For years, I always wondered with overwhelming curiosity, why in the hell are NFL fans passionately brag about their team’s wins. But it is not like these fans have an invested interest in these team. I actually use to be one of these people. Wait, they actually do. And I mean most of Americans have a financial interest in the local NFL team (distraction).
Whether we are a fan of the local team or not, your tax dollars are going toward the funding of a monstrosity of a stadium. So, maybe it is essential as a fan to vent and tirade on Youtube if your team loses. The reality is that your local politicians have raped and robbed you blind forcing you to pay for a colosseum for a billionaire and his millionaire employees.
While watching the Kansas City Chiefs blowout the Houston Texans last evening, I began reading an article, discussing how NFL teams have left taxpayers on the hook for hundreds of millions of dollars as the majority investor for the cost of constructing a colossal colosseum for these team. I also began to reminisce of a study regarding corporations, sports teams, local governments working against the taxpayers. Take a look!
States in Competition to Sell Communities to Corporations
Many cities, towns, and other communities around the country, who are faced with an economic debacle have an incentive to bring prosperity back into their citizens. Government tends to act on impulse, especially if there is a relatively high unemployment rate; they want to be able to repair the problem by bringing more jobs to their desperate population. This is usually an ideal opportunity for corporations to enter into the picture to help bring employment to communities that are desperately in need of jobs. In 2002, Daimler Chrysler was strongly considering building a new factory in the United States, the state of Georgia decided offer Chrysler $330 million to build the factory in the Peach state (Halbfinger, 2002). States and local government usually offer tax exemptions, property tax abatements and other types of promises and incentives to lure in these mobile corporations.
It is very common for two or more state and local governments to contend over corporations interested to build a factory that would locate in their community. This competitive nature is out of the fear that multinational corporations would move jobs overseas if they are not offered a lucrative amount in subsidies. This exploitation by multinational corporations made local governments fierce competitors. There has even been a multitude of incidents where multinational corporations have accepted tax incentives, free buildings and even cash rewards from mayors and governors to later rescind on the deal (Story, 2012). The New York Times conducted an investigation and discovered that localities are granting 80 billion dollars a year as incentives (Story, 2012). Taxpayers sometimes benefit from incentives, but if all fails the citizens are coerced to pay the debt.
How do states and local governments compete with each other for businesses? It is also essential to be able to examine the type of benefits businesses obtain from the state and local governments that are willing to offer private businesses. Unfortunately, every local government is not a winner, but the winners usually add incentives to their budget, allocated for spending. It is also interesting to assess whether the incentives offered are similar or different when it comes to tech corporation, i.e., Facebook and Twitter in comparison to automotive corporations, i.e., Ford and General Motors. Incentives have become the nature of local government doing business with corporations.
A case study is an ideal approach in examining how local governments offer tax incentives and other types of subsidies local private companies to locate to their jurisdiction. The case studies will provide the research with a cohesive understanding of whether the incentives that are offered by local governments is the primary reasoning for companies to choose one locality over another.
The findings from previous research illustrate that localities that have the presence of new firms carry positive attributes to uplift the economy while other finding show that providing large incentives can impede some communities. The state of Pennsylvania offered a tax credited to Royal Dutch Shell for $1.6 billion over 25 years, this was their strategy to compete with neighboring states, e.g., Ohio and West Virginia for energy facilities (Shock, 2012). Pennsylvania predicted that Shell would produce thousands of jobs, despite making a $35 billion dollar profit in 2011.
According to a Wharton School of Business study, when local governments negotiate for incentives for new businesses they go through a 2-step process, once the locality reveals their interest in the firm they submit a bid. A list complies of other potential communities with more attractive bids to the firm. The competitors on the list learn about the plans of the facility to submit a final bid. The research of the study discovered that the first bid is essential than a final bid (Calango, 2005).
It is the standard procedure for local and even state governments to offer property tax abatement, sales, and income tax breaks and other subsidies to firms willing to locate to their jurisdiction. Most politicians are conscious that it is political suicide to be the one responsible for losing a competitive bid to lure corporations. Some studies indicate that there is very little evidence to support the notion that tax incentives are effective (Greenstone and Moretti, 2003).
A case study will be the research method utilized to examine various local governments across the country and their strategies to compete with other localities in an effort to offer private companies tax incentives to relocate to their jurisdictions. This research will select three cases: the first case will involve Caterpillar Inc. building a factory in the state of Georgia; the second case will discuss the competition between Kansas and Missouri; the third and final case will examine how local governments compete with where sports franchises regarding their relocation.
