Reforming Economic Development 
An Enduring, Growing Movement
By Greg LeRoy

Some people call it “corporate welfare,” others say “business incentives,” or “development subsidies.” By any name, state and local spending for economic development has boomed in the last 20 years. With that boom have come disputes about plant closings, dubious deals, and a “civil war for jobs” among the states. These problems have spawned a wide array of grassroots reforms, most of them spearheaded by NFG-member grantees who are forming new and unusual alliances to thrust historically arcane budget matters into the broader public debate.

The Rise of Subsidies

No one can assign a total dollar figure to subsidies such as property tax abatements, tax credits, training grants, or tax-exempt bonds, but we can track their proliferation. Twenty years ago, only 21 states granted corporate income tax credits; today 37 do. Only nine states granted tax credits for research and development; today, 36 allow them. Only 20 states provided low-interest, tax-exempt bond financing; today, 44 provide it.

The decline of manufacturing during the 1980s made it easy for companies to pit states against each other. Changes in the federal tax code in 1981 and 1986 (especially the Alternative Minimum Tax), caused many companies to turn their tax-cutting energies to the states. A small consulting niche, the “site location” industry, exploded in size and policy influence. In 1985, GM’s Saturn plant won a package worth $50,000 per job from Tennessee; by 1993, the value of Alabama’s package for Mercedes Benz was three and a half times greater: $178,000 per job.

Such spending inevitably raises questions of outcomes. The first subsidy abuse challenges arose in the mid-1980s. Presbyterian, Methodist, Unitarian and Catholic funders convened the Interfaith Economic Crisis Organizing Network (IECON), an embryonic network of plant closing groups. Often born in church basements around an individual shutdown, these local coalitions later renamed their network the Federation for Industrial Retention and Renewal (FIRR).

Over and over again, FIRR groups discovered that plants slated for closing had received major subsidies. But a reading of the fine print in the development agreements revealed that the community could neither challenge the closure, nor get the subsidy back, nor win severance for the community or the workers. In the wake of such revelations, cities and states began enacting “clawbacks,” or money-back guarantees, in the late 1980s.

There were a few victories, as well as some high-profile defeats. The case of Ypsilanti Township v. General Motors, which was won in a lower court but overturned on appeal, attracted national attention. The now-defunct Minnesota Working Group on Economic Dislocation helped win a landmark lawsuit – Duluth v. Triangle Corporation – that actually stopped the shutdown of the largest factory in Duluth. In northwest Indiana, the Calumet Project for Industrial Jobs assisted workers at an American Home Products factory in Elkhart as they sued for multiple frauds and settled for $24 million. Finally, the Campaign for a Sustainable Milwaukee mobilized to help win anti-piracy safeguards for HUD block grants when it was revealed that Briggs & Stratton was benefiting from those federal monies as it relocated work from Milwaukee to Missouri and Kentucky.

The cumulative result of such disputes was a surge of new safeguards, including clawbacks, wage standards, environmental standards, public disclosure, and public participation requirements, collected in the 1994 book, No More Candy Store: States and Cities Making Job Subsidies Accountable, published by FIRR and the DC-based Grassroots Policy Project.

Although the pace of deindustrialization has slowed and the longest recovery in the nation’s history is masking many of its effects, the rate of public spending on economic development has continued to rise. Hardly limited to manufacturing anymore, such deals routinely exceed $100,000 per job. The practice of “job blackmail,” in which companies threaten to relocate unless they receive tax breaks, has also proliferated beyond manufacturing into financial services, media and telecommunications.

The most recent trend in economic development spending is a shift to more tax expenditures such as state corporate income tax credits. Debated only once and then embedded in the tax code where they receive far less scrutiny than annual appropriations, permanent tax cuts in the name of development are shifting state tax burdens away from corporations and onto wage earners. That is, the share of income tax from corporations declines as the share from individuals increases. The costs are great: for example, a recent study of North Carolina found that corporate tax cuts enacted for development now exceed appropriated spending by a ratio of four to one – and that the revenue lost due to such cuts is growing more rapidly than any other budget item except Medicaid!

Current Campaigns

Grassroots response to this issue has come from several kinds of groups, including state citizen networks like the Minnesota Alliance for Progressive Action, the Maine Citizens Leadership Fund and Citizens for Economic Opportunity in Connecticut, and from state tax and budget equity groups such as the Fiscal Policy Institute in Albany, NY and Kentucky Youth Advocates, which formed the Kentucky Economic Justice Alliance with the Community-Farm Alliance, Kentuckians for the Commonwealth, Appalshop, and the Democracy Resource Center. The nation’s largest local subsidy accountability project, run by the Los Angeles Alliance for a New Economy (LAANE), has partnered with UCLA on a series of major research projects. Organized labor has also weighed in, both as a frequent coalition member and as a direct investigator. Subsidies have figured prominently in three recent labor campaigns, including a successful organizing drive in Cleveland by the Union of Needletrades, Industrial and Textile Employees (UNITE).

