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Take away a family’s home through eminent domain
“Eminent Domain” is the legal principle that governments may take private property for public use. It’s usually intended so that governments can build things like highways, railroads and other public infrastructure. But in the world of economic development in America, “public use” all too often means “any use a politically connected developer wants to put it to.” In many states, an approved redevelopment plan is enough to start the process of taking away someone’s family home, their business or other private property.
This got worse in 2005 thanks to the landmark U.S. Supreme Court case Kelo v. City of New London, when the economic developers of New London, Connecticut successfully argued that it served a “public purpose” to seize and condemn Susette Kelo’s house so that a developer could build something larger and more expensive on the property. While some states responded to the backlash against the decision with laws limiting the ability of economic developers to wield this power, others did not and the use of eminent domain exploded.
Worst of all, eminent domain is frequently used for projects that end up failing. In Wisconsin, it was used – or threatened to be used to pressure families to sell – more than 100 times for a Foxconn plant that has been dramatically scaled back from its initial promised size.
And the project that Susette Kelo lost her famous “Little Pink House” to? It never got built. It’s vacant land to this day.
For more information on the abuse of eminent domain to seize property for economic development projects, we recommend the Institute for Justice (IJ). The excellent team at IJ helped Susette Kelo take her fight to save her home all the way to the U.S. Supreme Court, and they work across the country to fight eminent domain abuses. Learn more at https://ij.org/pillar/eminent-domain/.
Ignore a scathing state auditor’s report
Economic development agencies are usually required to have their programs audited by a state Auditor General or some other official body to ensure that everything is working as intended. But in reality, economic developers regularly ignore or dismiss even the most critical of audit reports, and simply wait for things to blow over so that they can continue business as usual. Some examples include:
- A 2019 report by Wisconsin’s Legislative Audit Bureau found that projects subsidized by the Wisconsin Economic Development Corporation (WEDC) were only meeting 34.9% of job creation targets. Additionally, the audit found that companies were only meeting 58.8% of their contracted “retention” targets to keep jobs in the state. (The costs of these programs in FY2017-18? $3.1 billion in tax credits, $25.6 million in grants, $4.5 million in loans and $65.7 million in local-government debt.) It shouldn’t have been news that the WEDC’s programs were mismanaged, as auditors had identified many of the same problems in 2013 and again in 2015. But little changed, and many of these same issues would rear their heads in the WEDC’s disastrous Foxconn deal.
- A 2013 state audit of the Michigan Strategic Fund (MSF) found a wide array of mismanagement, poor oversight and untrustworthy reporting. Among other issues, the MSF had reported a 75% job creation success rate for its “Centers of Energy Excellence” program. However, the state Auditor General found that the actual figure was just 19%. It turned out that the MSF had counted jobs existing on a particular date, which happened to be shortly before one major subsidy recipient had gone bankrupt. These issues were not new, as a previous audit of the same program three years earlier had warned that the MSF “did not document its review of eligibility requirements” in any of the company proposals the auditors had reviewed. (For more information on Michigan’s economic development agencies’ long and contentious history with state auditors, see the Mackinac Center for Public Policy’s excellent overview of the topic.)
- The Missouri State Auditor’s 2020 report on Tax Increment Finance (TIF) districts in St. Louis uncovered fundamental flaws and delivered the lowest possible grade to the city’s management of $656 million worth of incentives. The city’s economic developers were failing at even the most basic of responsibilities, auditors said, as their policy “does not define how the need for TIF incentives should be documented and determined” – a fairly basic component of effective TIF district management. The audit also warned, “the city’s policy does not include specific program goals or strategic preferences, does not clearly define the evaluation process or criteria to be used in project selection, and does not include effective project cost limits or overall program cost controls.” Additionally, the audit found that the city regularly waived its cost control policies, did not go back to compare projected outcomes to actual outcomes from completed projects and did not comply with accounting and transparency standards. Perhaps most dangerously, the auditors warned that the fundamental structure of the TIF program “creates an appearance of a conflict of interest” for the St. Louis Development Corporation that evaluated and recommended projects, as the agency received funding from each subsidized project that was tied to the size of the award.
