State handing millions to businesses who threaten to move

Dayton Daily News - October 8, 2012
   

Tom Beyerlein

As he travels around Ohio, Gov. John Kasich regularly points out that the state’s unemployment rate is a full percentage point lower than the national average, and more than 123,000 jobs have been created under his watch.

But a Dayton Daily News investigation shows taxpayers are paying a high price for some of those jobs. Kasich’s administration approved $487.7 million in taxpayer-subsidized tax credits, grants and low-cost loans for businesses during 2011, a 44.3 percent increase over the $337.9 million approved in 2010.

More than $200 million of the 2011 incentives came in the form of tax credits to companies that simply agreed to keep existing jobs in Ohio after threatening to leave the state, the Daily News found.

Among 16 states with tax credits for job creation and retention, Ohio has the largest number of recipient companies, with 567, according to an April report by Good Jobs First, a Washington, D.C.-based incentives watchdog group. These incentives give companies tax credits equal to a percentage of their employees’ withheld state income taxes.

The use of such incentives, commonplace across the country, is increasingly coming under fire as companies get breaks for moving within states and, in some cases, within metropolitan areas. Companies that get incentives frequently miss their employment pledges.

“Economic times are so desperate, a lot of times communities will do whatever it takes” to attract or retain employers, said Cuyahoga County Executive Ed FitzGerald, a Democrat who is considered a possible challenger to Kasich in 2014. “It almost ends up being an extortion situation.”

Kasich defended his administration’s choices. “Incentives matter,” he told the Daily News. “They’re critical, sometimes more critical than others. It’s a situation we measure on each and every company. We don’t just throw money at everything.”

Kasich’s critics say that’s exactly what he is doing. Phillip Mattera, research director for Good Jobs First, said NCR Corp.’s 2009 decision to leave Dayton for Atlanta has made the administration quicker to offer incentives to companies that threaten to move.“What got everybody shook up was NCR,” he said.

Kasich has handed out richer subsidies to fewer companies than did his predecessor, Ted Strickland, state data maintained by Good Jobs First show. And the biennial state budget Kasich signed into law in June 2011 contains provisions allowing more businesses to qualify for tax credits for retaining existing jobs.

In some high-profile 2011 cases, the state subsidized new corporate headquarters for corporations that threatened to leave the state but ultimately used the money to move only a few miles, to wealthier communities.

For example:

• After securing $93.5 million in state incentives over 15 years, American Greetings Corp. last year announced it will leave its longtime hometown of Brooklyn and move a dozen miles away to the more upscale Cleveland suburb of Westlake. The new headquarters with its 1,750 workers will be in a chic lifestyle center part-owned by the family that controls American Greetings. The cost for each of those jobs: $53,429.

• Diebold Inc. received state and local tax credits sufficient to pay for a new $100 million headquarters in the Summit County town of Green. Diebold officials promised to keep 1,500 employees in Ohio for 18 years. But in a move allowable under incentive agreements, the company announced in April it will move 200 Ohio jobs to India.

• Columbus officials were surprised when Bob Evans Farms snubbed their incentives package and announced plans to leave the city’s south side for affluent New Albany. A spokesman for Mayor Michael Coleman said company officials told Coleman they planned to stay in Ohio, but used a relocation threat to squeeze $17.4 million in incentives from the state.

• The Wendy’s hamburger chain returned to its traditional hometown of Dublin after a brief corporate marriage to Arby’s in Atlanta. The state ponied up $8.9 million and Dublin gave $8 million for 223 jobs, bringing the total public expenditure to $75,785 per job. Meanwhile, Wendy’s racked up millions in severance and relocation payments to executives, including an $11.5 million golden parachute to former Chief Executive Roland Smith, who declined to move to Ohio.

• Kasich granted $78 million in incentives to keep Marathon Petroleum Corp. in Findlay. He also granted Marathon an exemption from the state’s commercial activities tax, against the recommendation of his tax commissioner.

Zach Schiller, research director for the left-leaning Policy Matters Ohio, said large awards went to companies that were unlikely to leave the state.

“We gave Marathon in Findlay an $80 million tax package when they had no intention of going anywhere,” Schiller said. “It’s $80 million that the people of Ohio will not (be able) to spend on schools or roads or, should they see fit, tax cuts.”

