In late November, President-elect Donald Trump announced that he had reached a deal with Carrier to keep about 800 manufacturing jobs in Indiana from moving to Mexico. After the announcement, we learned that the Indiana Economic Development Corporation would give US$7 million in tax credits and grants to Carrier’s parent company in exchange for keeping the jobs in the state.
Having the chief executive of the United States negotiate individualized deals with corporations is certainly a new approach to economic policy nationally, though it is not without precedent. In fact, state governments have been negotiating targeted incentives with corporations for decades.
My research focuses on why states use incentives to attract and retain investment from corporations and whether they are effective. My work, as well as that of many others, shows that these deals do not create the jobs and economic growth they are purported to.
A common economic tool
Every year, states spend billions of dollars to entice companies to create jobs within their borders. These inducements include some combination of property, sales and income tax credits and rebates, tax abatements, cash grants and cost reimbursements.
The deals are meant to reduce costs for the businesses that receive them in order to encourage their investment and job growth in a particular location. The most prominent packages usually grab headlines nationally.
In 2013, for example, Boeing received $8.7 billion in tax breaks from Washington state to secure the production of the 777x. This record-breaking package came shortly after Boeing had received $900 million from South Carolina for opening a new 787 assembly plant in Charleston.
Other examples include Tesla receiving $1.3 billion from Nevada in 2014 to subsidize a battery factory outside Reno and the Los Angeles Rams collecting $180 million in sales tax revenue from Inglewood for relocating there from St. Louis this year.
Just as Carrier threatened to move jobs to Mexico and promptly received a tax break, so too did Sears receive millions from Illinois to keep its headquarters in Chicago back in 1989.
From 1984 to 2012, incentive spending increased in the states from about $500 million per year to about $13 billion per year, according spending data gathered by the Good Jobs First Subsidy Tracker.
Has it worked?
Despite the hundreds of billions of dollars in incentives thrown their way, many companies have still decided to move more manufacturing jobs and corporate headquarters overseas.
This is because corporations consider many other factors when making decisions about where to build a factory or establish a tax home. In a 2016 survey, incentives lagged behind skilled labor, labor costs, highway access, corporate tax rates, available buildings, construction costs, proximity to markets and quality of life as important factors for location decisions.
For example, scholars have found that the Sun Belt has been able to attract investment away from the Rust Belt because it has lower wages but similar access to the interstate highway system.
In other words, jobs move (or don’t) based on the overall range of costs facing employers, which are determined by larger economic trends and policies and not necessarily by individually negotiated deals. When subsidies do matter is when corporations are choosing between equally strong locations. In those situations, incentives serve as “deal sweeteners” but don’t change the fundamental reasons for why the location was considered in the first place.
In light of the realities of corporate location decisions, there is scant evidence to support the arguments that targeted incentives produce economic growth. Rather, the evidence shows that they tend to fail to achieve their intended goals.
Often, subsidies fall short of job creation targets and fail to create growth, even if they retain jobs. As University of Iowa scholars Alan Peters and Peter Fisher argue, based on a review of several studies of their impact, “incentives work about 10 percent of the time and are simply a waste of money the other 90 percent.”
One reason why scholars have struggled to measure the impact of incentives is because of the complexity of the economy. Economic growth is affected mostly by national and international forces. State economic development strategies have little effect when compared with broad national economic policies.
The wrong kind of impact
Subsidies still can have an effect on economic behavior, just not in the way they were intended, such as by encouraging rent-seeking.
Critics of the Carrier deal have already noted that Trump may have opened the federal government up to increased threats from companies to move overseas unless they receive more incentives (aka rent-seeking). In the days following the Carrier deal, Ford Motor (already one of the largest recipients of state-level spending) expressed a willingness to make a deal with Trump to retain jobs scheduled to move overseas. In a first move, Ford announced that it had canceled a planned investment in Mexico and will instead invest $700 million in its Flat Rock, Michigan, plant.
There is also some evidence that incentives can exacerbate economic inequality.
Incentives, when used to influence location decisions, tend to be awarded to the largest and wealthiest corporations. These corporations need the money the least of all businesses and usually receive the money for making investments they likely would have made anyway in order to remain competitive. The result is that fewer resources are available for education, workforce training and social services. As a result, the gap between rich and poor tends to grow.
Raising red flags
While it is laudable that several hundred Indianans get to celebrate the holiday season with their jobs secure, evidence from the states raises red flags on the viability of targeted incentives as a national policy for growth.
Not only would Trump be needing to negotiate several packages per week in order to have a noticeable effect on the U.S. economy, doing so opens the government up to increased demands for subsidies, most likely from the wealthiest corporations, and could exacerbate income inequality in America.