- In New York State, a 2020 State Comptroller audit of the scandal-plagued “Buffalo Billion” subsidy program found a lack of up-front oversight and cost-benefit analyses, insufficient measurement and evaluation of project performance and poor reporting to the public. New York taxpayers didn’t really need an audit to tell them the Buffalo Billion was mismanaged, though, as the federal corruption convictions of the lead executive on the project and three other officials, as well as the related corruption conviction of a former aide to New York Governor Andrew Cuomo, were evidence enough. The Empire State Development Corporation’s response? “This audit confirms what is already known: all ESD expenditures were made appropriately, and until a global pandemic shuttered companies worldwide, not a single company within the portfolio had missed an annual investment or job creation commitment.”
Subsidize a big company at the expense of small competitors
In 2015, multinational furniture retailer IKEA received $9.5 million in tax credits from Memphis, Tenn. to open up a new store. Of course, Memphis already had more than 20 furniture stores in the community, including small family-owned and minority-owned businesses that had been there for decades. These hometown businesses ended up subsidizing their giant competitor through their local taxes.
What happened in Memphis takes place every day across the country, as some businesses get special advantages over others thanks to economic developers playing favorites. To hear first-hand what this meant in Memphis, watch the Beacon Center of Tennessee’s award-winning mini-documentary on the subject, “Rigged: The Injustice of Corporate Welfare”:
Give big tax breaks to a connected political donor
Companies that donate to state politicians are nearly four times as likely to receive economic development subsidies as companies that don’t donate to political campaigns. These politically connected companies also get awards that are almost two-thirds larger than those received by companies that rely on the merits of the deal rather than their connection to elected officials. Connected companies are also generally held to lower capital investment requirements and weaker job creation standards.
(Relatedly, research from the Federal Reserve found that the same held true for “stimulus” grants during the Great Recession, where political donors were 64% more likely to receive a grant from state-managed federal programs – but had no measurable impact on job creation.)
It’s not just individual companies, either. We also see this at the industry level, where politically dominant industries in a state regularly receive much more than their proportional share of subsidies.
One prominent recent example of this kind of cozy relationship is in Camden, N.J. where an ongoing investigation by WNYC and ProPublica has connected a “New Jersey political boss” to more than a billion dollars in questionable subsidies and tax breaks, awarded through laws and regulations that the power broker’s lobbyists and allies reportedly had a large role in creating.
Bankrupt your city with a big failed project
Small towns can get suckered by big deals and big dreams in the name of “economic development.” The results can be disastrous, often crippling communities for decades.
Consider Allen Park, Michigan. In 2009, this blue-collar suburb of Detroit made a big bet on a movie studio and film industry training facility connected to the generous film tax credits the state was handing out at the time. The city issued $31 million in bonds to acquire and renovate the property for $10.8 million more than the land had previously been valued. (It would eventually be sold five years later for just $12 million.)
For context, the entire city general fund budget of Allen Park in FY 2008-09 was just $22.8 million. The $31 million in bonds for the studio came with a $2 million annual debt service price tag, betting a tenth of the city’s budget – or more – on the future of this one movie studio.
It failed. Quickly and almost completely.
The deal was such a disaster that the state had to use the same law better known for putting Detroit and Flint’s city finances under direct state control in order to keep Allen Park from filing for municipal bankruptcy. The fallout was profound: The U.S. Securities and Exchange Commission would later settle fraud charges with local elected officials, including the former mayor, and the city’s finances were under state control until 2017.
Allen Park is just one example of many small towns that made big bets that went terribly wrong. One community in a similar situation right now is Mount Pleasant, Wisconsin. Home to the Foxconn factory boondoggle, Mount Pleasant and local Racine County have already spent more than a reported $130 million on the project, and at one point were facing project costs of $912 million. The city and county combined had budgets before Foxconn arrived of roughly $145 million, and they are broadly reliant on future tax revenues from Foxconn and any spinoff developments to cover their current and future costs. The shrinking of the project from 13,000 employees to 1,454 puts that future in deep doubt.
Get your governor reelected
Recently, researchers at Princeton and Columbia set out to understand why some states suddenly see large spikes in the size and number of subsidy deals they hand out to companies. They looked at potential causes like unemployment rate, GDP per capita and other economic factors, but those didn’t seem to be the keys. Then, they came across the answer: “per capita incentive spending increases by more than 20% in half of the cases in which it is an election year and the Governor is up for re-election versus one-fifth of the cases otherwise.”