The conservative Buckeye Institute is no fan of incentives, either. “A clear, more transparent, lower rate is the recipe for job creation and a more robust economy,” said President Robert Alt. “If you’re looking for long-term growth, you want the stability created by clear rules rather than special carve-outs.”

Dayton City Manager Tim Riordan, frustrated by a spate of publicly financed corporate relocations in the Miami Valley, called on businesses to stop pitting communities against each other.

“We need something to change here,” he said. “The individual company is benefiting, but tax dollars are being spent moving people around on the checkerboard. Let’s spend our money on things that will really grow the economy.”

Transparency poor

It’s hard to say how much tax money government entities expend on subsidies to business, experts say, because transparency is so poor in many states. But in a landmark study, Kenneth Thomas, associate professor of political science at the University of Missouri-St. Louis, calculated total government subsidies to business at $70 billion in 2005. That includes $46.8 billion through programs like Ohio’s Job Creation and Retention Tax Credits, up from $26.4 billion in 1996.

“Companies have come to expect them, so everybody’s pushing them,” Thomas said. “I think for the most part these subsidies are a waste of money — in a big way.”

Critics argue that the losers greatly outnumber the winners when a company relocates following a bidding war.

When specific businesses get incentives, their competitors are harmed, causing less efficiency in the marketplace, Thomas argued. Incentives contribute to income inequality, as average citizens effectively pay taxes to wealthy business owners. Projects funded by incentives often damage the environment. And incentives further erode public services, said Thomas, adding: “$70 billion would be more than enough to rehire every single public employee that’s been laid off since 2007.”

Job creation and retention incentives often bring little or no net benefit, according to Thomas, as one state’s gain is another state’s loss. Chiquita’s move from Cincinnati to Charlotte cost jobs in Ohio and tax revenue in North Carolina, he said, and the same scenario would have played out in reverse had Ohio succeeded in luring Sears from Chicago.

“It would have improved Gov. Kasich’s job-creation credentials for a while, but it wouldn’t improve the country at all,” Thomas said.

While tax incentives are costly to states and communities, they’re not at the top of the list of factors employers use in making site-selection decisions. Incentives rank fifth, behind existing workforce skills, ease of permitting and regulatory procedures, state and local tax rules, and the pricing and availability of land and buildings, according to Site Selection magazine. Some experts say that means tax dollars are being expended for moves that businesses would have made anyway.

But supporters say tax incentives are just one of the ways states can remain competitive for jobs.

“What’s going to push us over the edge to get the project done?” said Steven Schoeny, a Columbus-based site selection and incentives consultant and head of Ohio’s Strategic Business Investment Division during the Strickland administration. “Often it’s the tax incentives, once you’ve made the cut on those other four or five factors.”

He said the Boston law firm WilmerHale, which located back-office jobs in Kettering in 2010, is an example of the kind of “portable” operations that aren’t necessarily tied to any geographic area and can be legitimately attracted by incentives.

Job Creation Tax Credits carry little risk to the state, Schoeny said, “because you don’t get the incentive until you hire the people and pay them.”

But retention credits, which allow companies to access credits without adding a single job, are “a lot bigger gut check,” he said. “You have to think about what you’re doing with the public trust that’s been placed in you. That’s a very serious thing.”

Retention credits were designed to help Ohio retain large manufacturing plants, with high eligibility thresholds based on employment numbers and corporate investment in the state. Those thresholds have been lowered over the years under both Democratic and Republican administrations, allowing more companies to access the credits for corporate-headquarters relocations. Last year, Kasich’s 2012-2013 budget lowered the minimum investment by companies to as little as $5 million and liberalized employment and payroll requirements, a move some say opens the floodgates for businesses seeking credits.

“There’s no end to this,” said Dale Butland, spokesman for the left-leaning Innovation Ohio. “If I’m a CEO, I now have a fiduciary duty to my shareholders to go to Kasich and hold him up (by threatening to leave the state).”

