Synthesis/Regeneration 10   (Spring 1996)

An Act to End Business Extortion of Local Tax Giveaways

Robert W. Benson, Loyola Law School

#A Model Act to End Business Extortion
of Tax Subsidies from State & Local Governments

Excerpted from: Getting Business off the Public Dole: State and Local Model Laws to Curb Corporate Welfare Abuse (National Lawyers Guild 1995) By Robert W. Benson. Booklet will be sent without charge upon request to Robert Benson, Professor of Law, Loyola Law School, Los Angeles, CA 90015.

Businesses are extorting billions of dollars from state and local governments in exchange for promises to create jobs. Not only are the promises often broken, but the cost to the public treasury is often much greater than any conceivable benefit to the economy. State and local governments, blackmailed by businesses threatening to move elsewhere, are competing in a race to give away their tax bases.

Illinois gave Sears land and bonuses worth $240 million near Chicago to keep Sears from moving. Soon after, Sears announced large Illinois layoffs as part of a restructuring plan. [1]

Kentucky gave Dofasco, Inc. and Co-Steel, Inc. $140 million in aid for a 400-employee mini-mill: $350,000 per job! [2]

Rio Rancho, New Mexico attracted Intel (close to becoming "the most profitable company on the earth," according to the Wall Street Journal [3]) with a $114 million package of incentives and tax breaks, including the promise of no property taxes for 30 years. [4] Then, the town found it couldn't afford to build a needed high school without the property taxes. Intel magnanimously offered to build the $28.5 million high school, in exchange for approval of a further $8 billion industrial revenue bond and a tax giveaway worth another $480 million over the 30 year life of the bond. [5]

The Texas Legislature is considering legislation that would refund 80 percent of the school taxes paid by large corporations. School districts were prohibited recently from joining the tax abatement giveaway game in Texas. "Since then, corporations have been seeking another way to cut their tax bill, particularly because school taxes account for about 60 percent of all property taxes in Texas. SB 345 is their solution. It cuts corporate expenses by shifting the cost of school taxes onto state taxpayers, who must foot the bill for refund checks. . . . The plan is being hustled through the Legislature by a powerful coalition that includes Dow Chemical, Union Carbide, DuPont, Amoco, Motorola and several big-business lobbyists. Benefits would be limited to giant companies. . . ." To qualify, they must merely be "reasonably likely" to contribute to the economic development of their cities. [6]

"According to the Council of State Governments, many incentives that were not very common fifteen years ago are now offered by 40 or more states; and the number of states that authorize cities and counties to lend for job creation or retention is also sharply up." [7]

Columnist Peter King in the Los Angeles Times sums up the problem perfectly:

"Sports teams, computer chip plants, military bases, forklift factories, fast-food chains, prisons, universities—all that stuff and more has been fair game in this raging war of municipal seduction. . . [A]ny softhearted municipality that frets about taking jobs from a neighbor might wake up one morning to find its own fertilizer factory loaded up and making tracks for the next county.

"And there always is a next county. . . .they raid one another day and night. They swoop in on private jets, governors, mayors, industrial pooh-bahs, dazzling CEOs with promises to suspend taxes, grease permits, sacrifice native fauna—whatever it takes to persuade their quarry to jump ship." [8]

A Solution: A state law declaring incentive packages to be illegal gifts of public property—unless justified by a cost-benefit analysis showing a net return to the people of the state.

There are two problems to be solved. The first is that taxpayers are not getting their dollar's worth in exchange for these breaks for business. Jobs and boosts to the economy are promised, but often not delivered. The second problem is that local governments are raiding one another's territories. Thus, even if one area does benefit by attracting a company through tax incentives, its prosperity may come at the expense of another area abandoned by the same company.