They might be ineffective economic tools, but economic development subsidies are incredibly powerful political tools. Researchers at Duke University and the University of Texas at Austin have actually measured that power, finding that a swing-state governor who takes credit for “winning” 1,000 manufacturing jobs through a major subsidy deal can gain roughly 9% more support among independent voters as a result. That’s enough to win many a close election.
Let a company keep subsidies even though it didn’t fulfill its side of the contract
In 2008, General Motors signed a subsidy deal with Ohio in which it promised to keep its Lordstown assembly plant open and employing 3,700 workers until 2028. In 2019, it closed the plant after receiving $60.3 million in tax credits.
The state’s attorney general had demanded that the automaker pay back all of the tax credits it had received, but in 2020, the Ohio Development Services Agency reached a deal that let GM pay back less than half the tax credits, subject to a commitment to invest $12 million in the region before the end of 2022.
Getting money back from failed deals is known as a “clawback,” and Ohio is far from the only place where economic developers are much quicker to hand money out than they are to fight to get it back when a deal goes wrong. Often, deals that were announced with great fanfare are quietly renegotiated to allow companies more time or hold them to lower standards so that economic developers don’t need to report the failure of the initial deal. In Texas, one external review of the state’s Texas Enterprise Fund found that of 165 subsidized companies, 46 had renegotiated their deals with the state. And while the original deal requires legislative approval, renegotiations apparently only need the governor’s signoff.
(And because Texas allows subsidy recipients to challenge the release of their information under FOIA laws, 42 of the companies fought the release of their contracts to the public.)
Also in Texas, a recent investigation by the Houston Chronicle into Texas’s massive Chapter 313 subsidy program found that at least 30 companies had failed to meet their contractual commitments since 2019 but faced no consequences. “Their tax breaks stayed intact, and they paid no fines,” the paper noted. That same investigation found that each job created by Chapter 313 subsidies cost taxpayers at least $211,600, and possibly as much as $1.1 million per job using metrics the state had used itself at one point to justify the program’s costs.
Trust Hollywood accountants
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States love film tax credits, because everyone loves having Hollywood stars wandering around town. But the downside of that is that Hollywood’s accountants also come to town, and they take a break from screwing each other to screw local taxpayers for huge piles of money.
Hollywood executives are able to take a billion-dollar Harry Potter movie and claim that it lost $167 million through accounting tricks. They can tell the actor who played Darth Vader that “Return of the Jedi” still hadn’t made a profit in their books as of 2011, despite being the 15th-grossing movie of all time and having long since made back its $32 million budget.
What happens in many states is that films don’t use their tax credits on themselves, because they rarely have any meaningful taxes to pay. Instead, what they do is sell the credits at a slight discount to companies that do have significant tax burdens. A tax credit tied to a superhero movie could end up reducing the taxes paid by a supermarket chain.
Film subsidies almost always end up costing more than they bring in, thanks in part to Hollywood’s accounting magic. For instance, a state legislative audit of Michigan’s former film tax credit program in 2010 found that it “spent $37.5 million in FY 2008-09 to generate $21.1 million in private sector activity and will have spent $100.0 million in FY 2009-10 to generate $59.5 million in private sector activity.”
Use an artificial “multiplier” to inflate your impact
In 2019, the Carolina Panthers NFL team asked South Carolina for $110 million in subsidies as part of its plans to move team offices and practice facilities from Charlotte, NC to Rock Hill, SC. The team and South Carolina Department of Commerce (SCDC) worked together to create an “economic impact” prediction of $3.8 billion within 15 years, despite just 150 jobs (including players) being located at the facility.
A skeptical legislator hired the SCDC’s former chief economist to dig into the proposal, and what she found was that the economic developers had arrived at the $3.8 billion figure by assuming what’s called a “multiplier” of 39.1. In other words, the SCDC was predicting that every job at the Panthers’ practice facility would create 39.1 new jobs in the surrounding community. That’s more than 10 times higher than the commonly accepted multiplier for such jobs, which is already unrealistically large.
