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Manufacturers’ Lucrative Tax Incentives

Posted By Chris Chiappinelli, December 04, 2012 at 3:45 PM, in Category: Industrial Policy

Each year, manufacturers operating in the United States enjoy $25.5 billion worth of economic development incentives, according to a New York Times article that examined the perks states and municipalities grant to businesses. That represents a sizable discount on the cost of doing business, and manufacturers are taking full advantage of it, according to the Times.

Before I came to Manufacturing Executive and the Manufacturing Leadership Council, I was an editor at a site location magazine for manufacturers. Those five years were a trip into the often obscure world of lucrative incentives—the property tax abatements, sales tax refunds, corporate tax credits, and other perks that companies receive in exchange for building a plant or siting a corporate headquarters in a particular location. Across the United States, states and municipalities use these incentives to attract jobs to their area, often in pitched battles against other short-listed communities. No industry enjoys a bigger windfall from those incentives than manufacturing.

12-4-12_Manufacturers_Lucrative_Tax_Incentives.jpgOf the 48 companies that have received more than $100 million each in state grants since 2007, 28 are manufacturers, according to data compiled by the New York Times as part of its investigation into the field. The second biggest beneficiary is the agricultural industry.

The Times article paints a rather dark picture of the practice, noting that in some cases it has proven detrimental to states and local governments. The linchpin of the Times analysis is the case of General Motors, which in 2009 announced a list of properties it intended to liquidate, 50 of which were in towns and states from which GM had accepted incentive awards. The authors rightfully note that the economic development incentives offered to GM and many other companies often come in the form of a reprieve on local property taxes. That, in turn, tends to deprive local schools of funding they might otherwise receive, since in most locations, property taxes pay for education.

But the article intimates that the corporate thirst for incentives amounts to a form of bullying: “A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them.”

To be sure, the practice of granting incentives to manufacturers and other companies can be a losing proposition for cities and states. Beyond the siphoning off ofeducation funding, there are cases in which companies, such as GM, can’t or won’t meet employment expectations when business conditions deteriorate. There’s also a lack of accountability in the case of some of the government officials who grant the awards. The mayor or governor who mugs for the cameras at the groundbreaking of a new manufacturing plant may not be the person forced to answer to taxpayers seven years later when the manufacturer closes the plant and moves away.

But there are ways to deal with those dangers. Clawback provisions, for example, can help states and municipalities ensure that a company doesn’t take the money and run. And beyond that, there’s the quaint notion that the market for incentives will support only what it can bear. A city that gets burned by a vanishing corporation isn’t likely to stack the deck so heavily in business’ favor next time.

In the end, it all comes back to the siren call of jobs, and the delicate give-and-take that attends any negotiation between a company looking to set down roots, and the government officials eager to provide the soil. Each side pushes for an advantage. You can’t fault a company for trying.

Category: Industrial Policy
Written by Chris Chiappinelli

Chris Chiappinelli is the online research manager for Manufacturing Leadership. He covers enterprise software, sustainability, economic trends, workforce issues, and emerging technologies.

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