Five Ways Out

By Donald L. Barlett and James B. Steele

What's a mayor to do? A major employer wants to expand or build anew. Rather than simply doing so, the corporation stirs up a bidding war to see which city and state will pony up the most cash, loans and tax breaks in the form of economic incentives. If you're the mayor and the facility means jobs and income for your town, do you play hardball and risk losing the plant and the jobs? Or do you give in and hand out tax money, only to face a never-ending string of similar demands from others?

Right now it's not much of a debate: the mayors cave.

The eagerness with which many states and cities routinely cancel taxes and distribute free services and grants to corporations puts enormous pressure on every other public official to do the same--even those who don't want to.

TIME has found many public officials deeply upset at the ultimate cost of the giveaways to their communities. Inevitably, tax rebates to a selected few lead to higher taxes for others and to cutbacks in essential services.

Can anything be done to stop the inequities? Absolutely.

But first, forget about cooperative agreements among states to stop the war of incentives. They've been tried, and they don't work. In October 1991, New York City, New York State, New Jersey and Connecticut agreed that a series of costly bidding wars to attract corporations was ruinous for all concerned. The four governments signed what was described as a nonaggression pact. Less than a year later, the truce was in tatters. New Jersey fired the first shot; among its targets was the New York Mercantile Exchange, which it tried to entice across the Hudson to Jersey City. Piqued New York City officials groused that because of New Jersey's wooing, the city was forced to come up with an extra $30 million to keep the exchange in Manhattan.

Next, in January 1994, New Jersey's newly elected Governor, Christine Todd Whitman, and New York's new mayor, Rudolph Giuliani, both Republicans, promised to end the border war. "We're not interested in stealing from each other," Whitman said.

But then, in September of that year, in what a deputy of Giuliani's called a "shameless raid," Connecticut lured Swiss Bank Corp. from Manhattan to suburban Stamford with $120 million worth of incentives.

Today, seven years after the first cease-fire, there isn't even a pretense of a truce. The latest poker game revolves around the new home of the New York Stock Exchange. Now in cramped quarters on Wall Street, the exchange has hinted that cheaper New Jersey real estate looks awfully good to it. In a knee-jerk spasm, New York City and State offered $600 million in incentives--more than twice the amount ever offered to keep a company in New York--to keep the exchange in Manhattan.

Which brings us to:

SOLUTION NO. 1 for ending corporate welfare at the state and local level: the levying of a federal excise tax on incentives. Under this proposal, Congress would enact a law imposing a tax equal to the value of the economic incentives granted to a company. In other words, if New York City and State governments were to give $600 million to the New York Stock Exchange, the Federal Government would hit the stock exchange with a $600 million federal tax. Hence no more value to economic incentives. No more bidding wars among governments.

"You have to make the tax confiscatory, a 100% tax, to take away the incentive," says Arthur J. Rolnick, senior vice president of the Federal Reserve Bank of Minneapolis, Minn. "Then there's no reason for a company to come knocking at your door. Some [public officials] have criticized [this idea], saying, 'We don't want another tax.' And we tell them, 'This is a tax you'll never have to collect.'"

The Federal Government has the authority to impose such a tax under the commerce clause of the Constitution, which gives Congress the power "to regulate Commerce with foreign nations, and among the several states."

That doesn't mean it would be easy. There would be strong opposition from the corporate-welfare bureaucracy: the tens of thousands of economic-development specialists, consultants, lawyers, accountants, conference planners and others who earn their living by giving away taxpayer dollars. Accounting and consulting firms in particular, says Ohio State Senator Charles Horn, work "both sides of the fence." They help communities dream up incentive programs, then bring them clients to collect the incentives.

What happens if Congress lacks the will?

SOLUTION NO. 2 A lawsuit to have incentives declared unconstitutional. Legal scholars believe the practice violates the Constitution's commerce clause. Indeed, the Supreme Court has said as much in several cases. In 1977, for example, the court struck down a New York law that provided for lower taxes on securities transactions processed by brokers in New York. The state pleaded that it needed the tax break to keep brokerages around. The court didn't buy it.

Even groups that usually oppose federal oversight of local affairs are calling for it in this case. The nonpartisan John Locke Foundation, a libertarian think tank in Raleigh, N.C., is a case in point. "We are a sort of right-of-center conservative organization, and what we are basically arguing is that the Federal Government should intervene," says John Hood, president of the foundation, which is readying a federal lawsuit to challenge state subsidies as violations of interstate commerce.

Hood says it's personally "troublesome" for him to call for a federal solution, but he and others in the foundation have come to believe it's the only way to end state subsidies to favored businesses.

Corporate welfare at the state and local level would end if either the Locke Foundation's proposed lawsuit succeeded or Congress accepted the suggestion of the Minneapolis Federal Reserve's Rolnick and enacted an excise tax. But what about all the incentives the Federal Government passes out? Many members of Congress, after all, build their careers on government handouts to corporations, which add up to two weekly paychecks for every working person in America every year.

SOLUTION NO. 3 Creation of a special commission that would study federal programs and propose which should be scrapped. That list would go to Congress, which would be forced to vote either to kill or preserve the programs listed.

In 1997, Senator John McCain of Arizona, along with other Senators, introduced legislation calling for the creation of an independent federal commission to eliminate "unnecessary and inequitable federal subsidies" to private industry. Both Congress and the President would be required to act on the recommendations of the commission--either by accepting them or rejecting them. "Unless Congress is forced to act to eliminate programs, it will not," McCain noted when he introduced the bill. "Perhaps independent commissions are the only fair way to ensure that neither side is given an advantage to protect its...corporate pork."

Of course, any such effort will be greeted with stiff opposition from yet another entrenched bureaucracy. Those are the agencies, departments and special-interest groups that profit from the existing system. There would be a spirited fight led by large corporations to preserve the Exim Bank, the Overseas Private Investment Corp. and the Foreign Sales Corporations, to name just three.

SOLUTION NO. 4 Shut off the flow of low-cost loans from the Department of Housing and Urban Development that have helped fuel the competition to snag companies. These loans date from the Housing and Community Development Act of 1974 and were aimed at "eliminating slums and blight." Today, TIME has found, HUD loans help bankroll such projects as a waterfront restaurant in Jacksonville, Fla. (it later went out of business), a downtown hotel in Philadelphia and an upscale fashion retailer in Spokane, Wash. In that case, a $24 million HUD loan arranged by the city of Spokane will go to construct a new store and enlarge a parking garage for Nordstrom Inc.

And if these four solutions are rejected?

SOLUTION NO. 5 is rooted in what has become the American way of late: sue. That's the course advocated by Dwight D. Brannon, a Dayton, Ohio, lawyer, who is suing state and local officials and a onetime Dayton-based company on behalf of its former workers.

The company is Hobart Corp., part of an international conglomerate with sales of $2.4 billion in 1997. Hobart produces commercial equipment for food preparation. Ever since the Great Depression, the company had operated a plant in Dayton. But in 1995, Hobart pulled up stakes and moved 30 miles to the north, to Piqua, Ohio, which offered $2 million in incentives. In July, the company informed its 66 hourly employees in Dayton, many of whom had worked at the plant for years--their average age was 52--that their jobs would be terminated in three days. According to the suit, Hobart staffed the new location with part-time workers--average age 34--from a temporary firm.

During a hearing in the lawsuit pending in U.S. District Court in Dayton, the company's lawyer explained it this way: "Every action [Hobart] has taken is motivated by sound economic or operational rationale."

Exactly. And until governments figure out a way to end the practice, corporate welfare will flourish.