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Rex Nutting
March 23, 2011, 12:01 a.m. EDT
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Capitalists tighten grip from Madison to DC
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Blankfein fingers the Goldman Sachs mole
By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) "” From the smallest hamlet all the way to Washington, D.C., elected officials are facing up to the grim reality that budgets must be balanced. They are firing workers left and right, or cutting the pay and benefits of those lucky enough to keep their jobs. Public services "” such as libraries, parks, schools, public safety and health care "” are being severely reduced.
The government will be downsized, no matter how painful it might be.
But there's one area of government that isn't sharing in the necessary sacrifices: Taxpayer giveaways to our most profitable corporations, who are showered each year with hundreds of billions of our hard-earned dollars.
These gifts don't help the economy, or create any jobs. But someone benefits: The executives and shareholders of the companies who get the goodies. There are even a few industries "” such as professional sports "” where taxpayer subsidies account for 100% of profits, according to tax columnist David Cay Johnston. Read more on Johnston's Tax.com blog.
The money is supposed to boost economic development but most of it is wasted. In many cases, the subsidies from the taxpayers far exceed any possible benefit to the public. Most of the subsidies don't add to the national economy at all, but merely shift jobs and spending from one town to another.
For instance, Google Inc. /quotes/comstock/15*!goog/quotes/nls/goog (GOOG 577.73, +0.41, +0.07%) , Yahoo Inc. /quotes/comstock/15*!yhoo/quotes/nls/yhoo (YHOO 16.01, -0.35, -2.11%) , Microsoft Corp. /quotes/comstock/15*!msft/quotes/nls/msft (MSFT 25.35, +0.05, +0.20%) , Dell Inc. /quotes/comstock/15*!dell/quotes/nls/dell (DELL 15.03, +0.32, +2.16%) Verizon Communications Inc. /quotes/comstock/13*!vz/quotes/nls/vz (VZ 36.89, -0.06, -0.17%) , and other high-tech companies would have to build server farms someplace, even if they weren't subsidized by local governments. But these powerful and profitable companies have pitted communities against each other, extracting billions of dollars in subsidies to locate their operations in such towns as Quincy, Wash., Lockport, N.Y., or Lenoir, N.C. Search for more corporate subsidies at GoodJobsFirst.org.
As one Washington state legislator told the Seattle Post-Intelligencer in arguing for a $1 billion subsidy to Microsoft and other companies that would create just a few hundred jobs: "Those jobs are going to go somewhere "” better they should come to us."
States, cities and towns all over America are engaged in a mad race to the bottom, competing with each other to see who can give the biggest bribe to a company to locate here instead of there. In hopes of beating out their neighbor, state and local governments seize private property through their power of eminent domain, give tax breaks, offer cheap taxpayer-guaranteed financing, and even train the workers at taxpayer expense.
And yet, study after study show that these subsidies create few, if any, net jobs. For instance, California's Enterprise Zone program "” which is supposed to boost business in 42 economically distressed communities "” has cost the taxpayers $3.6 billion over 27 years, but to no avail. A legislative analyst report in 2005 found that "EZs have little if any impact on the creation of new economic activity or employment." Read more from the legislative analyst report.
California Gov. Jerry Brown has proposed to kill the EZ program and the even-more expensive redevelopment agency program, but he faces an uphill fight in the Legislature. Such subsidies are popular with the legislators who receive boatloads of campaign contributions from businesses lucky enough to find a government teat to latch on to.
Nationwide, such giveaways from state and municipal governments amounted to more than $70 billion in 2010, according to Kenneth Thomas, a political scientist at the University of Missouri at St. Louis, who has specialized in studying these subsidies. That's more than the states collect in corporate income taxes in a good year. Read about Thomas's book: "Investment Incentives and the Global Competition for Capital"
And that $70 billion is twice as much money as would be required to fully fund the pensions owed to state and local government workers, the very same pensions that budget-cutting politicians across the country claim are responsible for the fiscal hole we're in.
Aside from the direct costs, these subsidies also pose a hidden danger to state finances. In some cases, states or municipalities issue revenue bonds that support private ventures. These sorts of bonds have a default rate of about 15%, compared with less than 0.5% for general obligation bonds, according to Fitch Ratings. If there is a looming crisis in muni bonds, it isn't because we're borrowing too much for schools or highways; it's because we're borrowing too much to subsidize corporations that feel no compunction about walking away if another town or state or country offers more.
At the federal level, subsidies to corporations and investors total a staggering $365 billion, according to the Treasury Department. That's a huge share of the structural budget deficit. Federal tax policy is so favorable to large, multinational corporations that many of the largest and most profitable companies pay no federal tax at all. For instance, Boeing /quotes/comstock/13*!ba/quotes/nls/ba (BA 72.69, +0.84, +1.17%) reported nearly $10 billion in profits over the past three years yet paid no taxes at all. Read testimony from the director of the Center for Tax Justice.
For the most part, we are bribing these businesses to do what they would do anyway: build manufacturing plants, open stores, expand their operations.
As Gov. Brown said: "The private development that occurs in redevelopment project areas often would have occurred even if the RDAs were never established. There is little evidence that redevelopment projects attract business to the state."
Almost all the benefits of these subsidies go to large corporations, not to the small businesses that we celebrate in our national myths. Companies such as Wal-Mart Stores Inc. /quotes/comstock/13*!wmt/quotes/nls/wmt (WMT 51.63, -0.37, -0.71%) and Home Depot Inc. /quotes/comstock/13*!hd/quotes/nls/hd (HD 36.53, +0.24, +0.66%) get taxpayer subsidies that doom smaller, existing businesses to extinction. How can a small retailer compete against a big-box store that's heavily subsidized with her tax dollars?
Some states are waking up to the huge costs and meager benefits of these subsidies. New York, California, Colorado, Oklahoma and Hawaii have curtailed or are considering curtailing some of these goodies.
But other states are doubling down on the fiscally ruinous corporate giveaways. Even as he slashed public workers' compensation and benefits, Wisconsin Gov. Scott Walker persuaded the Legislature to expand the state's economic development tax credit.
The state motto shouldn't be "Open for Business," it should be "Open for Looting."
Instead of cutting spending on things that would actually help the economy grow (such as education and infrastructure), states and cities should carefully analyze their corporate subsidies and eliminate any that aren't effective.
There's nothing wrong with government trying to support economic growth, but handing out billions of dollars in wasteful giveaways isn't helping anyone, except the big corporations that don't need the breaks.
Rex Nutting is Washington bureau chief of MarketWatch.
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