Open for Business

When Governor Walker was elected a few years ago, one of the first things he did (even before some of the more, shall we say, controversial moves) was to commit to supporting business growth in Wisconsin.  The slogan "Open for Business" was a key part of the governor's new platform to create 250,000 new jobs.  Personally, I'll admit I found it tacky to slap the bumper-sticker like slogan on our beautiful state welcome signs [the best in the Union!], however if we can put that aside for the moment, this sentiment of promoting business growth is typically one of the top responsibilities of any political leader.  The question is, how do we best go about doing it?

Having just finished the first week of class in my Public Finance course, my students were tasked with a homework assignment to ponder some aspects of the role of government as it interacts with the market economy.  I'll report back on some of their thoughts, but today I want to consider the question at the local and state level: if you were a governor or local city council member, what policies would you endorse to improve the economic climate of your constituents?

Governments and markets interact in numerous ways, from regulation to infrastructure to taxes.  However, it seems that the current conventional wisdom is that if you want to attract business to your community, the way to do it is with tax breaks and subsidies.

A few weeks ago the NY Times released a really amazing database of state-by-state incentive programs targeted at businesses.  Below is a screenshot of the Wisconsin page, but I really encourage everyone to go to the actual Times page and poke around for yourself.  The data are really interesting, and eye-opening.  For instance, you'll find that we spend about 10% of our state budget per year in direct handouts or tax breaks to support business in Wisconsin.  This money goes to encourage new businesses to locate in Wisconsin or encourage old businesses to stay.  By comparison, across the river in Minnesota (where all the women are strong, all the men are good looking, and every business is apparently above average) they spend only about $240 million or only about 1% of their budget on business subsidies.

Explore the Subsidies

Browse a database of business incentives awarded by hundreds of cities, counties and states compiled during a 10-month investigation by The New York Times.

So, where does that money go and what are we getting for it? 

First of all, this is not a new phenomenon for Wisconsin, nor did it originate under Governor Walker. In fact, many of theses programs grew immensely under Governor Doyle's 2005 ACT 361 Enterprise Zone Job Credits, and expanded in 2009 under Acts 265 and 266. Governor Walker has continued the practice with several additional expansions (2011 Acts 3,4, 26, 28 among others). "Enterprise zones" are designated areas within the state targeted for business growth. The enterprise zone credits allow businesses to lower their tax liability if they operate within these zones. For example, Mercury Marine received $65 million in tax breaks under the enterprise zone program for continuing to operate their factory in Fond Du Lac. Quad Graphics ($46million), Oshkosh Corp ($35million), and W Solar Group ($28million) are other companies that have gotten large enterprise zone credits. Others such as Kohl's ($62million), Kestrel Aircraft ($28million), and Harley Davidson ($25million) have also received large corporate tax credits or reductions. A complete list of hundreds of businesses receiving subsidies and credits can be found on the NY Times database, all the way down to a mere $78 worth of tax credit that went to Bolzano Artisan Meats in Milwaukee for what appear to be some DELICIOUS looking products if their website is any guide. In fact, Wisconsin has a whole menu of Business Incentive Programs ranging from customized labor training to energy efficiency credits to Tax Incremental Financing to Industrial Revenue Bonds and transportation/infrastructure improvements.

So, we spend a lot of tax money supporting business in our state. The question then is, is it worth it? As one of the most manufacturing-heavy state economies, Wisconsin often finds itself at risk of losing jobs when factories relocate out-of-state or overseas. Just down the road in Eau Claire, people still remember the impact of the Uniroyal plant (at one time the city's largest employer at about 1,500 jobs) closing 20 years ago. The risk of this type of event puts tremendous pressure on local governments to do everything in their power to keep businesses from relocating, even when at times it feels like little more than extortion.

Perhaps nowhere is this practice of businesses holding community tax dollars hostage more prevalent than in professional sports.  In the news this week, the city of Sacramento is set to lose their NBA franchise the Kings to Seattle after years of attempted deals for a new stadium.  Last year, things came to a head in Minneapolis where the Vikings were set to leave for LA if not for an 11th hour taxpayer-funded stadium to replace the Metrodome.  And my hometown of Cincinnati was home to what has been dubbed "The Worst Stadium Financing Deal Ever" when Mike Brown extorted the city with a threat to move the team to Baltimore (ironically, the team named after his dad ended up doing it instead).   In Cincinnati, we were so desperate to keep our team (which by the way has a stellar 120-167 record and 3 winning seasons in the nearly 20 years since) we basically agreed to pay for the entire stadium out of tax revenue.  Almost 20% of Hamilton County's budget still goes to paying off that stadium debt, despite very limited economic impacts being realized (in fact, economists almost universally find that public stadiums are bad investments for communities - summary here).  So, is there any point to this other than me taking an opportunity to bash Mike Brown (probably the least popular person ever in Cincinnati, and we've had some unlikable sports owners)? 