Failed obligations

Companies receiving incentives frequently fail to meet their job-creation obligations. A Dec. 29 report by Ohio Attorney General Mike DeWine’s office concluded that the compliance rate in 2011 was 52.4 percent, barely better than half. The state can and does claw back some incentives, but a January report by Good Jobs First gave Ohio a C-minus in its enforcement activities.

JobsOhio, Kasich’s development arm, acknowledged in a report earlier this year that tax incentives were used in the vast majority of cases it handled involving job creation and retention.

JobsOhio Managing Director Kristi Tanner said in practice the Kasich administration is “much more conservative” than its predecessors in granting state incentives, using them as “absolutely the last resort.”

“Incentives wear off,” she said. “Companies want to be where there’s the best business environment, where there’s not going to be a lot of interference from government.”

Tanner said JobsOhio demands “return on investment,” with a goal of recouping incentive expenditures in the first year through additional payroll and commercial activity tax revenue. “We want to make sure it’s a net win for the state of Ohio,” she said. For example: Kasich didn’t try to match North Carolina’s bid to lure Chiquita from Cincinnati last year because it would have taken 10 years to put Ohio in the black.

Kasich spokeswoman Connie Wehrkamp said the governor opposes “corporate welfare” and is “very clear that we’re not going to give away the store” to businesses. But “we aren’t going to roll the dice with the futures of hundreds of Ohio employees,” she said. “We’re going to be aggressive when we need to be aggressive.”

Rob Nichols, Kasich’s press secretary, cited NCR’s departure as evidence that government officials need to take strong action to retain employers. “The NCR example is illustrative and tragic, what happens when you fall asleep at the switch,” he said.

Others, including Schoeny, said NCR officials had already made up their minds to leave Dayton and no amount of incentives would have kept them here.

Richard Balbier, mayor of the blue collar Cleveland suburb of Brooklyn, said his town didn’t stand a chance of keeping American Greetings, even though it offered about $10 million in incentives after the company threatened to move to Chicago. But in May 2011, Brooklyn didn’t lose American Greetings to another state; the company announced it had selected nearby Westlake, in a lifestyle center with office, retail and residential components similar to The Greene. The Weiss family, which controls American Greetings, owns a minority share of Crocker Park, and can expect to benefit from the addition of 1,750 jobs there.

Westlake offered $11 million in incentives. The state approved $93.5 million in tax credits, which would have been granted regardless of which Ohio town landed the headquarters. Some of the state incentives were made possible by legislation Kasich signed into law at American Greetings’ headquarters in March 2011.

“American Greetings got its own credit,” said West Chester-based attorney Mark Engel, a partner in the law firm Bricker and Eckler and an expert on the state’s tax incentives. The legislation makes the tax credit “refundable,” he noted, meaning that if the company’s credit exceeds the taxes it owes, the state will give the company a cash payment for the difference.

The American Greetings move will cost Brooklyn its largest employer and 20 percent of its tax base.

“We tried everything we could,” Balbier said. “They were in our city for 50 years but it didn’t make any difference.”

American Greetings officials did not respond to phone calls seeking comment.

‘We did everything’

Columbus officials thought they had offered all the incentives Bob Evans Farms needed to overhaul its headquarters in downtown’s south side. So they were surprised when the company announced it was moving to a new headquarters to be built in affluent New Albany with the help of $17.4 million in state incentives.

“We worked very diligently with Bob Evans to get them to stay here,” said Dan Williamson, spokesman for Columbus Mayor Michael Coleman. “We did everything they asked for and they left anyway.”

According to Williamson, company officials told Coleman they wouldn’t abandon the state, and then used a relocation threat to get state tax credits. “They made it very clear to us they had no intention to leave Ohio, but they weren’t as clear with Governor Kasich when they went to get state incentives,” he said.

Company spokeswoman Margaret Standing denied Bob Evans misled state officials, and said it considered several options, including building on company-owned land in Texas. “I can’t comment on water under the bridge,” she said.

A month after the Ohio Tax Credit Authority granted Bob Evans millions of dollars worth of incentives, Kasich named Bob Evans CEO Steven Davis to the JobsOhio board of directors. Gary Heminger, CEO of incentives recipient Marathon Petroleum was also named to the board at the same time.

JobsOhio recommends incentive deals to the Ohio Development Services Agency, which decides whether to seek final approval from the tax credit authority and the state controlling board.