Multipliers are an arbitrary tool that can be dangerous in the wrong hands. It’s reasonable to use some kind of multiplier to predict economic impact, as new jobs do have a ripple effect in the broader economy. But the best evidence is that the multipliers commonly used by economic developers on a daily basis are far too large and consistently over-predict the impact of subsidized projects. According to research from the experts at the W.E. Upjohn Institute for Employment Research, it’s rare to see a real-world multiplier effect over 2: “At the local labor market level, our estimated long-run average local job multipliers range from 1.3 to 1.8. State level multipliers are higher, at 1.9 to 2.0, and our county-level multipliers are lower, at 0.9 to 1.2.”
Multipliers are a deceptively easy and deeply dangerous tool to make a project’s projected “impact” be whatever its supporters want it to be. Skeptical taxpayers, legislators and other stakeholders should always be asking “What multipliers did you use?” whenever economic developers start predicting the future.
Subsidize jobs in some other state
It’s one thing for taxpayers to subsidize jobs in their state. It’s another entirely for them to be subsidizing jobs in other states thanks to poor oversight by economic development bureaucrats.
In 2018, the Wisconsin Legislative Audit Bureau warned that the Wisconsin Economic Development Corporation’s (WEDC) policies for managing the massive Foxconn subsidy violated state law and could put the state’s taxpayers on the hook for workers who never even visited Wisconsin:
These written procedures allow WEDC to award program tax credits for “any employee that does not live in Wisconsin and is designated as ‘remote’, ‘working at home’, or ‘sales’” as long as these employees are paid in the zone. These written procedures do not comply with statutes or WEDC’s contract because they allow WEDC to award program tax credits for the wages of employees who do not perform services in Wisconsin.
An audit of Georgia’s bloated film tax credit program found similar issues. The state’s official auditor found that the bureaucrats running the program had approved tax credits for expenses that included “payments to employees or contractors for work not performed in Georgia and to vendors outside the state.”
Lax oversight of what companies are actually doing with their subsidies is all too common at economic development agencies. When that results in subsidizing some other state’s economy, it’s time for a change.
Build a stadium for a team that moves anyway
St. Louis lured the Los Angeles Rams to town in 1995 to play games at what was then the Trans World Dome. But after the Rams moved back to Los Angeles in 2016, the renamed Edward Jones Dome stayed behind, sticking taxpayers with roughly $144 million in debt and maintenance costs. (A lawsuit by the city against Rams owner Stan Kroenke has been delayed until 2022.)
Adding insult to injury for St. Louis taxpayers, the Rams built their new home in Los Angeles, SoFi Stadium, without any public subsidies.
That didn’t stop local elected officials from signing up to subsidize a new soccer stadium, though. St. Louis is forgiving $34.5 million in property taxes for the new MLS team and kicking in an undetermined amount of other subsidies through two new 1% sales taxes. Meanwhile, the state threw in $5.7 million worth of subsidies.
Refuse to tell legislators how you’re spending public funds
When reporters asked Ohio House Speaker Larry Householder in 2019 whether the state’s JobsOhio economic development program was working, his answer was telling: “I don’t know,” he said. “That’s part of our transparency problem.” Created in 2011 to replace the Department of Development, JobsOhio is a nominally private corporation that is intentionally exempt from virtually all government transparency requirements. (It wasn’t until 2019 that JobsOhio even agreed to disclose how much its staff was being paid.)
Ohio’s legislators, taxpayers and other stakeholders have gotten fed up with JobsOhio’s fortress mentality. Newspapers across the state have all joined in, with editorials in Cleveland, Akron, Columbus, Toledo and other communities all calling for improved transparency and oversight by legislators and auditors.
The problem is that JobsOhio’s funding model leaves the economic developers there almost literally drunk on power and able to resist outside pressure with no real cost for inaction. JobsOhio is funded by the profits from the state’s monopoly on liquor distribution, which insulates it from the need to ask legislators for appropriations — or tell them where the money’s going.
Many states and cities operate economic development “corporations” that are designed to avoid transparency and exempt economic developers from the same restrictions and oversight that constrain bureaucrats in other state agencies. If anything, you would think that the combination of big money and politics should encourage more transparency in economic development agencies than elsewhere, not less. But as recent research from the National Freedom of Information Coalition makes clear, that’s not how the industry works.
