Molten iron undergoes purification at ThyssenKrupp.Alabama and Louisiana, two of the poorest states in the nation, recently battled to host a new ThyssenKrupp steel mill. Alabama "won," but getting the mill cost the state $734 million in tax breaks -- or $272,000 for each of the 2,700 jobs the steelmaker will create.

Federal tax giveaways to industries ranging from energy to agriculture have received much criticism, but the relocation incentives offered by states for corporations to move their facilities from one to another may be the most counterproductive of all corporate subsidies.

How the Game Is Played

Companies know that states are willing to award generous packages for minor job additions and pit the governments against each other in bidding wars that essentially amount to blackmail.

One political scientist estimates these state and local giveaways to corporations at $70 billion or more.

Consider these recent deals companies bartered for their business:
  • Sears (SHLD) recently broached the idea of relocating its Illinois headquarters and 6,000 jobs with it. A company rep said about one-third of the states had sent in proposals to entice the retailer, including Ohio, which offered $400 million in incentives, leading Illinois to counter with $371 million to stay put. Those expenditures work out to more than $60,000 per job.
  • After considering offers from a number of states, manufacturing giant Caterpillar (CAT) recently won $45 million from Georgia -- and $75 million from others sources in the state -- to relocate a Japanese plant to the Peach State, bringing with it an estimated 1,400 jobs.
  • One of the biggest offenders in the corporate giveaway bonanza may be New Jersey Gov. Chris Christie. In just two short years, Christie has given away more than $1.5 billion to recipients including Panasonic (PC), Goya Foods, Campbell Soup (CPB), and Prudential Financial (PRU). The rewarded companies have promised to add just 2,364 jobs over the next decade, equivalent to a cost of $387,537 per job.
Commenting on the surge in spending, one policy advocate said, "Christie has taken it to a whole different level; it's becoming a feeding trough." The Christie administration has also offered about $300 million for select New York businesses to move across the Hudson, moves that have sparked the ire of New York City Mayor Michael Bloomberg, among others.

New Jersey Gov. Chris Christie answers a question during a town hall meeting.


Good for One and Bad for All

Such overtures highlight the greater problems with state tax giveaways. At best the tax breaks are a zero-sum game and at worst a lose-lose situation as corporations bleed states for subsidies. Like a ball-hogging basketball player who pads his stats to the detriment of the team, this system has led states to put their interests ahead of the country as a whole, diverting more tax dollars toward corporate welfare and damaging the nation in the process.

While these policies may seem like an inevitable race to the bottom, other countries may have found solutions. Canada has had some success in preventing competition between its provinces, and in Europe the sweetheart deals happen much less frequently because relocation subsidies must be approved by the European Commission and there are spending limits.

Local communities nationwide have also been fighting back by signing noncompete agreements, but many have failed because there is no enforcement structure. The National Governors Association has also consistently opposed any steps to deter the job-poaching practice.

Two Better Ways to Promote Job Creation

Instead of a system where states steal jobs from each other, governments would be better off encouraging job creation from the bottom up. Two easy ways to facilitate this would be by removing some of the most unnecessary business expenses: employer payroll taxes and health care costs.

A direct tax on hiring would appear to be the clearest government obstacle toward boosting employment. Employers pay 7.65% of wage expenses up to $110,100 for an individual to support Social Security and Medicare, plus any extra charges for federal and state unemployment taxes. Employer contribution from payroll taxes total about $450 billion a year. A reduction in that tax burden would surely incentivize more hiring. One estimate concluded that a one-year 3.1 percentage point decrease in employer payroll taxes (based on a proposal made by President Obama last fall) would create 1 million jobs. A permanent decrease would likely provide a more favorable employment climate and continue to boost job creation.

Like payroll taxes, health care payments represent another heavy burden on employers. Though the health care system has been at the center of national debate, its costs to employers and entrepreneurship are often overlooked. Many countries subsidize health care directly through the government, making it easier for businesses to compete. Eliminating the practice of giving group discounts would be one way to encourage individual health insurance purchasing and move the responsibility away from employers. Furthermore, attaching individuals to their employer's health care plan discourages entrepreneurship since people are often reluctant to lose their employer-paid health insurance.

State budget deficits have recovered somewhat since revenues bottomed out in 2010, but with 30 states projecting shortfalls totaling $49 billion over the next year, they are still a serious concern. If the earlier estimate of $70 billion being awarded for business relocation is accurate, it seems like the time has come to address these lavish corporate subsidies being awarded at the expense of the taxpayer. Eliminating relocation incentives would help fill state coffers and end a pernicious distortion of the market.

