In tax giveaways to corporations like Amazon, Illinois loses

Governor Bruce Rauner is expected to sign a bill reviving the state’s controversial EDGE corporate tax credit program, which passed with overwhelming margins in both houses of the legislature.

The new measure includes a few tweaks that will marginally improve the program, intended to spark job creation through state subsidies to businesses. But the far-reaching recommendations by watchdog groups remain unaddressed.  Beyond that is the bigger question: Does the program actually work, or is it just a big giveaway? Research strongly suggests the latter.

The “war between the states” to land businesses and the jobs they would bring has heated up since July, when Wisconsin won a Foxcomm electronics plant with a $3 billion state subsidy. Even if all 13,000 potential jobs are created – which is less than likely – that will mean a state subsidy of $230,000 per job, making the deal “a sure loser for Wisconsin” that “can only be described as a transfer of wealth from Wisconsin taxpayers to Foxcomm shareholders,” said Greg LeRoy of Good Jobs First, which tracks corporate subsidies nationally.

The EDGE program is controversial – or should be, according to LeRoy – simply due to its design.  Because most corporations in Illinois pay no state income tax, the program lets employers who promise to create or retain jobs keep the payroll income tax that is withheld from their employees’ paychecks. Workers who think their taxes are going to fund public services are actually paying a back-door kickback.

In addition, the program has been rife with abuse. EDGE credits were part of more than $900 million in three state subsidy “megadeals” to Sears, Mitsubishi, and Motorola Mobility that actually reduced jobs and closed plants.  Indeed, in 2015 the Chicago Tribune studied the EDGE program and found that two-thirds of recipients failed to meet job goals, and 79 recipients reported eliminating 23,369 jobs.

While the new bill somewhat tightens eligibility standards and increases credits for locating in “underserved” areas, it doesn’t require regular evaluations of EDGE, said Sarah Brune of the Illinois Campaign for Political Reform.  She points to a recent study by the Pew Charitable Trusts that found that Illinois lags behind neighbor states in evaluating its tax incentive programs.

The Illinois Economic Policy Institute recently posted a series of studies of corporate tax subsidies in Illinois. Among their findings: subsidies were heavily skewed toward affluent communities with few minorities.  In the Chicago area, only 80 subsidies have gone to projects in the southern portion of Chicago and Cook County since 1985, while 130 went to sites in DuPage County and 120 to Lake County.

The biggest winners were Hoffman Estates, with a poverty rate of 6 percent but $9,954 worth of state subsidies per capita; and Libertyville, with a poverty rate of 4 percent but $5,836 in per capita subsidies.  Chicago, with a poverty rate of 21 percent, received only $124 in state subsidies per capita.

The additional credit for underserved areas in the new EDGE bill isn’t going to fix that, said Mary Craighead, author of the Policy Institute’s reports.  The state needs a comprehensive economic development plan that identifies industries and areas that most need development, and “one option may be offering certain subsidies only if businesses locate in [underserved] areas,” she said.

Illinois’ economic development subsidy programs generally lack exact job requirements, “often relying on a recipient stipulating their own anticipated numbers,” and generally do not include job quality requirements, Craighead argues in a report on best practices for business subsidies.

More fundamentally, are these payouts a good use of scarce taxpayer funds? Since the year 2000, Illinois has paid an average of $288.5 million annually on business subsidies, saving or creating an estimated 1,700 jobs a year, according to another recent Policy Institute report.  If spent on public infrastructure, the report found, that money would have supported 3,900 jobs a year; on higher education, 3,400 jobs; on public K-12 education, 6,100 jobs. And investments in infrastructure and education benefit the entire state economy, not just one company.

It starts to look like there may be better ways to spend public funds than lining corporate pockets.

That’s especially true when we pay corporations to do what they would do anyway.  Take Amazon.  Their new business model is focused on same-day delivery for Amazon Prime customers, and requires numerous fulfillment centers near major consumer markets.  After years of building only in states without sales taxes – costing states like Illinois billions in lost revenues – Amazon is coming.

Yet Illinois is falling over itself to pay Amazon to do what its business model requires it to do.  Bloomberg reports that over the past two years,  one-third of the state’s EDGE credits went to Amazon – a total of $112 million (far more than previously disclosed) for warehouses in Joliet, Monee, and Aurora. That’s for a company with an annual net income last year of $2.37 billion.

On Wednesday, Amazon announced a national search for a second corporate headquarters location, and Mayor Rahm Emanuel is reported to be planning to aggressively pursue a deal.

LeRoy released this statement: “Taxpayers should watch their wallets as the trophy deal of the decade attracts politicians to a hyper-sophisticated tax-break auction. We fear that many states and localities will offer to grossly overspend to attract Amazon, even though the business basics – especially a metro area’s executive talent pool – will surely control the company’s decision.”

He warned about negotiations conducted in secret and added, “In [Amazon’s] press release today, we already see the markings of an aggressive messaging strategy to justify massive subsidies.”

Meanwhile, retail strips are going vacant and department stores are closing at a record rate. In just the past three months, the state’s plant closings database listed four Sears stores (two of them in Chicago), along with a Sam’s Club, a J.C. Penney, and a Kmart, with 100 or so employees losing their jobs at each location. In addition to the costs to workers and their families, the closings will mean higher retail vacancy rates and lower property tax revenues.

LeRoy suggests that since Amazon needs access to Illinois markets no matter what, and since it’s destroying as many jobs as it’s creating, perhaps public officials should consider requiring the company to pay a “real estate tax-base impact fee” before allowing it to enter a community.  And he suggests that each new Amazon facility be required to enter into a community benefits agreement, stipulating living wages and benefits along with local hiring targets for disadvantaged workers.

We could do that.  Or we could just keep throwing our money away.