Here's a business practice likely to keep booming in 2014: corporate extortion.
We don't mean extortion of corporations, as is practiced by Somali pirates or entrepreneurial Russians. We mean extortion by corporations.
In this field the victims are taxpayers, and what makes it a beautiful business is that the taxpayers think they're getting a great deal, even as they're led to the shearing. And a lucrative shearing it is, for business: By the estimate of the Washington-based Institute on Taxation and Economic Policy, state and local tax incentives funnel $50 billion in tax revenue into corporate coffers every year. On a national basis, ITEP says, this is worse than a zero-sum game: The incentives are "much more likely to reshuffle investment between geographic areas than … to spur genuinely new economic activity."
The trendsetter for the coming year may turn out to be Boeing. The aerospace company has been dangling the prospect of a big airliner production facility in front of several states, including California, since mid-November. That's when union machinists in Everett, Wash., rejected its demands for big concessions on pension and healthcare benefits. The process started only days after Washington Gov. Jay Inslee signed the biggest state tax break in history into law — a package that will give Boeing up to $8.7 billion in benefits through 2040.
Boeing's shopping the production program to other states goaded the International Assn. of Machinists to schedule a second vote Friday. As this column went to press the results were unavailable. The company said it would keep much of the production of its new 777X airliner in Everett if the contract passes, though some work may go to other locations anyway.
"What I've heard is that we're still in the running," Rep. Alan Lowenthal (D-Long Beach) told me. Lowenthal, who says he's spoken with Boeing executives, says that would be true even if the machinists approved the new contract.
So the competition may continue in some form, whatever the outcome of the union vote. The company's specifications for an alternative site are exacting. Its "desired incentives," according to a Seattle Times report on the confidential list, include a plant "at no cost, or very low cost," to the company; infrastructure improvements such as rail and highway access at the expense of the bidder; and "significantly reduced" income, property, excise and sales taxes.
But Boeing is also looking for a workforce of high quality and productivity, which usually results from good educational systems, which in turn have to be paid for with, you know, income, property, excise and sales taxes. It is also seeking to cut its pension contributions to employees.
In other words, this global manufacturer wants all the good things that come from excellent physical and educational infrastructures, but wants someone else to pay. By the way, the company also wants to pay low wages. Who wouldn't want to live in Boeing's nirvana? Great infrastructure, an educated workforce — and all at minimal cost.
It's proper to observe that Boeing is a veteran at such scheming. Back in 2001 it held a nationwide auction for the right to host its corporate headquarters, which it had decided to relocate from Seattle. The company said its rationale was to shed its image as a maker of commercial airliners, which it built in Washington state, and reposition itself as a diversified aerospace company. A laudable goal, no doubt, but does anybody really believe that its ultimate choice of Chicago had nothing to do with the $60 million in tax breaks and other giveaways to be parceled out over 20 years by the state of Illinois?
Despite the discrepancy between what Boeing wants and what it will pay for, state and local governments have fallen all over themselves crafting incentive packages to lure it from Washington state. Missouri, which is hoping that Boeing will expand the St. Louis facilities it acquired by taking over McDonnell Douglas in 1997, is offering as much as $1.74 billion, not counting whatever breaks the company can extract from local jurisdictions in the area.
California has assembled its own package in the name of keeping Boeing in Long Beach, another former McDonnell Douglas location where production of the C-17 Globemaster III cargo jet will be wrapping up next year. The 777X project could last until 2020.
So far, California's offer is being kept a secret between Gov. Jerry Brown's office and Boeing. "Our office has not shared the proposal," Brook Taylor, a spokesman for the governor's business development staff, told me by email. Well, not shared it with the taxpayers who would be fronting the bennies. That's one way of avoiding the embarrassment of public skepticism, as when Missouri's largest newspaper, the St. Louis Post-Dispatch, labeled that state's process "legalized bribery." But if you're preparing to give away the farm, as Brown could be (for all we know), shouldn't you let the farmers in on the news first?
Lowenthal, for his part, urges the governor and Legislature to devise a strong package to attract a program he says would be "an amazing coup for Southern California." What's the limit? He won't say. "You don't give up your values or do something stupid, but you have to see what it will take."
The last year has brought encouraging signs that some states and municipalities are fed up with being held up. Cupertino, Calif., for example, pared back its 1997-vintage sales tax rebate to Apple in November, even as Apple was presenting plans for a huge new headquarters complex in the Silicon Valley community.
The original deal, crafted when the company was flirting with bankruptcy, required Cupertino to rebate 50% of the sales taxes it collected on Apple-related purchases. Now that Apple is one of the world's most successful consumer companies, the new deal rebates only 35%. As my colleague Chris O'Brien reported in November, the new deal could be worth nearly $2 million a year to Cupertino at the outset and much more as the headquarters expansion unfurls.
Illinois, which rolled out that cherry-red carpet for Boeing more than a decade ago, refused to do the same last month for the commodity firm Archer Daniels Midland, which was hoping to obtain as much as $30 million in payroll tax incentives to move its world headquarters to Chicago from Decatur, Ill.
The deal ran into resistance from Democratic Gov. Pat Quinn and Democratic legislators, who became sensitive to the spectacle of handing out millions in corporate welfare while demanding pension cutbacks from public employees. "I find it very difficult to support tax giveaways for corporate CEOs and millionaire shareholders," said state House Speaker Michael Madigan, "while middle-class families and taxpayers face an increasing number of burdens."
The state also turned down incentives for Office Depot, which merged last year with Illinois-based OfficeMax. The merged office supply company will move its corporate headquarters to Florida, the home of the pre-merger Office Depot. But Archer Daniels Midland will go through with its relocation to Chicago, albeit at a smaller scale than it originally planned.
That's a signal that tax abatements and other incentives often play a smaller role in corporate siting decisions than the companies let on — though they're not above squeezing cities and states for everything they can get. The most recent survey of corporate relocation consultants by Site Selection magazine identified the availability of a "skilled" and "qualified" workforce as the most important factor, followed by transportation infrastructure and proximity to clients and markets.
Incentives ranked further down the list. The consultants said that "incentives should never be the major driver of a location decision, although they can play a decisive role later in a project to tip the scales between locations that otherwise fulfill all requirements," the magazine reported.
Still, politicians' faith in the magic of industrial incentives is hard to shake. A perfect example is the film incentive, which has gotten etched into the tax code of dozens of states despite consistent evidence that the giveaways to movie and television producers cost more than they deliver in terms of economic development.
In California, where the Legislature is under pressure to expand the state's film incentive program as much as fourfold from its current budget of $100 million a year, no objective study has shown that the program produces more revenue than it spends. The only study to make that claim, by the Los Angeles County Economic Development Corp., was financed by the incentive-hungry Motion Picture Assn. of America. (Cannily, the LAEDC's study didn't disclose the MPAA's role.)
Even worse, as my colleague Richard Verrier recently reported, the film incentives have become the grist of a nationwide trade in tax breaks worth as much as $1.5 billion a year.
A Hollywood producer snags a few million in credits to shoot a picture in Georgia, Pennsylvania or Illinois, say, then sells them to a middleman who hawks them in turn to Kohl's, or Macy's, or Bank of America, or the power plant company Exelon.
The studio gets its money more quickly than if it had to wait for a tax refund. The buyers cut their state tax bills as much as 15%. The middleman makes a profit.
Everybody wins, its seems — except for taxpayers, who get hosed.
Such is the natural harvest of a system that hands out tax breaks, regulatory exemptions and other benefits to business just for the asking. You get to the point where no smart businessman will make a move without expecting a payoff. As long as politicians aren't smart enough to turn them away, why should they expect anything different?