Saturday, December 15, 2012

"Enterpreneurial City Halls" Across America

We're pretty deep into the holiday chaos right now and I haven't had time to post as much here. But before it gets away I wanted to mention, this recent NYT series on government "incentive" subsidies to businesses.

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.

Most of us are familiar with the grift pro sports franchises play on municipalities where they regularly threaten to move if they don't receive a new package of inducements, or a new stadium from the local taxpayers. Fewer of us realize, though, that, rather than an aberration, this sort of thing is standard business practice across a wide variety of industries.

The Times feature comes with a database of "incentive" programs broken down by state. Such giveaways currently amount to $1.79 billion or roughly 20 percent of Louisiana's budget. The biggest slice of that goes, of course, to oil and gas in the form of allowances and exemptions from state severance taxes.

Another significant chunk of our state budget  goes toward the so-called "Hollywood South" package of incentives. Earlier this year a report released by the Louisiana Budget Project concluded that these incentives are expensive and unproductive.
The Louisiana film tax credit program—born in 1992 and vastly expanded in 2002—has mushroomed into one of the nation’s costliest. 1 As the state’s investments in education, health care, infrastructure, and other critical services have faced a series of severe cuts, the subsidies paid to Hollywood continue to grow—29 percent over the most recent fiscal year. Louisiana paid $231 million in credits in 2011-12, bringing the state’s total film spending to more than $1 billion over the past decade.

Unfortunately, the returns to the state on this investment, like many of the movies made here, have been a flop. While the subsidies have helped create film industry jobs that weren’t here before, many of these positions are temporary and have come at a steep cost to taxpayers, who paid an average of more than $60,000 per direct job.
We've also witnessed the havoc the Hollywood South program has wreaked on the New Orleans Saints, on the Blaine Kern family, even on the cost of providing essential flood protection to New Orleans.

Worse yet, as the LBP report says, the competition between states and municipalities to offer the most attractive inducements to industries creates an incentive for our political leaders to become ever more compliant in this effort.
Since Louisiana began subsidizing the film industry, more than 40 other states and Puerto Rico have followed. States are throwing money at film productions, trying to outdo each other by offering bigger and better subsidies. “The rapid spread of film tax subsidies across the country is a classic case of a race to the bottom,” wrote Robert Tannenwald in a report for the Center on Budget and Policy riorities.14 In 2008, Michigan created numerous film tax credits for up to 42 percent of total expenditures, and Georgia increased its own state tax credit by up to 30 percent. A year later, Louisiana raised the investor credit from 25 percent to 30 percent and eliminated a planned phase-down.

Mitch Landrieu, in his former capacity as Lieutenant Governor as well as his current role as Mayor, has made appeasement of exploitative industries such as film and tourism his professional specialty.   Earlier this month, when Landrieu said he wants to create "a more flexible, entrepreneurial and forward-leaning City Hall" this is basically what he was talking about.

According to the Times feature, the entrepreneurs who have benefited the most from City Halls leaning in their direction have been the consulting firms who lobby on for more "flexibility" on behalf of the industries who benefit from tax incentives.  This is from a recent NPR interview with the NYT feature's author Louise Story.

It's a very lucrative business for them because every award they get for a company, they typically get to keep about 30 percent of it for themselves. And one of the things that was an interesting theme I heard across the entire country was economic development officials, the local officials, would tell me they to some degree relied on the private consultants to tell them what the companies wanted and to tell them which companies were looking around.

But these consultants are not neutral. They're not going to say oh, you know, all the company wants is X, Y, Z, and they'll come for that bare minimum. They're going to say they want 10 times that because their financial incentive is to get as much as possible.
Recent years have been a boom time in New Orleans for consultants. The Boston Consulting Group has worked with the Landrieu and Nagin administrations on the Hospitality Zone package and on the ongoing disastrous privatization of our public schools. Landrieu's civil service reform effort has been aided by Public Strategies Group hired through a combination of city funds and contributions from local plutocrats.
To bring PSG on, the city last May entered into a partnership with Baptist Community Ministries (BCM), which controls the mixed public-private “New Orleans Innovation Fund” that pays the firm’s costs. If it had contracted the firm directly, through a Requests for Proposals process, PSG would have had to enter into a competitive bidding process. However, as Kopplin pointed out, by using the fund, which has a maximum value of more than $500,000, BCM is able to solicit outside donors — such as the Business Council of New Orleans and the River Region, which has contributed — therefore reducing the city’s end of the costs.
This is not to say that all governmental consulting is a racket. But the conflicts of interest inherent in the behind the scenes function these firms have in public policy formulation place it very much in that neighborhood.  Clearly they play a key role in securing and protecting privileges in our tax code such as those enumerated by the NYT feature. 

Currently a state legislative commission is looking at means to reform the state tax structure. According to reports, the commission is looking specifically at the efficacy vs cost of incentive programs. Sounds like a step in the right direction.  According to the NYT database, Louisiana could recoup up to $628 million in lost revenue by  taking back only the gifts it makes to Oil and Gas and to Hollywood, the two largest beneficiaries of state tax privileges.

Why, then, are we reading that the commissioners are focused instead on these much smaller clean energy incentives?  Probably has something to do with "entrepreneurship" or "forward-leaning flexibility" or something.  I'll wait for the consultant's report. 

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