When corporations act like protection rackets . . . and taxpayers are left holding the bag

As if my earlier post about the curse of the state lotteries were not depressing enough, here comes yet another depressing report from the laboratories of democracy. In part one of a series, the New York Times reports not on the lotteries, but on a different grotesque and failed state fiscal policy. This time, it concerns those multi-million, sometimes even multi-billion dollar tax breaks that many state and local governments give to big businesses to prevent them from relocating elsewhere, taking their jobs with them. In my hometown of Chicago, perhaps the biggest offender along these lines has been the Chicago Mercantile Exchange, but pretty much every city and state has its own horror stories, some of which reporter Louise Story details in the Times article.

There are numerous problems with these schemes, which often seem to amount to little more than a giant extortion racket. Here are some of the troubling issues Story’s article documents:

— Companies may promise to stay put if they get their tax breaks, but there is no way to hold them to their word. There are numerous instances where firms helped themselves to generous amounts of taxpayer money and yet still ended up relocating to another state — or another country. There was nothing the localities involved could do to get their money back.

— It’s very difficult to determine the true costs of these tax breaks. According to the Times, these types of subsidies add up to $80 billion per year. However:

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.

— State and local governments lack the resources to fact-check what the corporations are telling them. Financially strapped governments can’t afford to research whether it truly would be financially feasible for these companies to relocate, or whether they really require tax breaks that are as large as the ones they demand.

— Especially in this era of austerity, subsidizing these corporations is enormously expensive. It drains resources away from vitally needed public services and redistributes wealth to the rich. The Times quote a statistic that, interestingly, comes from the conservative group the Manhattan Institute for Policy Research, which “found that the amount New York spends on film credits every year equals the cost of hiring 5,000 public-school teachers.”

Part of the issue here is that state and local governments are facing a huge collective action problem. If they all banded together and refused to pay the extortion money these corporate bloodsuckers demand, all the governments would be better off and the public good would be served. But these firms opportunistically play states and localities off against each other, so that they compete against one another for the privilege of being screwed over by these gonifs, rather than working together to defeat them.

Hopefully, future articles in the Times series will look at potential public policy solutions to this terrible problem. Again, in my hometown in Chicago, Occupy and some of the unions have engaged in actions against the Chicago Mercantile Exchange designed to shine a spotlight on this problem, so that’s a start. One of the reasons I was so impressed by this year’s Chicago teachers’ strike is that the teachers’ union repeatedly made the connection between our decimated public sector and upward wealth redistribution in the form of ginormous tax breaks to bad actors like the Merc. Perhaps the budget crises that are affecting so many states and local governments in this austerity era will force them, at long last, to re-examine these kinds of lavish corporate subsidies. It certainly has the makings of a winning political issue for any progressive group or leader with the courage to take it and run with it.

Update: I should note that sometimes, citizen activism against these kinds of corporate abuses does work. Earlier this year, the Merc agreed to forgo $15 million in taxpayer funds from the city of Chicago. They backed down largely due to pressure from Stand Up! Chicago and other activist groups. The Merc was reportedly going to use the taxpayer money for a golden toilet, and activists had a lot of fun with this. Among other things, they attempted to deliver a beribboned golden toilet to Merc chairman Terrence Duffy. A video of this stunt can be found here.

Kathleen Geier

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee