Providing tax breaks and other kinds of subsidies to attract or retain businesses has become increasingly common. Businesses promise communities new jobs, tax revenues, and better economies in exchange for billions of taxpayer dollars. If communities don’t agree with underwriting their operations, the businesses threaten to skip town, if they are already there, or to settle in the town next door. Without accountability, companies use taxpayer subsidies to fatten profits instead of investing it into the workers, business, or local community.

The American public has become increasingly outraged at the abuse of taxpayer-backed subsidies. Taxpayer’s hate to hear that their tax money is going to underwrite the profits of a large corporation. For example, Frank Luntz, a pollster who works for the Republican Party leadership, says that “corporate welfare” is ranked third on a list of “things people flip out on.” The only two that come in ahead of “corporate welfare” are, one “foreign aid” and two “waste, fraud and abuse.”

According to a study done by Good Jobs First, Wal-Mart has received at least $1 billion in economic development money. To read the entire study, click here.

Types of Taxpayer-Backed Subsidies

1. Tax Incentives - Tax incentives are the most common development incentive program. These most generally address corporate income taxes, sales and use taxes, and property taxes. In addition to tax abatement and exemptions, which reduce the company’s taxes for a period of time, tax increment financing (TIF) has become a wildly popular subsidy, especially for retail development. TIFs allow cities to create special districts and to make public improvements within those districts to attempt to generate private-sector development. During the TIF development period, the tax base is frozen at the predevelopment level. Property taxes continue to be paid, but taxes derived from the increases in assessed values (the tax increment) resulting from new development are siphoned off to retire bonds issued to originate the development, or to future growth in the district. The tax-freeze lasts for a defined period of time, as set forth in the redevelopment plan. At the end of that period, taxing jurisdictions finally receive the benefit of increased property values.
2. Industrial Revenue Bonds - Industrial revenue bonds (IRBs) allow states to sell bonds whose interest is exempt from federal and state taxes for purposes of economic development. States sell the bonds at lower rates, and then pass the money raised by selling the bonds onto businesses as low interest loans.
3. Grants and Loans - Grants are direct transfer of government funds to private-sector development, which are not required to be paid back. Almost all states offer loan programs to subsidize business development. Direct loan programs are direct transfers of state tax dollars to private businesses. In the case of loan programs, firms repay the assistance at a favorable interest rate. In the case of grant programs, the funds are given with no repayment requirements.

These taxpayer-backed subsidies are fundamentally flawed in several ways: they are anti-competitive, fail to create living-wage jobs, rarely prevent companies from the pirating jobs, fail to prevent retailers from leaving, breed corruption within government, and ultimately burden the taxpayers at the expense of necessary public services.

1. Anti-Competitive - The most basic problem with development subsidies is their anti-competitive nature. Targeted subsidies leave an uneven playing field that puts existing firms, or firms that are not eligible for the subsidies, at a competitive disadvantage. When incentives are offered on a case-by-case basis, or are offered as targeted incentives for new businesses, they result in one firm facing a very different tax situation than another firm. As a result, two firms selling exactly the same product and facing exactly the same costs for labor and raw materials may face very different levels of taxes. The firm without tax incentives to its advantage will eventually charge higher prices to cover its costs and will be at a competitive disadvantage with its fellow company that has received incentive.

   More often than not these existing firms or ineligible firms are locally owned businesses or firms that have a proven history with the town. Rather than being rewarded, these businesses see their tax dollars handed over as a welcome present to national competitors, which do not have a permanent interest in improving the community.

2. The Myth of Good Jobs - Rather than creating a renaissance of new secondary-related jobs, such as research and development, these new retail “big-box” stores almost invariably cause sales to decline at existing retail businesses, which results in job losses.

   Instead of offering jobs that improve wages, these retail chains offer low-skill jobs with little or no mobility. Furthermore these new positions offer poverty wages and expensive health insurance. Both increased unemployment and low-paying jobs results in a greater reliance on local social services, which adds up to an increased taxpayer burden.

3. Pirating Jobs - Instead of creating organic business development, cities and towns frequently use tax incentives and development subsidies to lure Wal-Marts from neighboring cities or states. Corporate threats of relocation can spark a bidding war between cities. "Job piracy" produces no economic benefit for the region, as it simply moves existing jobs.
4. Skipping Town - What relocation does do is leave a legacy of vacated stores-- huge empty shells and acres of asphalt that most of the time remain abandoned for years. With the help of taxpayer development subsidies, leapfrogging from town to town costs these companies less than recycling existing properties. Ultimately, these subsidized eyesores contribute to blight and can inhibit the economic climate of the city.
5. Breeding Bad Government - In today's environment of "reinventing government," tax breaks and other business giveaways represent an abdication of responsibility for "the customer's best interest." Taxpayers deserve more from their elected officials than pandering to vague promises of new jobs and blackmail to move jobs out of state.

   A related point is that tax breaks for businesses create an opportunity for large, corporate interests to use thier dollars to unfairly influence the political process. As voters become aware of the insidious nature of corporate subsidies, tax breaks have become synonymous with corruption and thus a politically volatile issue.

6. A Costly Endeavor - All of this adds up to large, outright and hidden, costs. Someone has to pay for these corporate subsidies. Someone also has to pay for the services that states, counties, cities, townships, and school districts provide. For every dollar that business taxes are reduced to encourage economic development, someone else's taxes go up by a dollar.

   Most disturbing is Wal-Mart's use of TIFs and other tax abatements. For example, if a state exempts a business from corporate income tax, and the business would have paid $1 million in taxes without the exemption, this $1 million in foregone revenue represents a tax expenditure. Tax expenditures are far more insidious than direct financial aid because they frequently do not show up anywhere in the state budget and therefore are not subject to legislative or public scrutiny on an annual basis. Indeed, many people have no idea of the magnitude of revenue losses that result from this type of business incentive.