Tag Archives: Corporate welfare

American Politics: Who’s The Fiscal Conservative?

Sometimes, in American politics, it can be very disconcerting to notice the jarring differences between the “spin” of public relations and the reality of public policy. One such example emerged just last week, in an economic tussle that recently broke out on the border between New York City and New Jersey.

JP Morgan Chase, one of the “too big to fail” banks that received a $25 billion TARP program bailout from the federal government during the 2008/09 global crisis, earned over $21 billion of net income last year on total assets of over $2.5 trillion. Such immense wealth didn’t deter bank officials, though, from threatening to move 2,000 jobs from New York City across the river to northern New Jersey unless Bill de Blasio, the mayor of the Big Apple, granted them hundreds of millions of dollars in tax breaks.

At the same time, the bank offered New Jersey Governor Chris Christie the identical deal: 2,000 jobs in exchange for a massive amount of tax breaks. And then the institution played one politician off against the other, and waited to see whether either one would accept the offer.

The result? One politician refused to offer the tax breaks to JP Morgan Chase, retorting that the bank’s request was “excessive” and a “non-starter.” But the other politician offered close to $200 million in tax breaks, and ultimately won the jobs.

So which politician adhered to a fiscally conservative position and turned down the bank? Was it Mayor de Blasio, a liberal progressive Democrat? Or was it Governor Chris Christie, who is currently running for President as a conservative Republican?

If you listen to political spin, you’d undoubtedly guess that the Democrat offered the tax breaks and the Republican refused to do so. But if you made that guess, you’d be wrong.

In truth, the Christie administration has offered government fiscal support to many private corporations during his time in office. And some of his decisions, such as those to support a failing Atlantic City casino and a giant insolvent shopping mall development, have not turned out well.

In all fairness, though, other states in the New York metropolitan region have made similar mistakes. In Connecticut, for instance, massive fiscal benefits to global firms like the Swiss banking giant UBS and the pharmaceutical firm Pfizer have similarly failed to pan out.

In other words, this is not a partisan issue. It’s a concern that cuts across both political parties. And what lesson can we learn from this common experience?

Namely, it is not always wise for politicians to offer massive government tax breaks in exchange for short term employment promises by private organizations. And, perhaps more importantly, voters should never assume that government officials of either political party will necessarily act in a fiscally conservative manner when such promises are dangled before them.

Connecticut Tax Revolt!

Back in 1991, when Connecticut first introduced an income tax, outraged citizens staged a revolt on the steps of the Capitol Building. Some protestors even spat at Governor Lowell Weicker when he came out to address the mob.

Since that time, however, the citizens of the Nutmeg State appear to have reconciled themselves to the tax. But last week, when the Legislature passed a new state budget that included tax increases, a different group of stakeholders decided to revolt against the government.

Which group did so? Believe it or not, it was a number of the state’s largest and most profitable corporations. Aetna, General Electric, and Travelers, all firms with corporate headquarters in the state, publicly criticized the measure, and the first two firms threatened to move out of Connecticut if the tax increases were voted into law. After a brief delay, the legislators and Governor passed the budget any way.

The most surprising public announcement, though, may have been the one that was made by State House Leader Brendan Sharkey. According to the legislator, GE is “… not paying any taxes (to Connecticut). How much lower can their taxes be … ?”

Huh? Is it possible that General Electric, a profitable global firm with headquarters in Connecticut, is not paying any taxes to the state at all? In response to Sharkey’s comment, a GE spokesperson simply stated that “We don’t disclose taxes paid on a state-by-state basis.”

Nevertheless, the firm has become known for paying extremely low corporate tax rates by taking full advantage of credits, deductions, and other tax reduction opportunities. And Governor Dan Malloy offered further reassurances about the firms’ tax burdens, saying:

“I’ve had conversations with folks at GE over the last few days; I’m sure those will continue. I’ve had discussions with Travelers, I’ve had discussions with the Aetna over the weekend, and will continue to work with those companies about some of their concerns.”

So what does the Governor mean when he says that he will “continue to work” with these firms? Well, the Governor has a track record of granting generous financial benefits to large corporations. Disney’s ESPN sports network, for instance, has received tens of millions of dollars from the state during Malloy’s administration. Cigna and NBC Universal have received similar benefits as well.