Motley Fool contributor Jeremy Bowman holds no positions in the companies in this article.

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33 Comments

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Linda Jones

It is shameful what is happening to our state resources. It is a give away by our elected leaders. Prudential Insurance is one of the largest and most profitable company in the country and they were just give a $250 million gift from Governor Christie. Stop the Corporate Welfare.

April 12 2012 at 7:56 PM Report abuse rate up rate down Reply
1 reply to Linda Jones's comment
bggdg

It's far from a "gift" to have a thief discontinue his larceny.

Prudentials profits don't belong to the state. They belong to Prudential shareholders. Stealing less of these shareholders assets is not even close to a gift.

April 12 2012 at 8:35 PM Report abuse -1 rate up rate down Reply
crtranspor

This article is BS. StateS do not loose any money on corporate incentives. They just don't collect as much in taxes on the companies when they move to the states. The companies create jobs directly and indirectly by the jobs created to service the workers. The idea that a Political Science major actually knows what he or she is talking about is a Joke...Gov. Christi in NJ has the right idea. Stop gouging the companies coming to their state to create jobs. Stop killing them with local and state property taxes, intangible taxes, sales taxes, employment taxes, etc. etc.. and thats what the incendives do....this article IS A JOKE!!!!

April 12 2012 at 11:27 AM Report abuse -1 rate up rate down Reply
2 replies to crtranspor's comment
bggdg

if Christie's goal was as you suggest, why not just repeal local and state property taxes, intangible taxes, sales taxes, employment taxes, etc. etc,, thereby attracting even more businesses, while simultaneously defending against attempts by other states to poach existing NJ businesses into leaving for greener pastures?

April 12 2012 at 4:30 PM Report abuse -1 rate up rate down Reply
1 reply to bggdg's comment
stvngrmm

Hey that's brilliant. Take less and less in corporate taxes. That way we middle class people get to pay more and more. You're a thinker!

April 18 2012 at 9:49 PM Report abuse +1 rate up rate down
tommy4usa

this is a JOKE ......,....REALLY ........so when a Company moves out of New York state to go to another New York State does not loose Taxes? SEEMS people in New York LOOSE BIG due to INCREASE of local and state property taxes, intangible taxes, sales taxes, employment taxes, etc. etc

July 29 2012 at 10:46 AM Report abuse rate up rate down Reply
sfamilyent

States don't actually lose any money when they allow for future tax concessions to a business that they are not presently collecting any taxes from... Regardless, it should be illegal for one state to undercut another state - if the business is already located in the US. Similarly, it should be illegal for businesses to relocate within the US to chase lower wages and benefits for workers.

April 12 2012 at 7:48 AM Report abuse -2 rate up rate down Reply
2 replies to sfamilyent's comment
bggdg

Should it also be illegal for employees to leave one state so they can pay lower state and local taxes? And also illegal for employees to leave one state to relocate within the US to chase increased wages and benefits?

April 12 2012 at 4:32 PM Report abuse -1 rate up rate down Reply
tommy4usa

States dont loose . the Tax payers of that state loose with HIGHER local and state property taxes, intangible taxes, sales taxes, employment taxes, etc. etc

July 29 2012 at 10:48 AM Report abuse rate up rate down Reply
nhpb

The Democrats seem to miss the connection between lower taxes and an uptick in business. They are so busy devising schemes to extract more money from people and businesses that they view a decrease in taxes as a violation of the public trust. Oh those evil rich. Oh those evil corporations. Who exactly do the democrats think actually funds their social giveaways? " Oh the poor need free cell phones with 250 minutes a month, section 8 housing, welfare, food stamps. America is a rich country so lets give lazy non-producers the same things that more diligent people work hard to earn." The democrats, indeed all politicians, have wasted our patrimony. I despair for my child who is being burdened with unnecessary and unwarranted debt. Stop the give-aways, stop the budgetary madness, begin to put this country on a sound financial path. Give my child her future back. Let's cut the crap, get the looming riots out of the way, and begin to rebuild a sane country in which people keep what they earn and government stops trying to redistribute wealth.

