When they were drafting the Washington state constitution in 1889, delegates argued passionately about an issue at the heart of the would-be state’s economy. Should the state ban gifts of public funds to private companies? At the time, it was the railroads that sought public subsidies and often played one town against another. Since having rail connections to the rest of the country meant life or death, communities were willing to give subsidies.
But a majority of delegates knew the powerful railroads would win that game and voted to ban what the constitution terms the lending of the public credit to an “individual, association, company or corporation.” The phrase is still used whenever the state or local governments come up with yet another scheme to give away property, pay for services or reduce the taxes of companies.
Washington’s constitutional history came to mind again over the weekend with publication of an important series of stories by The New York Times. An investigation found that the states and local governments give up more than $80 billion a year in incentives to businesses to attract and retain jobs. But, as the reporters found, such incentives don’t guarantee much at all, not even the ongoing existence of the plant or office. GM, for example, closed many plants after getting public dollars from its government “partners.”
A database created by the Times shows that Washington state spends at least $2.35 billion a year on 147 incentive programs that benefit 10,528 companies. It appears, then, that our constitution doesn’t stop this practice; it only makes the supporters and the corporate lawyers come up with ways to meet the various tests created by the state Supreme Court to make gifts look like something else.
So Boeing gets “incentives” worth $3 billion to build the 787 in Washington, only to inform the politicians that it didn’t mean all of the 787s, just some of them. The Seahawks and the Mariners get taxpayers to build them stadiums after doing exactly what the railroads did — threaten to take a better deal from another government. Hollywood film producers get breaks to make movies here. Microsoft and Yahoo get breaks to build server farms here. And yes, the state’s newspapers receive business rate reductions in the midst of the recession.
Opening loopholes
For all the talk of closing corporate loopholes, the Legislature creates new ones each session because corporate tax breaks don’t seem to have natural enemies, at least not effective ones. Democrats like to pick winners, so they support green energy and high tech and Hollywood. Republicans think taxes are too high, so they have no problem with any cut. Business groups support their most powerful members. Labor buys the assertion that it all creates jobs. What is left of the good-government movement can be ignored when it complains about cuts to human services and education while profitable companies get tax breaks.
Sometimes it isn’t state vs. state competition. Sometimes it is city vs. city or port vs. port. That is, tax dollars are spent to lure an employer or a convention from one city to another with no net benefit to the regional economy.
Tacoma, for example, loves to crow when it recruits a steamship line from the Port of Seattle. And the state has now used tax credits to help a dozen of its cities build convention facilities that compete with one another for the same shrinking supply of conventions and meetings.
Economists know it is a zero-sum game that doesn’t create jobs but only moves them around. But still, it continues.
An economic development official from Kansas City who has used incentives to take business from other states and seen other states do the same to him said it best. “I just shake my head every time it happens,” Sean O’Byrne told the Times. “It gives me a sick feeling in the pit of my stomach. It sounds like I’m talking myself out of a job, but there ought to be a law against what I’m doing.”
