When the automaker released a list of factories it was closing during bankruptcy three years ago, communities that had considered themselves G.M.’s business partners were among the targets.
For years, mayors and governors anxious about local jobs had agreed to G.M.’s demands for cash rewards, free buildings, worker training and lucrative tax breaks. As late as 2007, the company was telling local officials that these sorts of incentives would “further G.M.’s strong relationship” with them and be a “win/win situation,” according to town council notes from one Michigan community.
Yet at least 50 properties on the 2009 liquidation list were in towns and states that had awarded incentives, adding up to billions in taxpayer dollars, according to data compiled by The New York Times.
Some officials, desperate to keep G.M., offered more. Ohio was proposing a $56 million deal to save its Moraine plant, and Wisconsin, fighting for its Janesville factory, offered $153 million.
But their overtures were to no avail. G.M. walked away and, thanks to a federal bailout, is once again profitable. The towns have not been so fortunate, having spent scarce funds in exchange for thousands of jobs that no longer exist.
One township, Ypsilanti, Mich., is suing over the automaker’s departure. “You can’t just make these promises and throw them around like they’re spare change in the drawer,” said Doug Winters, the township’s attorney.
Yet across the country, companies have been doing just that. And the giveaways are adding up to a gigantic bill for taxpayers.
A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.
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. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.
“How can you even talk about rationalizing what you’re doing when you don’t even know what you’re doing?” said Timothy J. Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.
The Times analyzed more than 150,000 awards and created a searchable database of incentive spending. The survey was supplemented by interviews with more than 100 officials in government and business organizations as well as corporate executives and consultants.
A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them. Many of the officials said they feared that companies would move jobs overseas if they did not get subsidies in the United States.
Over the years, corporations have increasingly exploited that fear, creating a high-stakes bazaar where they pit local officials against one another to get the most lucrative packages. States compete with other states, cities compete with surrounding suburbs, and even small towns have entered the race with the goal of defeating their neighbors.
While some jobs have certainly migrated overseas, many companies receiving incentives were not considering leaving the country, according to interviews and incentive data.
Despite their scale, state and local incentives have barely been part of the national debate on the economic crisis. The budget negotiations under way in Washington have not addressed whether the incentives are worth the cost, even though 20 percent of state and local budgets come from federal spending. Lawmakers in Washington are battling over possible increases in personal taxes, while both parties have said that lower federal taxes on corporations are needed for the country to compete globally.
The Times analysis shows that Texas awards more incentives, over $19 billion a year, than any other state. Alaska, West Virginia and Nebraska give up the most per resident.
For many communities, the payouts add up to a substantial chunk of their overall spending, the analysis found. Oklahoma and West Virginia give up amounts equal to about one-third of their budgets, and Maine allocates nearly a fifth.
In a few states, the cost of incentives is not significant. But several of them have low business taxes — or none at all — which can save companies even more money than tax credits.
Far and away the most incentive money is spent on manufacturing, about $25.5 billion a year, followed by agriculture. The oil, gas and mining industries come in third, and the film business fourth. Technology is not far behind, as companies like Twitter and Facebook increasingly seek tax breaks and many localities bet on the industry’s long-term viability.
Those hopes were once more focused on automakers, which for decades have pushed cities and states to set up incentive programs, blazing a trail that companies of all sorts followed. Even today, G.M. is the top beneficiary, public records indicate. It received at least $1.7 billion in local incentives in the last five years, followed closely by Ford and Chrysler.
A spokesman for General Motors said that almost every major employer applied for incentives because they help keep companies competitive and retain or create jobs.
“There are many reasons why so many Ford, Chrysler and G.M. plants closed over the last few decades,” said the G.M. spokesman, James Cain. “But these factors don’t mean that the companies and communities didn’t benefit while the plants were open, which was often for generations.”
Mr. Cain cited research showing that the company received less money per job than foreign automakers operating in the United States.
Questioned about incentives, officials at dozens of other large corporations said they owed it to shareholders to maximize profits. Many emphasized that they employ thousands of Americans who pay taxes and spend money in the local economy.
