The incoming Trump administration has signaled that it will use subsidies and other business incentives to keep jobs in the United States, seizing on a popular strategy that state governments have adopted to lure businesses to their towns and cities. But there is little evidence the tactic can succeed in the international competition for manufacturing, economists say.
In an unusual intervention on behalf of roughly 800 factory workers in Indianapolis, President-elect Donald Trump announced last week that Carrier — a manufacturer of heaters and air conditioners — would receive $7 million in state financial assistance to keep the facility's doors open. The deal exemplified the kind of agreements that Trump will make “on a day-by-day basis” to keep American jobs from moving abroad, Vice President-elect Mike Pence said Sunday.
Pence’s comment indicates that the president-elect views such tax breaks not just as a regional strategy but also as a new component of national economic policy — a vision that is drawing skepticism from experts.
While the subsidies might encourage a firm to locate in one state instead of another, data suggests that they have less effect on a company’s decision to move abroad, said Daniel Wilson, an economist at the Federal Reserve Bank of San Francisco.
“The role of tax incentives in outsourcing and international shifting of activity is, I think, small,” he said. “You’re not going to get a big influx of activity from the rest of the world.”
For decades, states have used various incentives — property tax waivers, credits, or one-time payments — as ways to recruit and keep businesses. Experts say the arms race has intensified in recent years as states vie for increasingly valuable manufacturing jobs.
The incentives tend to go to the largest companies: Boeing, General Motors, Alcoa and Toyota have all accrued state and local subsidies exceeding $1 billion, according to data from Good Jobs First, a think tank that tracks incentives and is typically critical of the practice.
In most cases, states bid against one another rather than against lower-cost nations. Inducements would have to skyrocket were states to routinely try to keep jobs from, say, Mexico, said Greg LeRoy, executive director of Good Jobs First. Firms that locate overseas typically rely on low-skilled labor in production, and the savings in reduced wages often dwarf any inducements a state can offer.
“Taxes tend not to be a big deal in these decisions,” said Bob Chirinko, an economist at the University of Illinois at Chicago.
For example, the $7 million Carrier would receive from Indiana is “small potatoes” compared with the $65 million that state officials have said Carrier told them the company would save every year by shifting production to the new plant outside Monterrey, Mexico, Chirinko said. He suggested that for United Technologies, the conglomerate that owns Carrier, the cost of producing in Indianapolis might be an investment in goodwill with the new Republican administration.
In a CNBC interview on Monday, United Technologies chief executive Greg Hayes suggested that business with the federal government was a consideration in his decision on the deal.
"There was a cost as we thought about keeping the Indiana plant open," Hayes said. "I also know that about 10 percent of our revenue comes from the U.S. government."
It might be a good strategy for United Technologies, but for the president-elect, peddling goodwill to firms nationwide could become costly, Chirinko warned.
“You could talk about serious money,” he said. “One deal looks good, but then you have to think about the ramifications.”
Most states that use tax incentives to recruit businesses say they’ve made good deals. Several states in the South, including Alabama and Georgia, have used nine-figure deals to lure automakers with the hopes that a major manufacturer such as Hyundai or Kia can create a constellation of new suppliers, with varying success.
On Georgia's state economic development Web site — available in Korean and Japanese — the state, after a 2006 investment in Kia, says it now has a network of 40 automotive companies that employ 7,000.
But in Alabama, the benefits of similar subsidies were limited, and the incentives held the state back from other kinds of spending, according to a 2015 study. Officials in Alabama paint a different picture — one in which a 1993 investment in Mercedes has helped launch a statewide automotive revival, with a massive Hyundai plant in Montgomery and a Honda light truck facility in Lincoln. Suppliers for those automakers have spread into rural Walker County.
The report, by George Crowley, an associate chair for economics and finance at Troy University in Troy, Ala., said the tax incentives have created thousands of jobs, but they've "come at a significant cost, both in taxpayer dollars and potentially lost opportunities."
Officials in Alabama paint a different picture — one in which a 1993 investment in Mercedes has helped launch a statewide automotive revival, with a massive Hyundai plant in Montgomery and a Honda light truck facility in Lincoln. Suppliers for those automakers have spread into rural Walker County.
“It’s a tool that we use, but it’s used wisely,” David Knight, executive director of the Walker County Development Authority, said of the subsidies. He said the region needed to diversify its economy after a glut of job losses in the coal industry.
Perhaps no state has suffered more from tax incentives than Louisiana, which pushed itself into a fiscal crisis in part by generously awarding corporations with various breaks. Earlier this year, Louisiana’s governor said the state was doling out more to corporations in refunds and credits than it was receiving in corporate taxes, many aimed at oil and gas companies that later cut employment during a commodities price crash. The state's unemployment rate has risen to 6.3 percent.
“We don’t have a tax code. It’s an exemption code,” said Greg Albrecht, the state’s chief economist. “These programs are very expensive. I personally say it’s an unhealthy situation.”
In Indiana, efforts by Pence and his predecessor, former governor Mitch Daniels, have been broadly successful in attracting businesses to the state, said Timothy Slaper, an economist at Indiana University.
"Being aggressive in showing that there's a climate and environment that's hospitable to business is a good thing," he said.
One important victory was Honda’s decision to open a new plant in Greensburg, Ind. in 2008. The Indiana Economic Development Corp. has committed $26 million in inducements to the Japanese automaker over the years, and the plant in Greensburg employs just over 2,100, state data show.
The state’s efforts have received criticism. While the corporation makes some information public, exact data on spending and employment is not available, hindering an objective evaluation of the policy, said Marcus, the economist.
It is a common problem for such programs.
“We don’t have a complete statistical picture of what’s going on so that we can evaluate whether or not these decisions have been successful,” Marcus said.
Moreover, unlike many other states, Indiana does not place statewide requirements for employment on firms that receive credits. One result is that employers can receive assistance for hiring more workers at one facility while shifting production at another facility in the state overseas, as detailed in an investigation by the Indianapolis Star earlier this year.
Abby Gras, a spokeswoman for the IEDC, said the agency keeps a close eye on companies that get the incentives.
“If a company chooses to neglect its commitment to the state and to its Hoosier employees,” Gras said, “we aggressively seek to claw back any incentives the company has received.”
Expanding such deals to federal policy draws more skepticism. Critics on the left and right say this approach risks enriching certain firms and their lobbyists, potentially straining public coffers with little way of evaluating the benefits to the broader economy.
Some economists also argue that such subsidies allow bureaucrats, rather than the logic of the free market, to influence decisions about investment and employment.
“These are supposedly conservative Republicans who don’t want government interference with private business decisions,” said Morton Marcus, an economist in Indiana who writes a syndicated column on state affairs. “They’re interfering with private business decisions.”
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