The nation’s first successful state effort for a subsidy disclosure program was launched in 1995 in Minnesota after the Minnesota Alliance for Progressive Action (MAPA) published a tongue-in-cheek op-ed article recommending “corporate welfare reform” in which companies would have “two years and off” benefit limits and be required to meet frequently with counselors to explain their strategy for getting off of “welfare” as soon as possible. The article, published in the heat of the debate over federal welfare reform, received such a strong response MAPA realized the issue of accountability over public resources had resonance. Since disclosure was enacted in 1995, Minnesota has been producing company-specific data on hundreds of deals every year. Under 1999 amendments, every deal must have wage standards. The on-going debate around subsidies has benefited local efforts such as the Duluth Living Wage campaign and ACORN’s efforts opposing subsidies for a new Minnesota Twins baseball stadium.

The nation’s second disclosure program was enacted in Maine in 1998, with active involvement by the Maine Citizens Leadership Fund and the state’s fiscal watchdog group, the Maine Center for Economic Policy. As in many cases, the public debate was triggered by a high-profile controversy: the state’s $60 million package for General Dynamics’ Bath Iron Works, which said it might relocate without the breaks. The resulting debate brought a disclosure system that even covers two state corporate income tax credits.

Citizens for Economic Opportunity and its members in Connecticut are now in their third year of a debate over subsidy reforms. Modest earlier reforms were triggered by a high-profile dispute: United Technology Corp./Pratt & Whitney’s thousands of layoffs after receiving over $32 million in state assistance in 1993, given as the company weighed relocating jobs from the state. Now, with the company announcing thousands more layoffs, the Machinists union is alleging breach of its contract, and the issue of taxpayer accountability for the 1993 deal is prompting debate on a proposed clawback rule.

Northeast Action, a Boston-based network of progressive coalitions, is coordinating assistance to both Maine and Connecticut. It has supported local efforts with research and education, and coordinated a research partnership with the Cambridge-based Commonwealth Institute, which has already performed two analyses of Maine’s initial data and one analysis of data from Connecticut’s limited disclosure system.

The Kentucky Economic Justice Alliance (KEJA) issued a major analysis of that state’s aggressive subsidy programs in late 1999 and the state is now debating proposed reforms, including wage standards and disclosure. Among the case studies highlighted in the report were subsidized poultry and pork businesses that create massive water pollution.

The Fiscal Policy Institute (FPI) in Albany has been a long-time watchdog of New York’s development spending, especially the state’s powerful but loosely regulated industrial development agencies. In addition to publishing various reports during the 1990s, it has often made the link between ill-spent development subsidies and what else the funds could be used for. FPI has recently joined with Good Jobs First (a project of the Institute on Taxation and Economic Policy) to form Good Jobs New York, which is preparing research and educational work around New York City’s many eight-figure Manhattan “retention” deals.

In a breakthrough event last summer, UNITE in Cleveland won the support of the mayor and city council to help win the first contract for 250 workers at Dreison Industries. Although the workers had voted for a union, the company was cited for failing to negotiate in good faith. Supported by community allies, including Jobs with Justice, the union alleged that the negotiation failure constituted a violation of the company’s enterprise zone tax-break agreement, which mandates full compliance with local, state and federal laws. Facing a possible loss of the tax break, the company signed a union contract.

Grantmakers and Economic Development Subsidies

Although these efforts represent a real trend, with broad and diverse coalitions and active synergy with the living wage movement, groups have found it difficult to obtain funding for this work – work that some call good government and others call corporate accountability. Local funding sources are often tied to local corporations who benefit from such subsidies. A few national funders with a policy bent have supported the work, including the Unitarian Universalist Veatch Program at Shelter Rock (which has backed groups doing such work for at least 15 years) and more recently the Stern Family Fund. The Ford Foundation, along with the C.S. Mott Foundation, Open Society Institute, and Annie E. Casey Foundation, has provided substantial support for state fiscal analysis projects. Ford has also supported leadership development and community building initiatives such as KEJA, and provided early backing for LAANE’s work. The New World Foundation backed the Kentucky work, as did the Jesse Smith Noyes Foundation, especially on environmental issues. The Rosenberg Foundation has also supported LAANE’s subsidy accountability project, as has the Rockefeller Foundation; the Penney Family Foundation recently added its support.

Besides these dedicated grants, the vast majority of work done by these and many other groups has come from general support. Sensing a worthy issue and responding to breaking events, groups have succeeded in making connections between individual “horror stories” and systemic program flaws and/or budget issues. To have such flexibility, groups need general support and encouragement to build partnerships with other constituent-based groups, research institutions, and kindred groups in other states.

The dividends are large: groups consistently find that the issue is a terrific tool for leadership development and popular education, and that it has very broad public appeal to low-income workers, good government advocates, labor leaders, and community groups involved in grassroots economic development. It has also spawned an emerging research and policy network that is virtually redefining economic development by focusing on the issue of wages and job quality.

 Undeniably, there is progress. As a recent Good Jobs First study found, there are now 36 states, 26 cities and five counties that attach wage or other job quality standards to at least one job subsidy – an eleven-fold increase in six years. But many programs remain that are very expensive and poorly monitored.

The successes to date indicate that reforming subsidies is a terrific “wedge” issue in redefining government’s role in the economy. With their broad effects and high costs, job subsidies have emerged as a winning issue of enduring value.
 

Greg LeRoy, former research director of the Midwest Center for Labor Research and policy consultant to FIRR, wrote No More Candy Store. Thanks to the Stern Family Fund’s 1998 Public Interest Pioneer Award, he now directs Good Jobs First, a technical assistance clearinghouse on development subsidies. Visit them at www.goodjobsfirst.org.

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