For government officials like Bobby Hitt of South Carolina, the incentives are a good investment that will raise tax revenues in the long run.
“I don’t see it as giving up anything,” said Mr. Hitt, who worked at BMW in the 1990s and helped it win $130 million from South Carolina.
Today, Mr. Hitt is the state’s secretary of commerce. South Carolina recently took on a $218 million debt to assist Boeing’s expansion there and offered the company tax breaks for 10 years.
Mr. Hitt, like most political officials, has a short-term mandate. It will take years to see whether the state’s bet on Boeing bears fruit.
In Michigan, Gov. Rick Snyder, a Republican in his first term, has been working to eliminate most business tax credits but is bound by past awards. The state gave General Motors $779 million in credits in 2009, just a month after the company received a $50 billion federal bailout and decided to close seven plants in Michigan.
G.M. can use the credits to offset its state tax bill for up to 20 years. “You don’t know who will take a credit or when,” said Doug Smith, a senior official at the state’s economic development agency. “We may give a credit to G.M., and they might not take it for three years or 10 years or more.”
One corporate executive, Donald J. Hall Jr. of Hallmark, thinks business subsidies are hurting his hometown, Kansas City, Mo., by diverting money from public education. “It’s really not creating new jobs,” Mr. Hall said. “It’s motivated by politicians who want to claim they have brought new jobs into their state.”
For Mr. Hall and others in Kansas City, the futility of free-flowing incentives has been underscored by a border war between Kansas and Missouri.
Soon after Kansas recruited AMC Entertainment with a $36 million award last year, the state cut its education budget by $104 million. AMC was moving only a few miles, across the border from Missouri. Workers saw little change other than in commuting times and office décor. A few months later, Missouri lured Applebee’s headquarters from Kansas.
“I just shake my head every time it happens, it just gives me a sick feeling in the pit of my stomach,” said Sean O’Byrne, the vice president of the Downtown Council of Kansas City. “It sounds like I’m talking myself out of a job, but there ought to be a law against what I’m doing.”
Outgunned by Companies
For local governments, incentives have become the cost of doing business with almost every business. The Times found that the awards go to companies big and small, those gushing in profits and those sinking in losses, American companies and foreign companies, and every industry imaginable.
Workers are a vital ingredient in any business, yet companies and government officials increasingly view the creation of jobs as an expense that should be subsidized by taxpayers, private consultants and local officials said.
Even big retailers and hotels, whose business depends on being in specific locations, bargain for incentives as if they can move anywhere. The same can be said for many movie productions, which almost never come to town without local subsidies.
When Oliver Stone made the 2010 sequel to “Wall Street,” in his mind there was only one place to shoot it: New York City. Nonetheless, the film, a scathing look at bankers’ greed, received $10 million in tax credits, according to 20th Century Fox.
In an interview, Mr. Stone criticized subsidies for industries like banking and agriculture but defended them for Hollywood, saying that many movies can be shot anywhere and that their actors and crew members pay state income taxes. “It’s good,” Mr. Stone said of the film subsidies. “Or like basically the way business is done. I don’t understand what the moral qualm is.”
The practical consequences can be easily seen. The Manhattan Institute for Policy Research, a conservative group, found that the amount New York spends on film credits every year equals the cost of hiring 5,000 public-school teachers.
Nationwide, billions of dollars in incentives are being awarded as state governments face steep deficits. Last year alone, states cut public services and raised taxes by a collective $156 billion, according to the Center on Budget and Policy Priorities, a liberal-leaning advocacy group.
Incentives come in many forms: cash grants and loans; sales tax breaks; income tax credits and exemptions; free services; and property tax abatements. The income tax breaks add up to $18 billion and sales tax relief around $52 billion of the overall $80 billion in incentives.
Collecting data on property tax abatements is the most difficult because only a handful of states track the amounts given by cities and counties. Among them is New York, where businesses save an estimated $1.1 billion a year in property taxes. The American International Group, the insurance company at the center of the 2008 financial crisis, continued to benefit from a $23.8 million abatement from New York City at the same time it was being bailed out with $180 billion in federal money.