Keep the price tag for your Amazon “HQ2” bid secret – forever
Cities made all sorts of massive and outlandish offers to try to win – or at least to appear to be trying to win – Amazon’s “HQ2” project.
(Of course, it later turned out that the subsidies were never going to decide where the project went. They were just a big deal because Jeff Bezos was apparently jealous of Elon Musk’s success at winning subsidies for Tesla. Amazon’s own VP for Public Policy later admitted that it was workforce, not subsidies, that mattered most.)
While bids were secret at the time at Amazon’s request, we now know that when it comes to major Midwestern cities, St. Louis offered $7.1 billion in subsidies. Pittsburgh offered $4 billion. Detroit offered $4 billion. Cleveland offered $3.5 billion (and Amazon’s own electric grid.) Cincinnati offered $3.1 billion. Gary, Indiana offered more than $2.3 billion. Even Toledo offered $780 million.
But we don’t know how much Indianapolis offered. That’s because the Indiana Economic Development Corporation has gone to court to fight the release of Indianapolis’s proposal, even in redacted format – and it’s won. The IEDC has successfully argued that its proposal wasn’t ever a “final offer” under the meaning of the state’s transparency laws.
It’s not clear why Indianapolis is even bothering to hide its proposal, as there’s no way it could have been the biggest or most ridiculous. That honor arguably belongs to the Dallas-Fort Worth International Airport and two neighboring communities, which offered the e-commerce giant a deal worth nearly $23 billion over the next 99 years — with no proposed “clawback” mechanism to get the land or money back if anything went wrong.
Drain hundreds of millions of dollars from public schools
Using official government financial reports, the economic development watchdogs at Good Jobs First identified $2.37 billion in public school funding lost to economic development tax abatements across the country in 2019.
This happens because companies don’t have to pay taxes that fund public education, thanks to tax abatements from state or local governments. In some places, state or municipal governments make the school district whole — although this can just shift where the drain on education funding occurs — while in other communities the cost to an individual school district can reach more than $1,000 per student.
Have your programs assessed by consultants who only do positive reviews
Most states have requirements that economic development programs be assessed by some third party for effectiveness. Often, that’s done by a state auditor — which we discuss above. But sometimes, economic development agencies get to decide what outside firm to hire to perform the review. Unsurprisingly, the firms that get chosen tend to be ones that have a history of generating reports that praise the programs operated by the people who hired them.
As documented by a 2016 study from the Mackinac Center for Public Policy, Michigan’s economic developers said the quiet part out loud in justifying a no-bid contract to Longwoods International by admitting it was necessary “to prove that the benefits for conducting a paid advertising program out weight [sic] the costs” and that “By using the service of this vendor and its unique method for identifying the return-on-investment for tourism advertising efforts, Travel Michigan can demonstrate not only the success of the program, but prove that the investment of state funds provides a higher rate of return on tax dollars than the investment costs.”
If there’s only one company that’s capable of justifying subsidies to the state’s tourism industry, then maybe the problem is in the subsidies, not the analyses. The Mackinac Center study noted that Longwoods “has been hired by many different states over the last decade or more and have produced similar results — all positive or neutral returns on investment — no matter what tourism promotion program they study.”
Longwoods is far from alone in its service to the interests of economic developers. In the world of pro sports stadium subsidies, the excellent blog Field of Schemes refers to the firm Conventions, Sports & Leisure International (CSL) as “everybody’s favorite incompetent cartoon supervillains,” and has cataloged the issues with their studies justifying stadium subsidies over the years.
Call it “job creation” when a company moves workers from one place to another
For a decade, Kansas and Missouri engaged in a corporate welfare race to the bottom in what became known as the “Kansas City Border War.” Each side offered businesses giant subsidies to move, often just a few miles, in the name of “job creation.” The estimated price tag to local taxpayers has been estimated to be in the range of $335 million given to 116 companies that moved one way or the other — or occasionally over and back — between 2011 and 2019.
Despite the claims of local politicians, this wasn’t “job creation.” These jobs largely existed already; they simply changed how long a commute the workers had, mostly by as little as five to seven miles.
While Kansas City was the worst example of this kind of zero-sum subsidy game, it occurs every day in cities and states across America as suburbs lure companies out of the city, or vice versa. Companies benefit, but the broader community is no better off than before.