Case Study: Caterpillar move to Georgia
As of 2012, the Caterpillar Corporation decided to relocate two of their production facilities, from factories in Japan to Minnesota and the Peach state. Caterpillar is an Illinois-based company that manufactures machines and engines for construction usage. According to company officials, another reason for relocating outside of the home state is because of the increase in state income taxes. In the fall of 2011, the company determined that it would be a financially feasible to relocate their factory in Japan to North America, primarily in Canada or Mexico. The company projected to relocate to a region near a port, but Caterpillar ultimately decided to build a factory in the United States (Reuters, 2012).
Caterpillar selected the state of Georgia as one of the locations to build a new manufacturing plant. In the later part of December 2011, Caterpillar began exploring various sites in the Southeast region of the United States, primarily in the Carolinas and Georgia. The Peach state provided the most competitive tax incentives to allow the company to build their new factory. Georgia has made Caterpillar Inc. eligible for $77.7 million dollars in state and local incentives on the development of the new plant near Athens, GA.
The two counties: Athens-Clarke and Oconee have amalgamated $32.7 million dollars in local development incentives, primarily because the site of the new plant borders the two countries. As a part of the $32.7 million dollars incentives the counties used $9.5 million dollars to purchase land from the Orkin family of Atlanta; according to Athens-Clarke and Oconee County, the property will eventually be transferred to the ownership of Caterpillar. The projected investment Caterpillar plans to devote is $200 million toward the development of the new manufacture plant. Caterpillar will receive $45 of $77.7 million in state job credits and project development grants. The company will also receive additional incentives that would be used to improve the roads and highways, (US 78 and GA 316) surrounding the manufacturing facility. The local government will grant tax abatements to Caterpillar, valued at $15 million dollars and the company is required to pay only 10 percent of the estimated total tax on the value of the property. The Orkin site has been touted as Athens area industrial savior for nearly 30 years. It was once a potential location for IBM and then the prime real estate was pitched to auto manufacturers and pharmaceutical companies (Williams, 2012).
The new factory plant will be built on 900 acres of Orkin family land and will initially employ 800 workers, which will ultimately employ a total of 1400 expected by 2020, additional jobs are expected from the company’s suppliers who plan to move their operations nearby. Georgia’s competitiveness overwhelmed North Carolina who was also at the forefront with the southeastern headquarters division in Cary, NC. One of the primary reasons Georgia was able to convince Caterpillar to move to the Peach state because of the seaport located in Savannah, according to Rep. Dewey Hill (Williams, 2012).
Kansas and Missouri War
States compete constantly for businesses to relocate jobs and operations to their state, but no other two states have been at “war” like Kansas and Missouri. These two bordering states have used incentives to entice businesses to provide a workforce and move operations across the border. In several years, this schoolyard rivalry has devastated Missouri; Kansas’s legislators cut taxes for more than 190,000 businesses and these actions have induced Missouri businesses to migrate across the border. The tension has exasperated politicians in Missouri because their vision is to keep the economy burgeon. Missouri Rep. Eric Burlison filed a bill in the early months of 2013, Broad-Based Tax Relief Act, which would cut income taxes by half for all state-based businesses for the next five years. According to Missouri lawmakers, it is imperative to use political leverage to compete with their neighboring state to keep jobs at home (Kampis, 2013).
The state of Missouri harbors some of the largest corporations and hundreds of thousands of others businesses; seventy percent of the state’s revenue is extracted out of their two major cities: Saint Louis and Kansas City. In September of 2011, the AMC Entertainment Inc. headquarters moved their office and about 450 employees twenty-four mile, from Kansas City to Leawood, Kansas. AMC was just one of three major corporations to relocate offices to their neighboring state of Kansas in two years. J.P Morgan Retirement Plan service moved 800 jobs to Overland Park in 2009 and the following year Key Bank Real Estate Capital relocated 300 jobs to the same jurisdiction. Kansas perpetuated businesses, i.e., AMC and J.P. Morgan, to relocate by enacting legislation allowing companies that relocate can retain 95 percent of employee withholding tax for up to 10 years (Vockrodt, 2011). In 2011, the Applebee’s restaurant chain moved their headquarters to Missouri, from Lenexa, Kansas because the state provided the restaurant chain $12.5 million dollars tax incentives for 10 years (Hancock, 2012).
Missouri is like no other state in the union, they offer corporations tax incentives, which allows the businesses to keep 100 percent of employee withholdings. Ironically these taxes are usually disbursed to fund state services, but these programs offer by the state allow companies to hoard those resources that were initially intended to fund public services. In 2005, legislators felt compelled to create the Quality Jobs Program for a Saint Louis-based pharmacy manager, Express Script because of the fear of exodus from the sunflower state. Since the enactment of the QJP, Express Script has accumulated $17 million in subsidies; QJP also awarded over $51 million in tax breaks in 2011 (Kampis, 2013).