In other words, Connecticut’s budget strategy involves maintaining high corporate income tax rates to pay for state expenses, and then negotiating special financial packages to selected employers to ameliorate their tax burdens. Such a strategy may appear to be reasonable at first glance; after all, it delivers tax restitution to the very corporations that currently employ thousands of state residents.

The problem, though, is that this strategy penalizes small and medium sized businesses that do not have the economic heft and political clout to win such government concessions. And future generations of successful companies spring from this entrepreneurial sector of the economy.

On the one hand, by raising taxes on all businesses, and then by striking deals with selected firms, the government of Connecticut might succeed in balancing its budget in the short term. But on the other hand, it might also inadvertently kill off the smaller and more entrepreneurial businesses that represent its long term future.

Agreeing On Corporate Welfare

Wouldn’t it be reasonable to assume that New Jersey’s Republican Governor Chris Christie and Connecticut’s Democratic Governor Dan Malloy would find nothing in common to agree on? After all, they occupy diametrically opposite positions on the nation’s “conservative vs. liberal” political spectrum.

Recently, indeed, the men have publicly (and vociferously) argued with each other. Six months ago, Governor Malloy wrote a guest editorial for New Jersey’s largest newspaper about Governor Christie’s veto of a proposed gun control law. He declared that: “Gov. Christie … showed a callous lack of respect to the families (who supported the law). Those families deserve better. The people of New Jersey deserve better as well.”

Four months later, while visiting Connecticut to campaign for Governor Malloy’s Republican opponent in the 2014 gubernatorial election campaign, Governor Christie exclaimed that: “The four years of Dan Malloy have been brutal for the people of this state.”

Wow! Callous? Brutal? That is certainly rough language, isn’t it? And yet Governors Christie and Malloy apparently do agree on one government policy. Namely, they both support the distribution of corporate welfare benefits to firms that threaten to leave (or that promise to enter) their states.

Two weeks ago, for instance, New Jersey agreed to give the automobile maker Subaru $118 million to move its corporate headquarters four miles up the road to Camden. Why? It did so because Subaru considered a potential move to Pennsylvania.

Subaru did commit to hire 100 new employees over a ten year period. But was it worth $118 million in corporate welfare benefits for New Jersey to generate 100 new jobs? Interestingly, that deal was actually less costly for taxpayers than an earlier agreement with the NBA’s Philadelphia 76ers. The basketball team received $82 million to move its front office and practice facilities to Camden, and to hire 50 new employees.

Those corporate welfare costs work out to $1.18 million for the new Subaru jobs and $1.64 million for the new 76ers jobs. Why did New Jersey offer the 76ers an additional $460,000 per new job? Perhaps it did so because Subaru’s headquarters is currently located in New Jersey, whereas the 76ers’ headquarters is currently based in Pennsylvania. Apparently, crossing a state border yields additional welfare benefits for relocating corporations, even when the geographic distances of their moves are miniscule!

Meanwhile, United Technologies obtained a $400 million benefit package earlier this year from the state of Connecticut without promising to hire any new employees at all. The firm simply agreed to make certain investments that would “have an impact” on 75,000 existing jobs. And two years ago, a global investment firm named Bridgewater Associates was promised $115 million to move approximately fifteen miles (and six local commuter train stops) down the Connecticut coast line from Westport to Stamford.

Bridgewater declined the offer earlier this year, but only after the state spent $16 million to demolish a boatyard on Stamford Harbor to clear space for the firm. News organizations and community leaders now refer to the empty construction site as “a pile of dirt” and “a money pit.”

Eventually, it may be possible to justify these government expenditures as investments in economic development activities. Who knows? Perhaps Subaru, United Technologies, and Bridgewater would have left New Jersey or Connecticut without these incentive payments. And perhaps the 76ers would have never moved to New Jersey without them.

Nevertheless, it is indeed noteworthy that such strikingly different politicians as Governors Christie and Malloy appear to agree that corporate welfare is a beneficial development strategy. With New Jersey and Connecticut continuing to place in the lowest quintile as the worst states in America for business, though, it may be time for both Governors to reconsider this strategy.