Hand out more in tax breaks than your city spends on its fire department
In its 2019 annual financial report, New York City reported roughly $3.8 billion worth of revenue lost to tax abatements. That’s more money than the city budgeted in its November 2019 financial plan to run both the New York Fire Department ($2.1 billion) and Department of Corrections ($1.3 billion).
This isn’t just a big-city thing. In 2019, Grand Rapids, Mich. racked up roughly $38 million in tax abatements, Economic Development Corporation appropriations and the costs of operating 11 different economic development authorities or districts. That same year, the Grand Rapids Fire Department had just a $30 million budget.
This isn’t just about fire departments. The evidence shows that spending more on economic development subsidies leads to “decreases in expenditures on productive public goods such as education and highways as well as corrections, police and fire protection and sanitation.”
Economic development deals come with very real price tags attached, and communities have to make hard decisions about what to pay for when those bills come due.
Get perfectly good property declared “blighted” so it can be seized for a project
New York City’s leaders had a problem in the mid-2000s. In order to get the high-profile “Atlantic Yards” project underway, including the new Barclays Center stadium for the now-Brooklyn Nets, developers and politicians had to somehow get rid of eight blocks worth of inconvenient residents and existing businesses in a 22-acre section of Brooklyn. Fortunately for their grand vision, they had the Empire State Development Corporation (ESDC) on their side. The ESDC performed a 381-page “blight study” that was used to declare the entire neighborhood “blighted,” which enabled the EDSC to use eminent domain to force people from their homes and businesses.
The New York Times noted that “Hardly a crack in the sidewalk escapes notice in the study,” which used a whole bunch of questionable metrics to (literally) trash-talk the neighborhood. One such factor the study used to identify “blight” was “lots built to 60 percent or less of their allowable Floor Area Ratio under current zoning.” (Yes, New York’s economic developers successfully argued in court that simply not having as big a building as New York City’s planners thought could fit on a particular piece of land counted as “blight” that negated the owner’s property interests, regardless of the actual quality of the home or business in question. Another factor in the blight determination was “irregularly shaped lots.”)
As for actual blight, fewer than one in seven lots were home to buildings that were arguably unusable or beyond repair.
If anyone doubted that “blight” was really just an excuse to give the Atlantic Yards developer whatever he wanted, the EDSC’s report essentially said that the community was blighted because it wasn’t owned by a single developer: “[A]n equally important reason for the continued blight is that the project site has historically been held under the ownership of multiple parties, and this diversity of ownership has hindered site assemblage that is necessary for redevelopment.”
In his opinion allowing the blight designation to stand, New York Court of Appeals Chief Judge Jonathan Lippman virtually begged the New York State Assembly to change the relevant laws, writing, “It may be that the bar has now been set too low—that what will now pass as ‘blight,’ as that expression has come to be understood and used by political appointees to public corporations relying upon studies paid for by developers, should not be permitted to constitute a predicate for the invasion of property rights and the razing of homes and businesses. But any such limitation upon the sovereign power of eminent domain as it has come to be defined in the urban renewal context is a matter for the Legislature, not the courts.”
But New York’s laws are far from alone in abusing “blight” as an excuse to do whatever politicians or their favorite developers want to do. A 2007 review of state blight laws found that states broadly agree on things like health and fire hazards, disrepair and other factors that the average person thinks of as “blight.” But many states allowed factors out of the control of property owners such as “faulty or obsolete planning” to contribute to a blight determination, or considered highly subjective factors such as “neighborhood character,” “economic underutilization,” “economic or social liability” or “attractiveness.” Some states were even more idiosyncratic: Oklahoma allowed “traffic” to be part of a blight ruling, while Nebraska factored in the average age of structures without regard to their actual condition.
Give companies billions in tax credits, but keep their identities secret
In December 2014, one company cashed in $224 million of tax credits with the State of Michigan, contributing almost half of an unexpected $532 million state tax revenue shortfall that led to years of budget uncertainty and cuts to services.
What company? Well, that was a secret, according to the Michigan Economic Development Corporation (MEDC). It was considered “confidential taxpayer information” under state law.
