesse (tax package) was offered to get Geico to come to Katy. Since the company’s expansion to the area was also touted by the governor, that pretty well told me they weren’t coming just for the good Tex-Mex and BBQ.

    A primary end result (particularly here in Texas) of all these fine handouts is of course higher local property taxes for your average homeowner.

  7. lakewoebegoner

    “But Wal-Mart gets more breaks than that.”

    another big, hidden subsidy that all big box retailers and Amazon get is via taxpayer-paid subsidies (via gas taxes) of roads. On the road per mile, one 80,000-lb tractor trailer generates more wear generates thousands of times more damage on the pavement as a 3,500-lb passenger car——as road damage increases exponentially versus the weight of each axle—–yet the road taxes are not distributed accordingly.

    one can argue that everyone benefits via lower freight costs, but a subsidy is still a subsidy. and when you subsidize shipping you get more movement of goods, less incentive to localize production.

    1. TheCatSaid

      Thanks for posting this comment. I never realized how much of a subsidy could take this form.
      Creating hidden advantages for non-local production is not what we should be subsidizing.

      Is there somewhere you know of where the actual cost is spelled out?

      Are there issues regarding in-state registration or usage fees for HGVs, and any states that charge out-of-state HGVs? (I’m thinking of the recent British fees for foreign HGVs, and wondering how a USA equivalent might look.)

  8. Klassy

    There might be clawback provisions on the books, but they really seem to be window dressing– rarely get money back.
    I’d add any sort of film/tv production enterprise to the list. Officials get particularly starry eyed over these.
    To this statement “retail is not economic development; it’s what happens after you have economic development” (so true!) I would add housing and hospitality. I suppose housing could meet the test– not for jobs, but if affordable housing is being created but here I see more developers claiming low income tax credits (among other subsidies) with little results in the way of affordable housing. This usually goes along with tearing down public housing. In fact, I believe that Obama’s nominee to secretary of housing followed this model in San Antonio.

  9. steelhead23

    Beyond the highly questionable practice of municipalities “competing” for goodies, like sports stadiums, there is another, subtler form of payola – special districts. First, let me say that many, perhaps most, special districts are a good idea. For example, in Washington state there are a number of public utility districts that not only provide some of the cheapest electricity in the nation, but also provide funds for infrastructure improvements within the district. However, back in the day (1980s), land developers in Colorado had a field day creating small special districts to pay for infrastructure needed for their developments. At that time, basically all it took for a developer to create a special district was to file for one and demonstrate that the majority of property owners within the district (which could be a single person – the developer) wished to form a special district. And, if not for a bill that Bill Owens championed, they could hold subsequent elections in their home, serve drinks, and count the votes themselves. Then, they’d run off to Lehman or others to create bonds to pay for infrastructure (roads, drainage, water, sewers). The debt would stay with the property, not the developer. Hence, it was common for a developer to have very little of his own money invested. Then, the bank would hire handsome young men to sell the bonds to unsuspecting “little old ladies” as well as the usual cast of marks. Hence, it was fairly common for a $120 thousand house to have a hidden debt of tens of thousands attached to it via special districts. When the housing bubble burst in the mid 80s there were a number of special districts for partially completed subdivisions that flat went broke, wiping out those little old ladies who had been hoodwinked into investing in this “sure thing”.

    I don’t know if these sorts of shenanigans continue in Colorado, but I would bet they do. You see, its developers who join planning commissions, run for county commissioners, and eventually to state legislatures and governorships. Having watched this happen – and having been reprimanded for questioning it when I worked for Jefferson County, I am today quite leery of special districts (also called municipal districts) and investigate all encumbrances of the real properties I buy. This issue is of particular concern to those purchasing brand new homes. Caveat emptor. I’d bet that Dr. Black knows a bit about this scam and has heard the names of Larry Mizel, Ken Waters, and David Mandarich who played this and other games back in the day.

  10. ep3

    “I’d add sports facilities. There are just about no instances where they’ve recouped their costs. Those projects should be regarded as pork for the local construction industry”

    not to mention billionaires like jerry jones get money making stadiums for free.

  11. Adam Eran

    One covert subsidy missing from the list: The “unearned increment.”

    This typically subsidizes land speculation. The speculator buys (or options) agricultural land for a few thousand dollars an acre. Zoning requires any parcels are 40 – 80 acres in ag land. The speculator then persuades (ahem!) local government worthies to approve development on this land, and subdividing it into much smaller parcels. The payoff for this “entitlement” (no improvements, infrastructure, etc.) is land worth 50 – 100 times more than the speculator paid for it. If the speculators 1031 exchange out of the newly valuable land, they don’t even pay income tax on that 5,000% – 10,000% profit.

    This scheme is the foundation of several large California fortunes, and corrupts local politicians while providing an enormous incentive to develop the least suitable land (edge city floodplain…long commutes, and bonus!…levee maintenance costs forever!).

    Contrast this covert subsidy — which appears as neither taxes nor spending — with what Germany does. Developers in Germany must sell land to the local government at the ag land price, then repurchase it at the development land price. The “unearned increment” — the egregious economic rent / profit — is entirely in the hands of the public.

    And Germany has lovely schools, infrastructure, etc. For one example, I’m told the arts budget for the City of Berlin exceeds the National Endowment for the Arts for the U.S. of A.

    Oh yes, and they have much lower unemployment than we do, despite their entanglement in the euro mess.

    1. steelhead23

      Oh yes, and let us not forget that land speculators and their lackeys have a clear pecuniary interest in seats on county commissions, etc. One lesson to take from this land speculation/county zoning love fest is that we should never elect developers, real estate agents, or anyone whose wealth is related to the decisions they make in “the public interest.” Haw.

  12. washunate

    This is a great look at problems at the detailed level. “Just say no” is a fantastic slogan.

    When government gets in the business of picking winners and losers, things go wrong.

  13. TheCatSaid

    This is a fantastic article–a real eye-opener.
    Great additions from the comments, too.

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