To address the first problem, the Model Act declares that incentive packages are illegal gifts of public funds unless justified by a cost-benefit analysis showing a net return to the public. Legal doctrine in every state has long held that government gifts of public funds, property or credit are illegal. [9] The doctrine became vital in the 19th century when robber barons controlled state legislatures and began handing out state land, money and credit to themselves, especially to their railroad companies steaming across America. Most state constitutions were strengthened specifically to prohibit such abuses.

The prohibitions were taken pretty strictly until recent years when a new breed of robber barons arose to seduce and pillage local governments. At first the courts resisted, striking down many schemes for public financing of private benefits. Then the judges, too, became pliant. Nowadays, they resort to legal fictions to uphold the schemes. They will not second-guess the legislature, they say. They will "presume" that a financing scheme has a legitimate public rather than private purpose and, on the basis of the scantiest evidence, that the public is getting its money's worth—so there is no illegal gift.

The Model Act reverses that presumption. Based upon traditional legal doctrine and reasonable requirements for evidence, the Model Act is not vulnerable to charges that it is radical or reckless legislation. It does not outlaw all public incentive schemes for business. It merely holds governments accountable to the constitutional standards they claim already to be meeting.

To address the second problem—local governments raiding one another's companies—the Model Act requires the analysis justifying incentives to consider the citizens of the state as a whole in its calculations of costs and benefits. San Diego incentives that lure a company from Los Angeles will probably not pencil out to be a net benefit for the citizens of California. Incentives that close jobs in Philadelphia to open them in Pittsburgh are not likely to benefit the citizens of Pennsylvania as a whole. Such schemes will be illegal under the Model Act. This goes beyond current legal doctrine, which generally requires only that local government agencies consider benefits to the citizens within their own jurisdictions.

Note that the Act, however, does not reach rivalry between states. Single states are probably powerless under the federal constitution to prevent the interstate competition even within their own borders, and would put themselves at a disadvantage if they tried to do it alone. The interstate problem must be handled by federal law, or regional interstate compacts. The staff of the National Conference of State Legislatures, and the authors of the book No More Candy Store, have proposed such laws, [10] and a Democrat and a Republican are co-sponsoring the bill H.R. 1842 in the current Congress which reads simply: "No State may engage in the direct or indirect utilization of Federal funds of any kind, in whole or in part, to lure jobs and businesses from another State."

No enforcement mechanisms appear in the Model Act, for the reason that it fits into the existing mechanisms by which the state enforces prohibitions on gifts of public property. The last sentence of the Model Act is a "clawback," which is commonly used in Europe in connection with government subsidies.

#Notes (at bottom or page)

A Model Act to End Business Extortion of Tax Subsidies from State & Local Governments


1 Greg LeRoy et al., No More Candy Store: States and Cities Making Job Subsidies Accountable, p. 2 (Federation for Industrial Retention and Renewal, and Grassroots Policy Project, 1994). This excellent book is the bible on the issue of job subsidies.

2 Id.

3 Don Clark, The Wall Street Journal, "Big Pentium Gamble Puts Intel in the Chips," The Phoenix Gazette, June 16, 1995, p. B-3.

4 Robert Tomsho, "Growing Pains: Rio Rancho Wooed Industry and Got It, Plus Financial Woes," The Wall Street Journal, April 11, 1995, p. A-1. Others put the tax and subsidy cost to the taxpayers of New Mexico at $250 million for the first five years alone. See the detailed study by Southwest Organizing Project, Intel Inside New Mexico: A Case Study of Environmental and Economic Injustice (Albuquerque 1995),p. 45. All of this for just 1,000 jobs. p. 40.

5 "Intel Offers Deal to Help Town Build School," New York Times, May 16, 1995, p. D-10.

6 Dianne Stewart, "Abatement is Corporate Welfare," Dallas Morning News, May 21, p. 6-J.

7 No More Candy Store at p. 3.

8 Peter H. King, "On California: Cats and Dogs," Los Angeles Times, June 28, 1995, p. A-3.

9 See generally 15 McQuillan, Municipal Corporations §3930 (3d ed. 1995).

10 No More Candy Store, pp. 17-21.

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