The point is this:  once you start down the path of trying to out-bid other communities to attract and retain business, we enter into a potential situation that may result in a downward spiral toward what economists call the "Winner's Curse."  The idea is as follows - despite our best forecasts, we're never totally sure what the economic impact of a particular business is going to be on a community.  Because of this, if we get into a bidding war based on our best estimates, the person with the most optimistic estimate will win the bid.  But, generally it's not the most optimistic estimate that's the correct estimate - the correct one is likely to be somewhere in the middle.  And thus, the winner is doomed to over-pay in comparison to the true value.  The Winner's Curse.  The degree to which some communities have been losing as a result is outlined very well in this NY Times article accompanying their subsidy database - "As Companies Seek Tax Deals, Governments Pay High Price."  

This is not to say that all local and regional economic subsidies are a bad idea - sensible investments can encourage growth and avoid under-provision when there are positive externalities resulting from market activity in a community.  It is to say, however, that we need to be realistic about our accounting of the positive economic impacts and shouldn't allow ourselves to get carried away with throwing money and payoffs at firms to the extent that Hamilton County and the Bengals did when we feel desperate to hold onto our local businesses.   Communities, including Janesville, WI did the same with General Motors in recent years - from the NY Times story:

For years, mayors and governors anxious about local jobs had agreed to G.M.’s demands for cash rewards, free buildings, worker training and lucrative tax breaks. As late as 2007, the company was telling local officials that these sorts of incentives would “further G.M.’s strong relationship” with them and be a “win/win situation,” according to town council notes from one Michigan community.

Yet at least 50 properties on the 2009 liquidation list were in towns and states that had awarded incentives, adding up to billions in taxpayer dollars, according to data compiled by The New York Times.

Some officials, desperate to keep G.M., offered more. Ohio was proposing a $56 million deal to save its Moraine plant, and Wisconsin, fighting for its Janesville factory, offered $153 million. But their overtures were to no avail. G.M. walked away and, thanks to a federal bailout, is once again profitable. The towns have not been so fortunate, having spent scarce funds in exchange for thousands of jobs that no longer exist.

Instead of continuing to double-down with all of our eggs in the baskets of large local firms who could leave town on a whim when they're offered a better tax deal elsewhere, it's better to consider policies that have broader positive impacts and diversify the community's investments.

For instance, when businesses are polled regarding the factors that are most important to them in their location choices, the tax environment is far from the only thing entering into their decisions (and is often fairly far down the list).  Businesses also care about the skill and education of the available labor force, the infrastructure and transportation in the area, the level of public safety provided by police and fire services, and the quality of life in the community.  It is often forgotten that businesses are consumers of the public services that tax dollars pay for - public safety, waste collection and disposal, water quality, educated workers, well maintained roads, etc.  Businesses need these things every bit as much, if not more, than citizens of the community and offering tax breaks can be counter-productive if it results in cuts to services businesses and the community members need.  

The worse the community is (schools, parks, recreation activities, etc), the more a firm has to pay its workers to entice them to work in that environment (or commute from a better one).  Thus, $100 worth of subsidies for a business means little to them if the resultant cuts in local services will mean having to pay workers $200 more.  On the other hand, $100 worth of investment in improving local schools may allow the firm to lower wage costs, AND it positively benefits everyone in the community simultaneously - Win-Win!  This breaks the prisoner's dilemma/race to the bottom between communities that potentially harms everyone, and replaces it with a race to the top that has the potential to benefit everyone

Wisconsin spent $1.5 billion on direct business subsidies last year as it cut $1.5 billion from K-12 and Higher Education - I think it's worth asking whether this is, in fact, the most effective way for us to be "Open for Business."  The problem with giving a company millions of dollars of incentives is that if they leave they take that investment with them.  If, however, we give them millions of dollars worth of educated workers, smooth roads, safe streets, and other amenities that contribute to the overall quality of life in the community, then these things stay behind if a firm closes it's doors, and remain there to entice other businesses to take their place.  

We probably don't want to pull the rug out of all our business programs at once, and there are cases where these are excellent programs, but it's worth considering transitioning away from some of them and diversifying our public investments.  If done correctly, there can be programs that will be just as useful if not more useful to attracting 21st century business growth, that simultaneously benefit our state and communities and also strengthen the bargaining position and prevent hold-up behavior from firms.   In the end, if tax breaks are all we have to offer businesses, they will leave for other states or other countries.  To retain and attract them, we need to be leveraging the qualities Wisconsin has a comparative advantage in - good communities, great quality of life, hard workers, strong education systems, and good neighbors.  

Closing thoughts from one of my favorite TV shows - Parks & Recreation - which I was watching the other day sort of indirectly inspired this long post.  At the end of Season 4 Leslie's campaign for city council reached it's crescendo with a debate against local trust-fund candy heir Bobby Newport who told the audience that his family would be moving the candy factory out of Pawnee and overseas if they didn't elect him to city council.  To this, Leslie responded:     

"I’m very angry. I’m angry that Bobby Newport would hold this town hostage and threaten to leave if you don’t give him what he wants. It’s despicable. Corporations are not allowed to dictate what a city needs. That power belongs to the people. Bobby Newport and his daddy would like you to think it belongs to them. I love this town, and when you love something you don’t threaten it. You don’t punish it. You fight for it, you take care of it, you put it first."

Take that Mike Brown!