The Missouri-Kansas tug-of-war competition has frustrated local businesses leaders that seventeen executives including, Sprint CEO Dan Hesse and Donald Hall Jr. of Hallmark sent a letter to Missouri Governor Jay Nixon and Kansas Governor Sam Brownback as a request for the two states to declare a memorandum to end the “economic border war” (Hancock, 2012). Hall has continued to speak out against subsidies and thinks they are destructive toward his hometown of Kansas City, especially when money is diverted from public education to support businesses (Story, 2012). According to the business leaders “Because of our unique bi-state community, too often these incentives are being used to shuffle existing business back and forth across the state line with no net economic benefit or new jobs to the community as a whole.” Despite the opposition from business leaders opposing rigorous incentive, practices have not persuaded politicians from devoting scarce dollars to offer companies. Kansas Governor, Sam Brownback and newly elected Mayor, Sly James refuse to consider the business leaders’ memorandum request because like their constituents jobs are essential to the economy.
It is rare for businesses to move across the border in the creation new jobs. When Kansas uses incentives to lure businesses from Missouri (vice versa), which could ultimately be a few miles away, does not have a dramatic impact on the workforce; in many of theses cases, people just decide to commute. According to Richard Longworth (2012) “The overall impact on job totals, incomes and economic gain in the region itself is absolutely nil.” Businesses are the only entity that benefit from the relocation. Governors like Brownback mentions that the intended purpose is to utilize tax lures to attract businesses from other states, not across the border. The problem is that Kansas campaign is failing. The University of Illinois conducted study to examine the reason governments vigorously compete for corporate relocation; the study observed that annually there are around 300 corporate relocations in the United States, while 15,000 jurisdictions, i.e., state, county, and local governments are all competing for them (Longworth, 2011).
Sacramento Team to Seattle
Local jurisdictions for decades have made attempts to persuade national sports associations, i.e., NBA, NFL, and MLB to either move or establish a sports team(s) in their locality. Most teams decide to relocate to new jurisdictions if negotiations about either renovating or building a new stadium fail with the state and local government. A similar situation occurred in Washington with the formerly known Seattle SuperSonics. The team was sold to an Oklahoma City-based investment group, subsequent to the sale Seattle failed to reach a deal to build a new arena, so the team moved. The state refused to allocate resources to fund the build of a $500 million arena project, so the new ownership decided to relocate the team to Oklahoma City to eventually change their name to the Thunder. At the end of the 2013 NBA season, the city of Sacramento may potentially be in a similar predicament as Seattle faced in 2008.
The Maloof family, who are the current owners of the NBA Sacramento Kings franchise, has decided to sell the team. The family has received offers from Virginia Beach and Seattle, both cities that are considering building an arena, but after Virginia Beach reconsidered efforts to build an arena, Seattle moved to the forefront. Mayor Kevin Johnson and the city of Sacramento have been unsuccessful in negotiating a tentative $391 million deal for a new infrastructure. Tension rose between the two institutions that the Kings broke off from all negotiations to decide to sell the franchise. Mayor Johnson has continued to fight to keep the NBA team in his city (King5, 2013). A community outreach organization, Eye on Sacramento, conducted a proposal where they determined that Sacramento would contribute an exorbitant amount of funds and resources to the arena project.
Eye on Sacramento (EOS) concluded that the latest proposal regarding the arena, the city taxpayers would contribute $334 million to the project representing 75 percent of the $440 million project, far more ($106 million) from the original proposal of $258 million. Of the taxpayers funds allocated to build the arena would not include subsidies from the county government or traffic infrastructure cost. The city has approximately provided investors a gift of 3700 parking space at Downtown Plaza with an estimated value of $57.8 million. According to EOS “The city council’s approval earlier this month of $30 million in city subsidies for the development of a mixed use, but predominantly low-income housing project (60% of the 112 housing units are designated low-income) on the 700 block of K Street, immediately adjacent to Downtown Plaza, does nothing to alleviate this problem and could add to the challenges investors will face in developing adjoining properties, Including the 800 K Street property that the city proposed to transfer to the investors as part of the arena deal” (Powell, 2013).
