Corporate tax incentives that don’t create the jobs they promised, like those Foxconn received in Wisconsin, are nearly as old as the United States itself — and they’ve been tailored to help the already-powerful for just as long.
In 1791, then-U.S. Treasury Secretary Alexander Hamilton was granted a 10-year tax exemption in New Jersey to build a manufacturing campus. At the time, critics said that the deal was “unjust,” “arbitrary,” and “injurious … to other states,” which all happened to be true. The plan was an economic flop: The area never took off as a manufacturing hub in the way Hamilton envisioned.
Today, the deal by then-Gov. Scott Walker, a Republican, to give more than $4 billion in tax breaks to Taiwanese manufacturer Foxconn in exchange for a manufacturing plant that would supposedly create 13,000 jobs seems destined for a similar fate as Hamilton’s boondoggle. The company announced this week that it is reimagining its plans, and, instead of a manufacturing hub, is going to create a research center likely populated by white-collar workers. Economists say it’s unlikely the new plan will require the number of positions the previous one did.
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President Donald Trump, of course, crowed at the time that the Foxconn deal never would have happened without him winning the 2016 election, and he touted it at a White House ceremony. But Trump’s big deal is turning into a big dud, much like his other high-profile corporate wrangles.
The Foxconn fallout demonstrates the folly of using such “deals” as the be-all, end-all of economic policymaking, which is a positive development. But corporate tax incentive programs turn into tax avoidance scams all over the country all the time with little if any attention paid to them.
States and cities in the U.S. spend tens of billions of dollars annually wooing corporations to either move existing facilities and open new ones, under the theory that doing so creates new jobs and boosts local economies. That theory doesn’t hold up: Most studies on the subject have found that corporate tax breaks have little to no effect on job creation or economic growth. They just encourage shifting jobs from one locale to another without creating any new economic activity; a job gained in one state or city is a job lost in another.
Even if new positions are created, they tend to be where companies would have put them without incentives, because taxes are just one factor among many that help companies evaluate their operations — and they’re often not a particularly important one. As former U.S. treasury secretary and corporate CEO Paul O’Neill once said, “I never made an investment decision based on the tax code.”
He added: “If you’re giving money away, I’ll take it. If you want to give me inducements for something I’m going to do anyway, I’ll take it. But good businesspeople don’t do things because of inducements.”
In another case in point, at the behest of Gov. Phil Murphy, a Democrat, New Jersey recently completed an audit of its corporate tax incentive programs. What it found was a complete and total mess: Nearly 3,000 jobs supposedly created by the programs couldn’t be accounted for. One company received $29.2 million in incentives and its employment levels went down. There was enough malfeasance at work that the state attorney general launched an investigation.
But New Jersey’s effort to actually figure out what it spent money on is relatively rare. Most of the time, governments are loathe to do this kind of oversight or even disclose what they offer up in incentives. Some cities have even gone to court recently to prevent the public from knowing what they offered Amazon for its much-ballyhooed second headquarters. While Wisconsin’s deal with Foxconn was contingent on job creation, that isn’t always the case — and many states have no real system for evaluating whether their tax breaks are doing anything positive.
There is, however, one thing corporate tax incentives definitely create: votes. Politicians giving out corporate tax breaks is correlated with rising vote shares, and studies show elected city officials give out more tax breaks than do unelected ones who don’t have to face the ballot box. Voters really like to see their politicians trying to create jobs and they apparently act accordingly, even if those jobs never materialize. The press releases and the handshake moments that appear on the front pages of local newspapers are seemingly enough to convince voters to pull the lever for the person in office.
Meanwhile, the costs of those tax breaks get punted down the road to some other sucker.
In that sense, the Foxconn deal is unique: It helped bring Walker down after Democrats in Wisconsin ran against the giveaway. It’d be great if that became the rule, not the exception — and if the current focus on Foxconn were extended to every corporate tax incentive deal, not just those the president stuck his nose into.