It’s Taxpayers’ Money and Business Wants It NOW!

OK, so I stole this week’s title from a TV commercial.  But it fits very well with the topic: corporate welfare through taxpayer subsidies.

I’m not talking about the financial bailout, although that is a rather spectacular example.  At least with the bailout, there was a fig leaf that those funds would be paid back.  (And in fact some of the bailout funds have been paid back, although there is that nasty PR over AIG paying another $100 million in bonuses while still owing us billions for its bailout.)

Quite apart from the bailout, there is now a definite expectation on the part of many businesses that they are entitled to corporate welfare.  Of course, no one uses that term because it is too….honest.  The term of choice is…“partnership.”

Here’s how it works.  A business approaches a few communities and tells them that it may locate there.  Many jobs are promised.  A big investment too.  Now, who will start the bidding?  Going once, going twice…..

Local, state, and federal tax dollars are literally being used to “buy” jobs.  Except these jobs are not being bought at Wal-Mart prices.

Depending on the type of jobs being purchased, the price may be $35,000 for a job that requires nothing more than a high school education.  Of course, the going price is much higher for those “high tech” jobs that every community says it wants.  I suspect that your elected officials at all levels would prefer a “don’t ask, don’t tell” policy when it come to buying jobs.

Lucky for you, I have no inhibitions about telling all.  It is my duty in the interest of… well, you know what my interest is.  So, for enquiring minds….

For brevity, I’ll provide only three examples.  They are the proverbial tip of the iceberg.

About five years ago, a well known (at least in the Southeast) non-big box discount retailer approached a rural city near where I live.  It was considering establishing a warehouse distribution center there which would serve its stores in a large region covering several states.  The business had identified property right off an I-10 exit which was perfect for its needs.

The business would create about 450 jobs paying an average of about $21,000 and invest about $50 million. What kind of …partnership…might be possible?  The business was also looking at four other locations, including Georgia and other states. (Hint, hint: bid high and bid often.)

After a few months of back and forth, the other locations fell by the wayside.  The “partnership” was this:  land worth $2.5 million; $2.1 million in state grants and $3.5 million in federal grants for dedicated infrastructure (water and sewer lines, fire suppression water tanks, etc.) needed by the business.  That’s about $8.1 million in direct “up front” cash. Cost per job: about $18,000.

But wait, there’s more!

The icing on this cake was: the city and county each waived property taxes for ten years. That value is a bit harder to calculate since it depends on each year’s tax rate. But given that the facility was about $50 million, we can do some math. The current combined property tax rate of the city and county is 10 mills ($10 per $1,000 valuation.) So this year, the business saved a good half million dollars.

Since this is year 5, if we say that the “average” annual tax saving over the ten years is $500,000 then that’s another $5 million saved by the business.  Factor that into the “final” cost per job and it goes from $18,000 to about $29,000 of taxpayer subsidy.  And the business was not required to guarantee the jobs would stay at 450 for any minimum period of time.

Interestingly, the city has been making the rounds of federal and state agencies looking for grants because it needs millions of dollars to replace sewer lines that are a good 40+ years old.  And one reason it has no money to replace those lines is….yes, the 10-year property tax abatement.

Overall, I’d say this is a success story, at least for the local governments.  The business made a significant private investment and in a few more years the local governments will see the tax revenue.  Not to mention the 400+ jobs.

But that example is chump change.  Warehouse distribution jobs are not crème de la crème so most governments are not going to bid them up too high.  So my second example is what the going price for high tech jobs can be.

A relatively rural city in southeast Florida, north of Palm Beach County, has struck a deal with a California-based company that is in the digital movie-game (computer games based on movies) business.  The company will open a facility that will create some 500 jobs by 2014.  These jobs will pay an average $64,000.  (I hate averages, which can be misleading; I prefer to know the median.)

So, what do you think the “partnership” is for 500 high tech jobs paying about $14,000 more than the county’s median (not average) household income of $50,500?  Take a deep breath….

Let’s start off with land worth $10 million.  Another $10 million in cash from the local governments.  Another $10 million from the State.  That’s a cool $30 million for 500 jobs, which is $60,000 of taxpayer money per job.

But wait…there’s more!

An additional $31 million in tax-exempt bonds issued by the local governments, most of which will be used to construct the business’ facility, and which will be repaid over 20 years by the business.  Assuming it is still around in 20 years.

But presumably, there is zero liability to the taxpayer because I suspect the bonds will be issued as “revenue” bonds pledged to lease payments paid by the business for the facility, probably under a lease-purchase agreement.  If the business goes under before 20 years, the bondholders are up the creek.

Now I’m not certain about this part, but I did come across “tax abatement” in this deal.  Seems to be popular, so why not?

Now this is a very nice deal for the business. Notice that it is putting up ZERO of its own money for start-up, except for (I presume) whatever computer and office equipment it needs.  No cost for the land. No upfront cost for the building. If it goes bust before 20 years, they walk away owing….zero.

Finally, the third example.  A small town about 75 miles west of me, whose economy has historically been centered on fishing, was anxious for….“diversification.”  So it’s… partnership…with a business that produces modular homes using light steel, looking to sell to Katrina victims along the Gulf Coast, was especially generous.

The City used local funds to build an $800,000 facility on City land.  Another $600,000 in federal funds paid for infrastructure.  The City signed a 99-year lease for the business to use the facility at $10 a year.  The business would create 19 jobs.

That comes to a whopping $73,000 per job. And since it is a City facility on City land, there is ZERO increase to tax base.  I’m sure the City saw this as a “first step” which would lead to an expansion, more jobs, etc.

But grasshopper, the road to hell is paved with good intentions and naivete.  The business did create the 19 jobs a little more than a year ago.  Today, the business is not in operation.  It has filed for bankruptcy.  It may or not be able to reopen.

My issue is this: even if all these business stay open and create all these jobs, what has the practice of buying jobs done to the so-called “free market”?  Businesses are routinely using taxpayer funds to gamble with.  Because that what capitalism is…gambling.

I wonder how competitors to these business feel knowing that, in many cases, their personal and business taxes are being used to subsidize competitors.  Let’s take that warehouse distribution center.  Thanks to the subsidies, it’s start-up and operating costs were lowered, which means it can price its products a bit lower, giving it a competitive advantage over similar discount stores which received no taxpayer subsidy.  Same with the movie game production company.

And as we saw with the modular home business, sometimes a subsidy is still not enough to keep you in business. The City has an empty $800,000 facility and isn’t even getting the $10 yearly rent.  I’m sure the city manager needs that $10… to buy him some Maalox for the coming Inquisition.

Welcome to Amerika comrade!  Unlike inferior socialist countries, which own production assets, in superior Amerika taxpayers just give business free money with no ownership rights at all.  The business need only promise to hire some folks, something they need to do anyway.

Getting paid for something you have to do anyway? Where do I sign up?

This is why capitalism is superior to communism!  Business takes all the profit but if it hits the fan, then the taxpayers go down.

This year, please send 25% of your taxes directly to the local Chamber of Commerce. Be sure to advise them whether you want them to place your money on “odd” or “even.”  Because it’s your money and business wants it NOW!