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State and Municipal Crony Capitalism

Posted by Steve Markowitz on December 3, 2012

Often when this Blog writes about the ills of crony capitalism it refers to the actions of the federal government.  Examples are many with this year’s high-profile ones including the $500 million plus loss that the taxpayers took on the wasted Solyndra investment.  A bit further back there was the ill-advised bailouts of General Motors and the Wall Street banks.  In each of these situations, taxpayers were forced to pony up money to save others who made poor business, personal or job decisions.

Crony capitalism is not limited to the federal level.  States and municipalities are guilty of corrupting capitalism and using it for political power.  The New York Times has published an in-depth look on how state and local governments hand out the People’s money to the benefit of some over others in an article titled: As Companies Seek Tax Deals, Governments Pay High Price.

The Times made studied over 150,000 awards made by states and municipalities to various companies.  It concluded that mayors and governors use governmental subsidies and handouts to attract or retain businesses in their localities in an effort to retain the related jobs.  However, these efforts often do not succeed with costs far outweighing the benefits.  Not only do the companies often close or shrink the facilities after receiving the handouts, but in the negotiations themselves the government officials are outgunned by the professionals hired by the companies to extract benefits.

The Times determined that the state and regional governmental handouts that include tax credits, tax exemptions, subsidize services and tax abatements and up to more than $80 billion annually with 20% of this total being subsidized by the federal government.  It offered examples of these misguided efforts:

General Motors – Long before GM received its $50 billion plus 2009 bailout from the federal government, it was extracting handouts from states and local governments in exchange for opening or retaining plants in certain locales.  Approximately 50 properties involved with the 2009 shutdowns or shrinkage were located in towns and/or states that gave GM incentives and handouts in the billions. The subsidies continue today with GM receiving nearly $2 billion in local subsidies during the past five years.

Ford and Chrysler – Each company received approximately well over $1 billion in subsidies during the past five years

Hollywood – Filmmakers continue to be large recipients of governmental gifts.  It is no wonder that these Leftists are for big government.  An example offered by the Times is Oliver Stone’s 2010 “Wall Street” sequel.  While this film by necessity had to be made in New York City, the filmmaker received $10 million in tax credits from the City.  While Stone has been a vocal critic of subsidies to banking and agriculture, he has no problem justifying handouts to his industry and when questioned said: “It’s good.  Or like basically the way business is done. I don’t understand what the moral qualm is.”  How disingenuous.  Like so many others, Stone is only against handouts that go to others.

New York Times – Yes, even the publisher of the story critical of government givebacks to companies received $24 million since 2000 from the state of New York and New York City.

Shell Oil – Pennsylvania has given this multinational conglomerate tax credits worth up to $1.6 billion over the 25 year period.

Caterpillar – This large equipment manufacturer received nearly $200 million in local aid since 2007.

Twitter – After threatening to leave the city, San Francisco exempted Twitter up to $22 million of payroll taxes.  However, this accompany is flush with cash and has since received a $300 million investment from a Saudi Arabian Prince and $800 million from another source.

BMW – This producer of luxury automobiles perceived a $130 million package from the state of South Carolina in 1992 to locate a plant there.

Mercedes-Benz – Not to be outdone by BMW, another German firm, Mercedes, in 1993 received incentives worth over $300 million from the state of Alabama to locate its plant there.

38 Studios – This videogame startup owned by retired Boston Red Sox pitcher Curt Schilling received $75 million in loan guarantees from the state of Rhode Island.  The company never released a game and dismissed nearly all of its 400 workers earlier this year.  The taxpayers of Rhode Island are stuck with the bill.

*******

States and municipalities across the Country are guilty of wasting taxpayer funds on crony capitalism.  The Times reported that Texas offers the most incentives, almost $20 billion per year.  Alaska, West Virginia and Nebraska offer the most corporate handouts per state residents.  Oklahoma and West Virginia giveaways account for about one third of their states’ budgets.  This corruption is massive.

The crony capitalism exhibited in the governments’ corporate handouts is problematic on many levels.  First, it assumes that the states’ constitutions allow these governments to make the gifts.  In addition, there are no guarantees the companies will remain after receiving the handouts.  Finally, giving these awards to particular companies is nothing more than governments’ picking winners and losers.  For example the incentives to bring in new companies come from the tax base that includes long-term payers, the already existing employers in the states.  This perverse system results in money from the long-term tax payers being used to increase the competition for local labor and materials that ultimately increases their costs and lowers their profits.  Not only is this a unfair disadvantage to the already existing corporations, but it ultimately leads to lower tax revenues from these entities as they become less profitable.

A company’s decision to locate its facilities in a state or city should be made only on the basis of sound economics that includes the quality of its labor force, the relative cost of that labor, as well as other factors such as permanent taxes and infrastructure availability.  When the government subverts this most basic of business and economic logic, it guarantees negative consequences in the long term.  It is also a corruptive force on the political class.

 

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