Do economic development incentives work?
By Deena Winter / October 4, 2012
TOP DOG: Charles “Mike” Harper could be called the grandfather of Nebraska’s economic development incentives, having pushed the state to adopt them by threatening to pull ConAgra out of the state in 1987. (Photo by Bethany Schmidt/Nebraska Watchdog)
By Deena Winter | Nebraska Watchdog
It was 1986, and the city of Omaha was still reeling from the loss of Northern Natural Gas to Houston, where it was renamed Enron. Then the chief executive officer of ConAgra was threatening to move to Tennessee unless Nebraska started giving his company big tax breaks.
The 6-foot-7, 250-pound CEO of the company that would become a giant food conglomerate, Charles “Mike” Harper, said at the time it’d be easy to move. Just click off the lights on a Friday and be gone by the following Monday.
Coming on the heels of an agricultural downturn, then-Gov. Kay Orr and Nebraska lawmakers weren’t about to call his bluff. They passed a costly package of corporate tax breaks in what the Wall Street Journal called a watershed moment in attitudes toward economic development.
About $2.4 billion in subsidies have been doled out since the law passed in 1987, creating nearly 89,000 jobs. However, annual reports generated by the Nebraska Revenue Department show most of those jobs would have been created anyway.
The department is required to compile an annual report on the incentives for lawmakers, and the most recent report says three of every four jobs subsidized by the program would have been created without incentives that cost the state $42 million in revenue in 2010-2011. The previous year, only one out of 10 jobs were identified as truly new jobs created by the subsidies.
Back when the legislation was being considered, there were cries of corporate welfare and blackmail, and state Sen. Ernie Chambers tried to filibuster the package with amendments, including one requiring that ConAgra’s logo be “tastefully added” to the state flag.
But the Employment and Investment Growth Act — better known by its bill number, LB775 — passed, allowing companies that create jobs to get property tax exemptions, sales and income tax refunds and a lower income tax rate for high-income employees like Harper and his administrators.
Nebraska made national news with its bold, new economic development program, and it’s been giving corporations tax breaks in exchange for jobs ever since.
But many experts doubt the expensive incentives really create many jobs. An Iowa expert on subsidies, Peter Fisher, research director of the Iowa Policy Project, said his research during the past 30 years shows most business investments and expansions would have occurred with or without subsidies — he estimates incentives are responsible for creating about one in 10 new jobs the companies create.
The Iowa Policy Project is a public policy research and analysis nonprofit based in Iowa City, Iowa.
“Generally these incentive packages and tax breaks have some effect, but it’s small,” Fisher said.
However, politicians are paranoid about losing a big company on their watch and will dole out incentives to keep them.
“The political cost of losing a firm is pretty high,” Fisher said. “There doesn’t seem to be a lot of political cost to get the firm.”
A 1997 study by Midwest economist Ernie Goss of Creighton University also concluded most jobs attributed to LB775 would have been created with or without its incentives.
Verizon is one of many large companies that have received state subsidies to come to, stay or expand in Nebraska. Photo by Bethany Schmidt/Nebraska Watchdog
Back when LB775 was being debated, former Gov. Bob Kerrey questioned whether lawmakers were giving money to “people that need it the least.” Indeed, Nebraska subsidies have gone to huge corporations such as 3M, Monsanto,Tyson, Archer Daniels Midland,BNSF Railway, Cargill, Kawasaki,Novartis, Paypal, Pamida, Swift Beef,TD Ameritrade and Verizon.
Some call that corporate welfare. And there’s much more to come. The report projects the state will lose out on $505 million in tax revenue during the next dozen years because of incentives that will help create 59,000 jobs. In other words, each of those jobs will cost the state nearly $10,000 — although that includes spinoff jobs and jobs that would have been created anyway, so the actual cost per new job is higher.
Arthur Rolnick, senior fellow at the Humphrey School of Public Affairs at theUniversity of Minnesota and former director of research at the Federal Reserve Bank of Minneapolis, has been speaking out for two decades against what he calls an “economic bidding war among the states.”
He first began writing about the issue in 1991, when Northwest Airlines threatened to move to Detroit if it didn’t get a billion dollars in subsidies to build a maintenance facility in Minnesota. Rolnick said jobs are just moving around when states bid against each other for companies. He said he doesn’t believe any new jobs are created by incentives.