An investment group led by Chris Henson a Seattle native and a San Francisco-based investor proposed a deal with the Maloof family to purchase 65% of the team for $525 million, allowing the Kings to relocate to Seattle and restore the SuperSonics name (Gonzalez, 2012). In April of 2013, Chris Henson and his investment group reached an agreement with the Maloof family to raise the bid by $25 million. In recent weeks, Henson reached a new agreement to raise the bid as a commitment to bring the franchise to Seattle. Henson and the investment reached an agreement with the city of Seattle to build a $490 million new arena (Komo, 2013). According to the Seattle government document, the investment firm will contribute $290 million for the construction of the ArenaCo and also in transportation infrastructure, leaving the government with an obligation to contribute $200 million toward the project. The site where the ArenaCo will be constructed on will be leased for thirty plus years. The document also mentions that the tenants of the arena will to ultimately reimburse the government for the partial finance of the project. Once the site ground lease expires, after the thirty plus years the local government would obtain full ownership of the site. Prior to the complete construction of the ArenaCo, the NBA team will utilize the Key Arena. (Gov’t)
States and local government are immensely competitive in coaxing businesses and other institutions to relocate to their jurisdiction that would inevitably provide jobs. Various governments institute different political strategies that would make it financially feasible for businesses or even sports teams to move to states where the corporate income taxes is significantly reduced as well as the property taxes. Local governments have a penchant for providing businesses tax abatements and other incentives illustrating to other businesses that they are also welcomed.
State-to-state relations is pivotal in understanding the interstate competition for businesses, but much of the interstate competition is at the result of border states feuding over private industry relocating to their jurisdiction. There is a multitude of boundary disputes other than Kansas and Missouri. States have been competing for businesses for decades, but what has become a new phenomenon is the rise of the interstate competition of sports teams. The acquisition of sports teams to a local municipality is beneficial for any government and when governments fail to meet requirements from sports teams, those teams relocate to municipalities that are willing to provide competitive incentives that the state of origin could not match.
In 1956, an economist and geographer, Charles Tiebout coined the term “Voting With Your Feet,” which is known as the Tiebout Model. The argument Tiebout Model insinuates is that local municipalities are more successful than the federal government. Local governments are in a better position to satisfy the wants of citizens. The premise of “Voting With Your Feet” illustrate that citizens have a direct interest in the actions of the local government, so these government officials are obliged to tailor to certain services and police to meet the needs of the citizens. This becomes crucial for municipalities because citizens provide the most in revenue for governments to function and when the government does not uphold the needs and wants of the people “vote with their feet” model is then utilized by moving to communities that will meet the citizens needs (Shock, module 7).
It is not unusual to find private sector businesses also engaged with “vote with your feet” model because it is beneficial for the profit margin of a business. Businesses have no problem utilizing the Tiebout model. State and local governments tailor more to the needs and wants of corporations with the hope that they will relocate and stay in their jurisdiction. In the Kansas and Missouri border war each state and even some localities provide businesses tax incentives and tax abatements to make the businesses comfortable.
The criticism that scholars observe from the Tiebout model is that it ignores social equity concerns. When governments provide astronomical tax incentives it can inhibit jurisdictions’ ability to provide citizens with the minimally acceptable services, especially in lower income communities. It is seldom for the average citizen in a jurisdiction to mobilize to a different community because of the dissatisfaction they have for their government, it is just not economically feasible. The false assumption for mobility does not apply corporations and sports teams that have the ability to “vote with their feet” to a jurisdiction that have implemented policies providing the businesses with extremely low-income taxes and other tax breaks. Disgruntled sport team owners on other would relocate to localities that are willing build a new stadium or arena and incorporate lucrative tax incentives. The city of Seattle is a novelty, despite the NBA Sacramento basketball team’s willingness move to Seattle the owners will not receive any tax incentives for the building of a new arena and public funding to assist with the build of the project would have to be repaid.
It is also important that when discussing government competition for businesses, there needs to be mention of the role of Dillion’s rule and home rule, despite being a minuscule argument. According to Jesse J. Richardson Jr. (2011) article, “local governments exist only as creatures, delegates and agents of the state and states exercise complete hegemony over local government. Dillon’s Rule merely reflects the constitutional principles embodied in the Tenth Amendment to the United States Constitution.” The fact that states exercise complete control over localities and allow them the ability of taxation it enables leverage to negotiate with potential businesses to relocate to their jurisdiction by offering tax abatements and other tax incentives. If local governments are not granted with tremendous authority it can impede on these jurisdictions to attract businesses.
It is undeniable that states are very competitive and effective in bringing the private industry to a region that may be in desperate need of jobs or attract people who “vote with their feet.” States and local governments take extreme measure in lowering taxes and providing other gorgeous incentives for businesses that are interested in relocating to a new jurisdiction. Citizens are also sometimes isolated from the picture of two adversaries, feuding over corporate businesses. On one side of the argument, the incentives offered to businesses are healthy for the competitive nature of the government and the free market. The alternative side of the argument is that the lucrative amounts of incentives governments offer will eventually impede the funding allocated for social services. The Kansas-Missouri border war epitomizes the negative of government competition because when corporations move across the border, Missouri suffers (vice versa). The reality is that corporations have no loyalty to governments, just themselves.
Remember these games are a distraction and never take your eye off of the true issue the NWO and tyrannical governments. Enjoy the games leading to SuperBowl 50!