Since 2000, The New York Times Company has received more than $24 million from the city and state.
In some places, local officials have little choice but to answer the demands of corporations.
“They dictate their terms, and we’re not really in a position to question their deal terms,” Sarah Eckhardt, a commissioner in Travis County, Tex., said of companies she has dealt with recently, including Apple and Hewlett-Packard. “We don’t have the sophistication or the resources to negotiate with a company that has the wherewithal the size of a country. We are just no match in negotiating with that.”
Local officials can find themselves across the table from conglomerates like Shell Oil and Caterpillar, the world’s largest maker of construction equipment.
Shell has been offered a tax credit worth as much as $1.6 billion over 25 years from Pennsylvania, which competed with West Virginia and Ohio for an energy production facility. Royal Dutch Shell, the parent company, made $31 billion in profits in 2011 — about $3.5 million every hour. The company’s chief executive made $13.1 million last year, according to Equilar, an executive compensation firm. Pennsylvania predicts that the plant will create thousands of long-term jobs, but it did not require them in exchange for the tax credit.
Caterpillar has received more than $196 million in local aid nationwide since 2007, though it has chastised states, particularly its home base, Illinois, for not being business-friendly. This year, Caterpillar announced a new plant in Georgia, which offered $44 million in incentives. Local counties chipped in free land and other aid, including $15 million in tax breaks and $8.2 million in road, water and sewer repairs.
The company, whose profits are soaring, recently froze workers’ pay for six years at several locations, arguing that it needed to remain competitive. A spokesman for the company, Jim Dugan, said it employed more than 50,000 people and invested billions of dollars nationwide.
Local officials typically have scant information about the track record of corporations, like whether they lived up to job assurances elsewhere. And some officials acknowledged that they did not know to what extent incentives were a deciding factor for companies.
“I don’t know that there’s a way to know other than talking to the businesses, and the businesses telling us that that was a factor in creating jobs,” said Ken Striplin, the city manager of Santa Clarita, Calif., which gives tax breaks in a designated enterprise zone. “There’s no box that says ‘I would have created this job without the enterprise zone.’ ”
California is one of the few states that have been cutting back on incentives. But that does not mean its cities are following suit. When Twitter threatened to leave San Francisco last year, officials scrambled to assuage the company.
Twitter was not short on money — it soon received a $300 million investment from a Saudi prince and $800 million from a private consortium. The two received Twitter equity, but San Francisco got a different sort of deal.
The city exempted Twitter from what could total $22 million in payroll taxes, and the company agreed to stay put. The city estimates that Twitter’s work force could grow to 2,600 employees, although the company made no such promise.
A Twitter spokeswoman said the company was “very happy to have been able to stay in San Francisco.” City officials did not respond to inquiries.
Like many places, San Francisco has been cutting its budget. Public parks have lost about $12 million in recent years, though workers at Twitter will not lack for greenery. The company’s plush new office has a rooftop garden with great views and amenities. Enjoying the perks, one employee sent out a tweet: “Tanned on Twitter’s new roof deck this morning as some dude served me smoothie shots. This is real life?”
A Zero-Sum Game
It was the company every state had to have. In 1985, General Motors was looking for a spot to manufacture its Saturn, a new compact car that would compete with Japanese imports and create thousands of American jobs.
Incentives were not in wide use, and several states had only recently begun to allow more of them.
In fact, when G.M. announced the search, its chairman, Roger Smith, said the perks would not be a predominant factor. “Tax breaks can’t make a silk purse out of a sow’s ear,” Mr. Smith told The Detroit Free Press. He said G.M. planned to avoid states that had large debts or lackluster schools.
Undeterred, some 30 states stepped forward in what became a full-out competition. One official, Bill Clinton, then the governor of Arkansas, traveled to Detroit offering income tax credits and sales tax exemptions worth nearly $200 million.