Michigan’s deeply flawed MEGA tax credit program had stuck the state with an unexpected $9.4 billion in tax credit liabilities, held largely by the “Detroit Three” automakers. After public outcry over the harm the secret deals were doing to the state, the automakers finally publicly revealed how much less in taxes they would be paying: $2.3 billion for Ford, $1.7 million for Fiat Chrysler and $2.27 billion for General Motors over the next decade.
Many states and cities make every effort possible to keep tax credit information private under laws that nominally protect “confidential taxpayer information” or “trade secrets.” But if the public is investing in a company through subsidies, then the public should have just as much information about the company’s finances as any bank loan manager, hedge fund operator, venture capitalist or other investor.
Make your city resort to “policing for profit” to cover its budget
In the summer of 2014, the city of Ferguson, Missouri boiled over in protests and demonstrations after the death of Michael Brown at the hands of local police. While it was well understood that existing tensions between local residents and the Ferguson Police Department fueled the anger and violence in Ferguson, what’s less understood is how economic development deals gone wrong helped contribute to that state of affairs in the first place.
An excellent 2015 investigation by The Atlantic showed how the city’s past decisions to offer large tax abatements to major corporations had eroded its tax base to the point where city leaders turned to the police and courts as revenue generators. In 2014, the city’s general fund budget was $18.6 million, of which $2.2 million came from “Fines and Public Safety.” Before the unrest, that figure was budgeted to increase by another $993,000 in 2015.
The result was what’s often called “Policing for Profit,” and it tore the heart out of the community. According to a 2015 report by the U.S. Department of Justice:
Ferguson’s law enforcement practices are shaped by the City’s focus on revenue rather than by public safety needs. This emphasis on revenue has compromised the institutional character of Ferguson’s police department, contributing to a pattern of unconstitutional policing, and has also shaped its municipal court, leading to procedures that raise due process concerns and inflict unnecessary harm on members of the Ferguson community.
Ferguson may be an outlier in terms of the aggressiveness with which it relied on police and courts to bail out a city budget crippled by the legacies of economic development deals, but they are far from alone in struggling with those costs.
Hand out tax breaks to “retain” jobs that were never going anywhere
Almost every state economic development subsidy program has a requirement that if not for the subsidy, the jobs might go to some other state. In practice, those requirements are rarely enforced and are treated more as a box to be ritually checked than an actual legally binding statement by a company that should be backed up with actual evidence.
Sometimes, companies don’t even realize that they’ve been considering moving out of state, as economic development bureaucrats have been taking care of that on their behalf. In 2018 in Michigan, United Shore Mortgage considered taking $1.9 million in subsidies for its new headquarters to cover brownfield remediation costs. The company eventually declined the deal, with CEO Mat Ishbia explaining, “It was disingenuous to take money that we were going to spend anyway.” But regardless of whether they were ever going to take the subsidy, United Shore had never considered moving out of Michigan. That’s why it was a surprise to Ishbia when he discovered that the Michigan Economic Development Corporation (MEDC) had effectively threatened to do so on his behalf, stating in a subsidy application:
Without State assistance, the project would move forward on a reduced scale. There would be less job creation, significantly less investment, the project would take more time and future growth would likely take place in California where the majority of the Developer’s customers are located.
Without this statement, the MEDC couldn’t by law have secured a grant for the company — and without a grant, the MEDC couldn’t have taken credit for “retaining” 2,200 jobs that were never going to go anywhere and “creating” 600 more that had already been planned for.
The other side of this issue is companies threatening to move that aren’t actually planning to go anywhere — and that economic development bureaucrats and elected officials let get away with their charade. Possibly the best example of this is Graceland, the former home of Elvis Presley. In a 2019 effort to get tax breaks from Memphis city government, representatives of Elvis’s estate literally threatened to move Graceland. “We’ve had substantial offers to take every piece of wood and panel and move it,” they told the Wall Street Journal, suggesting Graceland could be relocated to Nashville, or as far away as Asia or the Middle East.
Whether or not they believed the threat, Memphis City Council eventually approved roughly $75 million of the requested $100 million in tax breaks.
Graceland remains in Memphis to this day.
Let a film production company claim “lost petty cash” as an expense for tax credits
We’ve already talked about the inadvisability of trusting Hollywood’s accounting practices. But apparently, Hollywood’s crack accounting fabulists don’t actually need to work that hard. Sometimes, when they inadvertently tell the truth, state agencies let them get away with robbery – or at least with being the victims of a possible robbery.