April 12 2012 at 7:47 AM Report abuse +2 rate up rate down Reply
1 reply to nhpb's comment
stvngrmm

Show me the evidence of lower taxes and increased business. Where have you been the last decade? We gave the rich HUGE tax breaks and got ourselves in the worst recession in 75 years. I believe it was the Republicans who ran our country into massive debt. Can you admit it?

April 18 2012 at 9:53 PM Report abuse rate up rate down Reply
1 reply to stvngrmm's comment
tommy4usa

TEXAS has NO ......NO State Income Tax .......Largest Job Gainer in the USA in last few years

July 29 2012 at 10:50 AM Report abuse rate up rate down
SONONITALIANO

PLEASE PLEASE....MITT ROBOT....PICK OLLIE CHRISTIE FOR VICE PRESIDENT! PLEASE! GET HIM OUT OF JERSEY!

April 11 2012 at 9:55 PM Report abuse -2 rate up rate down Reply
mailman778

Corporate welfare the GOP way.....but holler loud and clear about the working class.... the voters can only stop this crap.......but as usuall they wont and the politicians have come to know this......

April 11 2012 at 9:18 PM Report abuse rate up rate down Reply
1 reply to mailman778's comment
tommy4usa

GREEN ENERGY ..........I thought the DEMOCRATS handed out a BILLION tax dollars to Companies that went bankrupt? Obama made loans to factories that went overseas? to companies that bailed out DEMOCRAT DONARS and the US Taxpayer GOT NADA

July 29 2012 at 10:53 AM Report abuse rate up rate down Reply
Scott Conner

These should be banned by constitutional amendment. Also included should be TIFD funds for private parties. TIFDs are Tax Increment Finance Districts, and allow voters or the city gov't to sequester a percentage of sales tax reciepts to be directed to certain projects. Well, I like the idea, but I don't like this money going to private firms. I'd rather a city build golden sidewalks than give money to private concerns.

Another way to encourage hiring would be to raise the top marginal tax rates on individuals and corporations. This would drive flight to deductible avenues. It would benefit capital intensive firms, as the depreciation of capital is more lucrative under higher nominal rates. Instead, low taxes benefit capital lite production. As start up costs are lower, we get more professionals, finance, executive profligacy, wage stratification. Remember, employee benefits, hiring, capital expansion, advertising, R&D, training are all deductible, and presumably more attractive under a higher nominal tax rate! Entrepreneurs, and small businesses are not taxed by these tax rates, as they presumably have ideas, and a nascent firm to absorb those gross profits.

Finally, it would be very helpful to exempt small businessmen perhaps a ten to a dozen employees from withholding and payroll taxes. I suppose I would put income or net profit qualifiers in there, though that would certainly be helpful to small businesses who are breaking laws to pay someone more than $600.

April 11 2012 at 8:39 PM Report abuse -3 rate up rate down Reply
1 reply to Scott Conner's comment
hightest2011

Scott.... At what Liberal university/ college do you teach Socialist Economics???? Harvard?/ Are you really one of the Czars??

April 12 2012 at 11:06 AM Report abuse +2 rate up rate down Reply
jdykbpl45

Is this like the Nebrtaska pIurchase that Obama, Reid and Pelosi ran so that they could buy votes for Obamacare?
I guess it depends on just who is getting the kickbacks. Obama does it with the taxpayer dime.

April 11 2012 at 6:55 PM Report abuse +1 rate up rate down Reply
STOP CORP WELFARE!

Why is Chris Christie giving Prudential Insurance a $2.5 million tax break when they profited by $3 billion in 2011 - and just so they can build a new corporate headquarters? It makes no sense. This is corporate welfare at its worst! It's not going to benefit the state nor the taxpayers of New Jersey. This country has seen enough bailouts and handouts to corporation who are profitable. It is not right our governor is not against this. http://www.occupyessex.com/2012/04/10/why-would-chris-christie-pay-2-5-million-each-for-100-new-jobs/

April 11 2012 at 6:38 PM Report abuse +1 rate up rate down Reply
aevf101

The Tennessee Constitution prohibits deficet spending. by law Tennessee has to operate within a balanced budget. Them 'rednecks" in Nashville must be purty smart. Ya reckon?

April 11 2012 at 6:05 PM Report abuse +6 rate up rate down Reply
1 reply to aevf101's comment
Scott Conner

All states must operate within a balanced budget. It is a luxury reserved for the US federal gov't and the Treasury.

April 11 2012 at 8:21 PM Report abuse rate up rate down Reply