Mr. Smith essentially kept his word and chose Tennessee, which had put together a relatively small package. Reid Rundell, a retired G.M. executive, said in a recent interview that it had come down to geography. “The primary factor was distribution for incoming parts, as well as outgoing vehicles,” Mr. Rundell said.
But the gates had been opened. In 1992, South Carolina lured BMW with a $130 million package; the next year, Alabama got Mercedes-Benz at a price tag that topped $300 million.
“What the auto incentives did back then was really raise the profile of economic incentives both within companies, in government and in the public’s eye,” said Mark Sweeney, who worked for the South Carolina Commerce Department in the 1990s and now advises companies on obtaining government grants.
By 1993, governors were regaling one another at a national conference with stories of deals beyond the auto industry, including a recent bidding war for United Airlines that drew more than 90 cities. The airline had set up negotiations in a hotel, and its representatives ran floor to floor comparing bids, said Jim Edgar, then the governor of Illinois.
Mr. Edgar said he had called for a truce, concerned that the practice was unfair to companies that did not receive incentives. But many states would not sign on, he said, particularly those in the South, where businesses were moving.
“If you’ve got some states doing it, it’s hard for the others not to do it,” Mr. Edgar said. “It’s like unilaterally disarming.”
Soon after, economists at Federal Reserve branches were questioning the use of incentives. One, in Minnesota, used mathematical proofs and game theory to show that competition between states did not increase overall economic value. Several other economists have since called the practice a zero-sum game.
A group of taxpayers in Michigan and Ohio went as far as suing DaimlerChrysler after Ohio and the City of Toledo awarded the automaker $280 million in the late 1990s. The suit argued that it was unfair for one taxpayer to be given a break at the expense of all others.
The suit made its way to the Supreme Court, and G.M. and Ford signed on to briefs supporting Daimler, as did local governments. The National Governors Association warned the court that prohibiting incentives could lead to jobs moving overseas. “This is the economic reality,” the association said in a brief.
The governors offered no hard evidence of the effectiveness of tax credits, but the Supreme Court did not consider whether they worked anyway. In 2006, the court concluded that the taxpayers did not have the legal standing to challenge Ohio’s tax actions in federal court.
The tab for auto incentives has grown to $13.9 billion since 1985, according to the Center for Automotive Research, a nonprofit group in Ann Arbor, Mich. G.M., the top recipient, was awarded $3.3 billion of the aid. Since 1979, automakers also closed more than 267 plants in the United States, about half of which still sit empty, according to the center.
The auto industry and some local officials have long argued that auto companies create so many jobs and draw in so many supporting suppliers that all taxpayers benefit. Even if companies shut down years later, as Saturn did in Tennessee for a few years, the trade-off is worth it, they said.
“I do believe that if a state ever is going to create incentives,” said Lamar Alexander, who was Tennessee’s governor in 1985 when Saturn selected the state, “the auto industry would be by far the No. 1 target, because an auto assembly plant is a money target.”
Still, Mr. Alexander, now a United States senator, said that recruiting a large factory today would be more expensive. “It has changed a lot,” he said. “It’s almost become a sweepstakes.”
G.M. Gets Into the Act
G.M. may have initially minimized the role of local dollars, but as the company’s financial problems grew, incentives became a big part of its math.
The actions of the company were described in more than two dozen in-depth interviews with former company officials, tax consultants and governors and mayors who have dealt with G.M.
The automaker’s real estate division, Argonaut Realty, oversaw the hunt for the most lucrative deals. Up and down the corporate ladder, employees were encouraged to push governments for more, according to transcripts of public meetings and interviews. Even G.M. plant managers knew that the future of their facilities depended in part on their ability to send word of big discounts back to Detroit.
Union representatives were enlisted to attend local hearings, putting a human face on the jobs at stake. G.M.’s regional tax managers often showed up, armed with tax abatement wish lists and highlighting the company’s gifts to local charities.