“They think they’re creating jobs, and that’s just economic snake oil,” he said.
But he understands the dilemma of a politician trying to prevent a company like ConAgra from leaving town.
“The winners are the CEOs and the owners of these companies,” Rolnick said. “Government creates jobs by keeping taxes low and educating kids.”
What are the costs?
The Nebraska Department of Revenue doesn’t exactly advertise the fact that their projections show most jobs would occur without incentives — it’s not clearly spelled out in the annual report.
When asked about the figures indicating one-fourth of the jobs created are true, new jobs in this year’s report, State Tax Commissioner Doug Ewald, said the jobs creation numbers include indirect jobs — jobs created through a ripple effect — which means the actual percentage of jobs directly created by the incentives is even lower.
Back in 2006, the department’s annual report to lawmakers said on average only 30 percent of the jobs created by the program are “true new economic jobs.” Dave Dearmont, chief economist for the Revenue Department, said the department looked at companies’ tax statements back then to determine how many employees they had before and after doling out subsidies. Now the department uses economic modeling to come up with the figures.
Catharine Lang, director of the state Department of Economic Development, referred questions about the report to the Revenue Department, saying her department’s role is to provide companies with information about the program. The Revenue Department administers the program, she said.
“Once it becomes technical, we refer questions to Revenue,” she said.
Once a company applies for incentives, her department is no longer involved, Lang said. Asked whether her department has any responsibility for making sure the incentives are working, she said, “We don’t.”
It seems state officials aren’t eager to cast doubt on a program that is clearly one of Gov. Dave Heineman’s most cherished. Heineman often talks about this “incredibly successful” program, which he calls an “outstanding recruitment tool.”
Until recently, the amount of subsidies companies received was not made available to the public. LB775 didn’t originally require disclosure, but that changed when the pot was sweetened with new incentives in 2005. Now the program, renamed the Nebraska Advantage Act, discloses the names of companies receiving subsidies, but in two-year increments, rather than specific dollar amounts by year.
Nebraska gets high marks for making incentives contingent upon performance and even incrementally recapturing incentives if a company fails to deliver on promised jobs or investments. But the state gets dinged by analysts for the lack of information it discloses about the subsidies.
Good Jobs First, which pushes to make economic development subsidies more transparent and effective, ranked Nebraska 35th among the states for its lack of transparency, giving the program a score of 19 out of 100 in transparency in 2010.
Common Cause Nebraska has pushed for more transparency about which companies are getting how much in incentives.
“To this day, no one knows how effective that legislation was,” said Jack Gould, issues chairman for the open government advocacy group. “The public has a right to know whether their money is working.”
The Pew Center credits Nebraska for evaluating the impact of its incentives, but says the state doesn’t require lawmakers to look at the data and decide whether to continue the program. When asked about the most recent LB775 report, for example, some key lawmakers said they hadn’t even seen it.
Harper recalls those days
As the debate over incentives rages on, one thing is for sure: ConAgra is still in Omaha, where it’s now one of the city’s largest employers.
Harper has long since retired, but still lives next to an Omaha golf course with his two dogs. Today, he says he wasn’t bluffing when he threatened to move the corporate headquarters.
“What I learned a long time ago is that you never bluff,” he said in an interview with Nebraska Watchdog. “Because if you bluff and walk away from it, you will never be able to make another deal or make another transaction.”
The company held employee meetings to warn that the company might pull up stakes.
“I thought it best that I put my cards on the table,” Harper said of his ultimatum to Nebraska officials.
Harper said he doesn’t want to brag, but he believes LB775 is one reason Nebraska has one of the lowest unemployment rates in the nation. The unemployment rate in Nebraska in August was 4 percent, while nationally it was 8.2 percent.
“Anything that has a significant effect on a company’s bottom line, it will get serious consideration by that company’s leadership,” he said.
In fact, he now acknowledges one of those cards was really a litmus test. He insisted Nebraska eliminate property taxes on corporate jets, because he knew that would be a bugaboo for politicians.
They did it. And companies that invest $12 million and create 100 jobs can still get the corporate jet exemption today.
Contact Deena Winter at [email protected].