Who benefits from more, bigger development deals?

A new study says state and local tax subsidies to businesses often create few if any jobs

6/23/2013

State and local governments have made an arms race of offering generous tax-paid subsidies to corporations, to persuade them to locate and expand in Ohio, Michigan, or places with which we compete. But is the return on these incentives, in jobs and economic growth, worth the investment? A growing body of research suggests it isn’t.

A new study by Good Jobs First, a nonprofit group in Washington that says it wants to make economic-development subsidies more accountable and effective, tracks 240 development “megadeals” over the past 35 years. These are private projects that each attracted more than $75 million in state and local aid.

All told, these deals cost American taxpayers more than $64 billion. The average cost per job created: $456,000 (a Michigan semiconductor project cost almost $2 million for each job). And both the number of megadeals and their costs have nearly doubled since 2008, the study says.

Michigan leads the nation in megadeals. Its 29 big deals have provided $7.1 billion in public money to such corporations as General Motors, Ford Motor Co., and Chrysler.

Ohio is tied for third among states with 12 megadeals, involving more than $1.5 billion in state and local subsidies. In northwest Ohio, they include a $227 million package back in 1997 to persuade Chrysler to build a new Jeep plant in Toledo, and a $78.5 million deal in 2011 to keep Marathon Petroleum’s headquarters in Findlay.

You can argue plausibly that subsidies paid by Ohio, Michigan, and other states and communities helped rescue GM and Chrysler from bankruptcy, keeping the car companies and their suppliers and dealers in business and preserving the U.S. auto industry. But the study contends that too many megadeals create few if any jobs.

“These are giant giveaways, and the practice has gotten out of control,” says Philip Mattera, research director of Good Jobs First and the lead author of the study. “The subsidies are too big, too frequent, and too indiscriminate.

“How high can you go as a cost of doing business?” he says. “Does it make sense to spend a million dollars to create a job? That’s crazy.”

Adds Greg LeRoy, the executive director of Good Jobs First: “Local officials drive lots of these deals. They’re giving away other people’s money.”

The researchers cite episodes of what they call job “blackmail,” in which a company that threatens to leave is paid to stay. Among such examples in Ohio, according to the study, are the $146 million subsidy package that American Greetings got in 2011 and a $152 million megadeal for Goodyear in 2007.

The American Greetings deal also involved job “piracy,” the study says, since the greeting-card company moved existing jobs within the Cleveland metropolitan area. The company cut about 2,100 workers between its 2012 and 2013 fiscal years. Other examples of megadeals that involved a company’s relocation within a state are Eaton in Ohio ($85 million) and Compuware Corp. in Michigan ($100 million).

The study’s authors say state and local governments generally are making progress at disclosing more information to taxpayers about development deals. But you couldn’t affirm that by looking at Ohio, or Toledo.

Gov. John Kasich has replaced the Ohio Department of Development with the essentially private corporation JobsOhio as the primary state agency for retaining and attracting business. The governor insists the state needs to operate “at the speed of business” to compete for its share of development activity.

JobsOhio officials say — but haven’t shown — that private companies will walk away from a deal rather than be forced to reveal too much of what they consider proprietary data. So JobsOhio has largely kept taxpayers in the dark about what it’s doing with its chief source of revenue: the $125 million or so in annual profits from state government’s liquor monopoly, which back the bonds the company issues.

Absurdly but effectively, the governor and General Assembly have defined these profits as private money rather than the public assets they are. That has helped keep State Auditor Dave Yost from performing a full audit of JobsOhio on taxpayers’ behalf. Ohioans still don’t know how well JobsOhio really is doing at creating jobs and recruiting employers.

In Toledo, Mayor Mike Bell has been notorious for keeping details of city development projects — notably the stalled revival of the Marina District by shadowy Chinese investors — under his biker’s helmet. And now, state lawmakers want to give all local governments in Ohio greater freedom to do development deals in secret, avoiding the nuisance of attention by citizens.

Mr. Mattera notes that Ohio was once a national model of accountability for the amount of information it made public about its development efforts — tax credits for job creation, property tax abatements, enterprise zones. No more.

“The privatization of economic development agencies” in Ohio and other states, he told me, “has raised a host of concerns about transparency, conflicts of interest, and corruption. And those concerns have come true. It’s an ominous sign when too much goes into the private sector. It’s a bad idea.”

Adds Mr. LeRoy: “Disclosure is fragile in Ohio — the quality has degraded. Reasonable people ought to agree to restore it.”

The researchers want Washington to issue rules for state and local governments to account for megadeals in a way that would invite meaningful comparisons of costs and benefits. But they note that federal courts failed to use a case that arose in Toledo in the past decade involving Chrysler to tighten the rules for megadeals.

“There’s no silver bullet coming from Washington,” Mr. LeRoy says.

No one would reasonably suggest abolishing all corporate incentives. Used strategically, they can stimulate economic growth and preserve and create good jobs.

But the money we spend on business incentives is money we can’t spend on education or public safety or other vital government services that also affect jobs and development. The Good Jobs First study reminds us that corporate subsidies demand at least as much attention as we pay to any other area of public spending. That isn’t happening.

David Kushma is editor of The Blade.

Contact him at: dkushma@theblade.com or on Twitter @dkushma1