An official audit of Georgia’s film tax credit program in 2020 found the state’s Department of Revenue (DOR) to be failing badly at keeping an eye on the taxpayers’ cash drawer. The DOR at the time was auditing the claimed expenses of only about 12% of film productions in the state, meaning it should have had the ability to do a thorough job on the few projects it did check up on. However, state auditors went back over the DOR’s reviews and found $4 million in bad or bogus expenses that should never have been repaid in the first eight projects they looked at.
This wasn’t highly technical accounting trickery that was bamboozling Georgia’s film office bureaucrats. This was basic stuff. “These included payments to employees or contractors for work not performed in Georgia and to vendors outside the state,” the auditors wrote. “We also found expenditures outside the eligibility period, for items unrelated to production, and for wages above the employee salary cap.”
One project had been reimbursed $54,000 for “studio executive airfare.” Another film was reimbursed $80 for a parking ticket. And yes, one film claimed $2,500 in “lost petty cash” as an expense for which the taxpayers of Georgia should reimburse them – and got it approved.
Georgia’s massive film tax credit spending spree – and its bureaucrats’ failure to keep an eye on the money – meant that Hollywood ended up taking an average of $220 from every single household in Georgia in 2018.
Exempt big developers from the same permit and inspection hassles as everyone else
The process of building anything in San Francisco is so famously convoluted and challenging that prospective developers are told, “Obtaining a city permit can undoubtedly be one of the most confusing processes you may ever experience.” That’s not sour grapes from some frustrated developer, though. Rather, that’s what the San Francisco Planning Commission’s own official guidebook says.
San Francisco may be one of the worst offenders in this regard, but red tape is a common challenge across most of America’s communities, especially the big cities, and companies have learned that they can make cutting through that red tape part of their ask to economic development bureaucrats. In Area Development Magazine’s annual survey of corporate decision-makers, “expedited or ‘fast-track’ permitting” was ranked as the 13th most important factor for major-project site selection. In 2019, 70.7% of respondents considered it a “very important” or “important” factor, up from 64.9% just the year before.
This was in evidence that year in Detroit, where the Memorandum of Understanding for a subsidized Fiat Chrysler Automobiles plant expansion didn’t just include tens of millions of dollars in free land and more than a decade of 50% tax breaks from the recently bankrupt city. It also included Detroit’s Buildings, Safety Engineering and Environmental Department commitment to have “inspectors on-call 24/7 for building, mechanical, electrical, mechanical, plumbing and fire marshal” while the plant was being built; as well as 24-hour turnaround on inspection requests, five-day turnaround on all approvals, expedited zoning change reviews and site plan approvals and other special treatment from the Motor City’s normally labyrinthine bureaucracies. Less-favored (and less-subsidized) developers working with Detroit’s bureaucracy are reportedly more likely to encounter three to six-month waits for permit approvals, not five days.
(Relatedly, there is a significant amount of research showing that the biggest driver of high housing costs isn’t land value or the construction cost of building housing. Rather, it’s artificial costs imposed by local zoning and permitting restrictions. One simple way to drive growth in a community is just to not make it so hard to build there.)
Build a giant squid statue
Communities often spend ridiculous amounts of money on dumb things in the name of “economic development.” In the small fishing town of Noto, Japan, local leaders spent the equivalent of $230,000 in COVID-19 relief funds on a 43-foot, 5.5 ton statue of a giant squid. The New York Times reported that a town official explained the purchase by saying local leaders hoped the statue would be “a driving-force attraction in the post-Covid period.”
The NYT did not report on whether the city had done any market research to determine the demand among Japan’s tourists for squid statue-centric day trips, but a plus-sized squid is far from the worst or most expensive thing a community has done in the name of attracting tourists. Consider, for instance, that in the 1980s, beleaguered Flint, Michigan spent a reported $36.5 million in public funds on “AutoWorld,” an automobile-centric theme park that took 15 years to develop but only six months to fail.
Have questions? Think there’s a “Bingo” in your hometown? Want to share your own stories of economic development gone bad? Think there’s something we got wrong or missed? Feel free to contact us!
