States Fall for Corporate Blackmail

Incentives take billions off tax rolls

By Frosty Troy

"Of course it makes me sick to my stomach. but you have to play the game." The remark was made by an ultraconservative state legislator while shaking his head.

He was referring to corporate America's professional blackmailers who specialize in a game known as "If we don't get better tax breaks and other freebies from you we will go where the grass is greener."

Oklahoma has $1.4 billion in "industrial development" tax breaks on the books -- and more are being added.

It's a bait-and-switch con that Oklahoma has repeatedly been caught in.

Most recently American Airlines talked of closing one of three maintenance of facilities, including Tulsa, and walked away with a pot of gold from Tulsa ($22 million) Fort Worth ($25 million) and Kansas City ($81.5 million).

American didn't stop there, putting the heat on the Oklahoma Corporation Commission for a special electric rate. The Commission wisely turned thumbs down. The airline already gets a vastly reduced Tulsa water rate and other goodies.

American's Tulsa facility is superb, with an outstanding Transport Workers Union workforce. Productivity of the 7,000 employees is the best in the industry. Chances of it being closed were slim and none, but Tulsa voters weren't willing to gamble.

St. Anthony's Hospital threatened to move from downtown Oklahoma City, creating a panic in city and county governments, picking up a windfall in the process.

That led Integris Hospital to bawl they wanted freebies, too. That's how the con game proliferates.

There was a Republican move in the Legislature to bail out mismanaged Williams Co., of Tulsa, by using state pension funds. Gov. Brad Henry quickly nixed that idea.

Williams settled out of court with the state of California for gouging on power supplied to the state. California was ripped off for more than $11 billion by Williams, Enron and other companies.

And there's the Boeing gambit -- possibly building a new plane that has several states, including Oklahoma, on their knees, willing to almost go bankrupt to win this prize. There's talk of a special session of the Legislature if Boeing looks favorably at Oklahoma.

No special session for the thousands of state employees furloughed. No special session for the 5,200 public education employees who have lost their jobs, or the 650 higher education faculty and staff positions eliminated.

As noted by Governing Magazine, targeted tax incentives violate sensible tax policy. Yet, they keep proliferating. In Oklahoma it's the Quality Jobs program which is not routinely audited by a Tax Commission riddled with corruption.

A few years ago hotel giant Marriott International "hinted" it might move its headquarters out of Maryland's Montgomery County. Virginia politicians sprang into action, offering Marriott $6 million to cross the Potomac River.

Fearing the loss of 3,000 high-paying jobs and a high-profile employer, Maryland countered with $58 million worth of incentives and Marriott stayed put.

It turns out that Marriott was never really interested in leaving Maryland. But it still received a windfall for staying put. Marriott is also one of those corporations with numerous offshore tax shelters to keep from paying its fair share of taxes in America.

Public finance experts have long criticized such incentives as violating all the established principles of sound tax policy. Yet, these incentives have proliferated over the past quarter century.

Hundreds of companies have received tax breaks worth billions of dollars. Alabama -- a leader in the use of incentives -- has granted Mercedes Benz more than $250 million in tax relief.

Oklahoma City just ponied up nearly $20 million to Bass Pro for a retail outlet that might have gone to Tulsa. It was probably coincidental that 20% of the company was owned by the company promoting it, the Gaylord colossus which publishes the state's largest daily newspaper. Oklahoma has come up with millions for the remodeling of two tire manufacturing plants in the state.

"When it comes to spurring economic growth, incentives are certainly the quick fix. Other ways of attracting companies -- creating better schools and transportation systems -- take years to develop," wrote David Brunori of State Tax Notes.

"Tax incentives can be pushed through the Legislature licketysplit and then, just as quickly, the governor and legislative leaders can be standing at a ribbon cutting ceremony announcing a new manufacturing plant that will employ hundreds of citizens."

Despite its political allure, the targeted tax incentive is a poor policy choice. First. and most important at this time, it costs a lot of money. Even conservative estimates place the lost tax revenue at billions of dollars over the past decade. Curbing or ending their use could balance the budgets in many states.

Do companies really make critical decisions based on a state's tax code?

Corporations are far more interested in access to market, an educated workforce and labor costs than state tax burdens. Even right to work ranks far down the scale in the decision on a plant location.

As former US Secretary of the Treasury Paul O'Neill said during his confirmation hearings: "I never made an investment decision based on the tax code. Good business people don't do something because of [tax] inducements." O'Neill led corporate giants International Paper and Alcoa.

Tax incentives are patently unfair. Typically, a corporation is offered significant tax breaks for creating a certain number of jobs and investing a certain amount of money in the state. But what of the companies that have already created the jobs and invested the money? An attempt in Oklahoma is being made to address that inequity.

Corporations that threaten to leave a state often receive tax breaks for staying put. But what about the companies that do not have the nerve or guile to threaten to leave? The companies and individuals not receiving concessions end up paying more to support public services.

Tax-incentive programs suffer from a lack of accountability. Neither the public nor most political leaders know if the corporations are doing what they promised. There are often no guarantees that the recipients will create good-paying jobs or that a company won't close down the operation a year or two later.

Some years ago a small Oklahoma community sought to win location of a helicopter manufacturing facility. They ended up holding the bag when the company folded before the first helicopter was produced.

That was a product of Oklahoma Industries Authority, which engaged in self-dealing and shameless conflicts of interest until the Legislature finally cracked down. Its permanent chairman was the late E.L. Gaylord who enriched his own investments via the authority's bonding maneuvering

Former Gov. Frank Keating spent a fortune in taxpayer money, offering the moon to land a high-tech plant that opted for Utah, where it folded. Utah ended up eating all the new access highways and other inducements.

Under the current system, government action is prompted by fear of losing jobs to other states, dubious promises and empty threats. The system prompts companies that do not receive incentives to lobby legislatures for similar breaks. And, the incentives run roughshod over the ideal that government should minimize its presence in the marketplace. Competition among the states, based on low tax burdens and good public services, is a good thing. Oklahoma has the third-lowest combined local, state and federal tax bite in the nation.

The market basket survey by the US Department of Agriculture shows that food is about 15% less in Oklahoma than the national average.

Oklahoma has one of the five lowest-cost housing markets in the nation. The state is located at the crossroads of America (I-35, I-40 and I-44), has a superb labor force and a CareerTech system second to none. Does the state need more gimmicks?

The State Chamber keeps promoting tax giveaways, too dumb to realize that the same investment in education would pay far higher dividends.

"Providing tax breaks to particular companies in return for a promise of doing what most companies would do anyway violates all notions of good government," Brunori wrote.

"Ending the practice would result in a fairer, more efficient and more accountable public-finance system. It might just save states a little money as well."

Meanwhile, Oklahoma has to play the game -- as disgraceful as it is.

Frosty Troy is editor of The Oklahoma Observer, where this originally appeared. Email

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