“We knew what our investment of X amount meant to the community, and we knew we needed to partner with the community to be successful,” said Marilyn P. Nix, who worked as a real estate executive at G.M. for 31 years until retiring in 2005.
At the top of G.M., executives reviewed the proposals from various locations and went where the numbers added up.
“I know people like to blame the industry for taking advantage of the incentives, but you go back to what your fiduciary responsibility is to the stockholders,” Ms. Nix said. “As long as you’ve got people that are willing to better the deals, the management owes it to their stockholders to try to get the best economic deal that they can.”
For towns, it became a game of survival, even if the competition turned out to be a mirage.
Moraine, Ohio, was already home to a G.M. plant in 1997 when the company pushed hard for additional incentives. G.M. said it was looking for a place to accommodate more manufacturing.
Wayne Barfels, the city manager at the time, said a G.M. representative had told officials that Moraine was competing with Shreveport, La., and Linden, N.J. After the local school board approved property tax breaks, The Dayton Daily News reported that the other towns had not been in discussions with G.M.
The school board considered rescinding the deal, but allowed G.M. to keep it after a company official apologized. In 2008, G.M. shut the Moraine facility.
In towns where General Motors remains, local officials praised the company. “I can say they have been a great partner to us,” said Virg Bernero, the mayor of Lansing, Mich. “It would do something to the psyche of this community if they were not here. I mean, I just praise God every day.”
Looking to lure businesses beyond automakers, states have routinely bolstered their incentive tool kits. In 2010 alone, states created or expanded about 40 tax credits and exemptions, according to the National Conference of State Legislatures.
The nature of the credits has also changed. New ones are geared toward attracting technology and green energy companies, but it is hard to know whether 15 years down the road they will thrive or wind up stumbling like the automakers. And many modern companies, like those in digital technology, can easily pack up and leave.
“I don’t see anything that suggests that Twitter and Facebook are better bets in the long run,” said Laura A. Reese, the director of the Global Urban Studies Program at Michigan State University. Ms. Reese advises local governments to invest in residents through education and training rather than in companies where “it’s hard to pick winners.”
Yet states try to do it all the time. In 2010, Rhode Island, which has the nation’s second-highest unemployment rate, recruited Curt Schilling, a former Red Sox pitcher, to move his video game company from Massachusetts. The company, 38 Studios, had never released a game and was not making money, but the governor at the time had the state guarantee $75 million in loans.
The company failed and dismissed all of its roughly 400 workers this May. Rhode Island taxpayers are now on the hook for the loans.
Officials said part of the difficulty was that communities do not get much say in a company’s business strategy.
“We, as communities, stake our futures with these people who are supposed to know what they’re doing, and sometimes they don’t,” said Arthur Walker, a businessman in Shreveport and former chairman of the city’s chamber of commerce.
Mr. Walker and other officials in Shreveport know firsthand. In 2000, they were worried that G.M. would close a plant in their area and responded with a generous proposal: the city would cut the company’s gas bill and provide work force training grants. In addition, G.M. would benefit by a recent increase in one of the state’s income tax credits.
Eager to encourage innovation, Shreveport officials suggested ways the city could assist G.M. in building electric cars. “We wanted to be part of the future,” said Mr. Walker, whose brother worked at the plant.
G.M. took the city’s incentives but not its business advice and began building the giant Hummer there.
“We knew they needed to build green cars — I mean, who builds a Hummer for the 21st century?” Mr. Walker said. “It was a losing proposition that we found ourselves in. We couldn’t win because those people weren’t making the correct business decisions, in my view. When it didn’t work, we’re the ones left holding the bag.”
The Hummer was discontinued in 2010, and the Shreveport factory closed this August, the final victim of G.M.’s bankruptcy.
Ypsilanti’s Losing Battle
For much of the last 20 years, Doug Winters has been agitating for General Motors to be held accountable.
Mr. Winters, the attorney for Ypsilanti Township and several other places around Ann Arbor, has lived in Ypsilanti all his life. His grandmother labored at the local plant, Willow Run, during World War II, when it made bomber planes. People in town still proudly point out that a woman known as Rosie the Riveter worked there as well. After the war, when G.M. moved into the plant to manufacture its automatic transmission system, his father got a job.