Former Gov. Strickland is critical of the American Greetings and Bob Evans deals, saying there was little chance of the companies leaving the state. “I don’t think there was a snowball’s chance in hell of Bob Evans moving to Texas,” he said.

Anti-poaching measures

Some local officials are seeking to stop communities from job poaching — or companies playing one state or community off another — through regional pacts requiring that member communities alert host cities if they are approached by a company seeking a relocation deal. Montgomery County’s Economic Development/Government Equity program has been hailed in studies as an example of such cooperation, and both Franklin and Cuyahoga counties are building their own agreements. Cuyahoga County has signed up 49 of its 59 communities for the anti-poaching pact, FitzGerald said. Franklin County’s pact is progressing more slowly, with seven of 16 cities signed up.

The agreements ensure that host communities at least have a chance to compete, but they don’t stop companies from getting incentives to relocate.

Some say there needs to be federal action to stop the poaching. The U.S. Supreme Court took up the issue when plaintiffs argued that a deal for a DaimlerChrysler Jeep plant in Toledo was unconstitutional, but the court dismissed the case without ruling on its merits, saying taxpayers don’t have legal standing to challenge state tax decisions.

Experts aren’t optimistic that Congress will step in to stop the use of incentives for interstate job poaching.

Edward W. “Ned” Hill, dean of the College of Urban Affairs and vice president for economic development at Cleveland State University, said such action could be an unconstitutional interference with states’ rights to manage their own fiscal affairs.

But Schiller of Policy Matters Ohio said, “You need federal legislation so that states are competing based on their attributes rather than giving money away.”

The least states can do, he said, is to require that companies receiving incentives pay fair wages and locate near public transportation.

“Our view is these incentives, if we have them at all, (should) provide good jobs,” Schiller said. “They shouldn’t be looked at as entitlements where companies come and say, ‘What have you got?’”


Ohio tax credit programs

Job Creation Tax Credit gives expanding businesses a credit equal to a percentage of the withheld Ohio income taxes of new employees. If a company’s tax liability to the state is less than the credit, the state reimburses the company in cash for the difference. Approved companies can get up to 75 percent for 15 years with the opportunity to receive a higher percentage in exceptional cases. Companies must get an often-smaller local incentive from the host community. They must create at least 25 new jobs at 150 percent of the federal minimum wage, and maintain operations for twice the length of the credit.

Job Retention Tax Credit provides a similar credit, of up to 75 percent for 15 years. The credit is available to companies with at least 500 full-time equivalent employees and those with annual payrolls of $20 million who retain existing jobs and make capital investments of $5 million, $20 million or $50 million, depending on the type of business. They also are available to companies with an annual payroll of at least $35 million that make a capital investment of at least $5 million. As with the Job Creation Tax Credit, recipients must make annual reports to the state, which may recommend the Ohio Tax Credit Authority take action against companies that fail to meet their obligations.

Source: Ohio Revised Code, Ohio Attorney General’s office, Ohio Development Services Agency

Here’s a breakdown of the maximum amount of tax credits, grants and low-cost loans provided to businesses by the state of Ohio from 2008-2011, and the number of jobs the companies promised to create or retain. These numbers do not include local incentives.

2011:

Subsidies: $487,689,000

Jobs: 39,481

2010

Subsidies: $337,889,365

Jobs: 41,697

2009

Subsidies: $419,700,759

Jobs: 36,118

2008

Subsidies to business: $345,208,709

Jobs: 43,206

Source: Ohio Department of Development data compiled by Good Jobs First

Here are some of the top Ohio projects of 2012 involving Job Creation and Retention Tax Credits:

• Halliburton Energy Services, Zanesville: 300 new jobs, building investment of $192.2 million.

• Abbott Laboratories, Tipp City: 241 new jobs, building investment of $115.3 million.

• Stanley Electric U.S. Co., London: 671 existing jobs retained, building investment of $56.7 million.

• Discover Financial Services, New Albany: 162 new jobs, building investment of $76.2 million.

• Ascena Retail Group, Licking County: 225 new jobs, building investment of $72 million.

Source: Ohio Development Services Agency

State handing millions to businesses who threaten to move

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