Mr. Winters loves the history of Willow Run but hates what he views as corporate hypocrisy: G.M. asked for government help on the one hand and then appealed to free-market rationales for closing shop.
Over the years, Ypsilanti granted G.M. more than $200 million in incentives for two factories at Willow Run, Mr. Winters said. “They had put basically a stranglehold on the entire state of Michigan and other places across the country by just grabbing these tax abatements by the billions,” he said. “They were doing it with a very thinly disguised threat that if you don’t give us these tax abatements, then we’ll have to go somewhere else.”
Ypsilanti first sued G.M. in the 1990s to prevent the company from closing the factory at Willow Run that made the Chevrolet Caprice.
The town had granted the company tax incentives after the factory manager argued that G.M.’s ability to compete with other carmakers was at stake, documents in the lawsuit show. The tax break and “favorable market demand,” said the plant manager, Harvey Williams, would allow the automaker to “maintain continuous employment.”
Nevertheless, G.M. shut the factory. A lower court found in favor of Ypsilanti, but the ruling was reversed on appeal. The judge said that a company’s job assurances “cannot be evidence of a promise.”
In 2010, when the company closed the remaining factory at Willow Run, Mr. Winters sued again. This time, Ypsilanti argued that the automaker should have been forced to close overseas factories instead, especially since American taxpayers had bailed out G.M. In addition, Ypsilanti sought to recover money from G.M., saying the company had agreed to reimburse the town for some incentives if it left.
So far, Ypsilanti’s claims have not been addressed. They were complicated by G.M.’s bankruptcy, which allowed the carmaker to emerge as a new company and leave some of its liabilities and contractual obligations behind.
When asked whether the new G.M. has civic responsibilities to its former factory towns, Mr. Cain, the company spokesman, said: “Our obligation to the communities where we do business is to run a successful business. And when we prosper, it allows us to do more than just turn the lights on and make cars.”
He also said that since the bailout, “G.M. has invested more than $7.3 billion in its U.S. facilities, and we’ve created or retained almost 19,000 jobs in communities all over the country.”
Matthew P. Cullen, who oversaw real estate and economic development for G.M. until he left the company in 2008, said the automaker was aware of its impact on communities. He said that what happened with G.M. was the result of an entire industry changing and that there had been no bad intentions.
“If you go forward in good faith doing everything you can and make the investment, then you’re partners,” Mr. Cullen said. “Sometimes partnerships in business work, and they work for 60 years. And in some cases, they don’t, and it doesn’t make you a bad partner.”
Some towns that are still dealing with the fallout of plant closings might disagree. In Pontiac, Mich., tax revenues have fallen 40 percent since 2009 after the old G.M. knocked down buildings on its property, resulting in lower tax assessments, according to the city’s emergency manager.
In Ypsilanti, an entity set up to sell off G.M. property is marketing the plant as valuable. At the same time, it has been arguing for lower property taxes on the grounds that its plant is not worth much.
Ypsilanti’s supervisor, Brenda Stumbo, said the township would be stung hard by further revenue cuts. Ypsilanti has already slimmed down its Fire Department, and city workers are juggling multiple jobs. There are seven to 10 home foreclosures a week, giving the township the highest foreclosure rate in the county, Ms. Stumbo said.
“Can all of it be traced back to General Motors?” she said, listing auto suppliers that closed after G.M. did. “No, but a great deal of it can.”
Nonetheless, Ms. Stumbo said that if G.M. would bring jobs back to town, she would be willing to grant the company more incentives.
But Mr. Winters is not so sure. He said he would never support more incentives without stronger protections for Ypsilanti. “They’ve done a lot of damage to a lot of people and a lot of communities, and they’ve basically been given a clean slate,” he said. “It’s a ‘get out of jail free’ card.”
Original Article
Source: ny times
Author: LOUISE STORY
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