The Business Climate Hoax

President Bush just can't leave bad enough alone.

With the Gulf Coast physically battered by Hurricane Katrina, the president's reconstruction plan is on track to do further harm to a region that was poor and maldeveloped even before the hurricane struck.

The core of his proposal is the creation of a Gulf Opportunity Zone that would provide massive depreciation and tax benefits to firms investing in new plant and machinery in the region. Translation: giant subsidies for oil companies and casinos.

Hurricane Wilma is on the way to Florida. Tropical Storm Alpha is brewing in the Caribbean. Scientists say a combination of natural hurricane cycles and global warming very likely mean we are going to see more, and more intense hurricanes over the next many years. So, Katrina reconstruction is not likely to be the last major clean-up and recovery effort during the next decade-plus.

How does a tax giveaway plan for big business end up as the centerpiece of the president's reconstruction plan?

It's easy enough to say the administration never misses an opportunity to cut taxes and do favors for its big business backers. And that's true. It's also easy enough to point to the influence of right-wing think tanks like the Heritage Foundation in designing the administration's plan. And there's no disputing that, either.

But something more is going on, too -- a decades-long effort to promote the idea that cities and states (and nations, for that matter) will best develop by cutting taxes and providing subsidies to big business.

Greg LeRoy, executive director of Good Jobs First and author of The Great American Job Scam (Berrett-Koehler Press, 2005), shows that these policies are not only unjust, they are unwise.

In The Great American Job Scam, LeRoy, whose organization has led the way in trying to counter the business climate ideology, provides case study after case study of corporate rip-offs of communities and states. One example is Marriott's leveraging of a threat to locate its headquarters in Virginia to extract more than $50 million in gifts from Maryland -- even though the company had already decided to build its new headquarters in Maryland, where it was already located. Another is Dell Computer's finagling of a roughly $250 million subsidy package from North Carolina -- as an incentive to invest $100 million to $115 million in the state. The Louisiana Coalition for Tax Justice found that, over the course of the 1980s, Louisiana granted $2.5 billion in property tax exemptions, nearly a billion of which would have gone to schools in the state.

States and cities do not get much in return for these donations to the corporate coffer, which is part of what makes them so flawed as development policy. LeRoy shows how blind faith, bad negotiating and illusory promises leave local and state government officials with little or no guarantee that new and permanent jobs will be created.

But it's not just that they get manipulated. LeRoy's key point is that business does not invest because of the tax breaks they are able to extract. Location decisions are driven by access to suppliers and customers, labor costs and skills, transportation facilities and costs, the cost of utilities, land or rent costs and, not so incidentally, the whim of executives. Tax rates make almost no difference in location decisions. So generous tax breaks will rarely attract investments that would not otherwise have been made.

Crudely put, in the case of Katrina reconstruction, oil and petrochemical companies are not going to locate or rebuild in the Gulf area because of tax breaks. They build there because there is oil there.

Perhaps most enlightening in LeRoy's book is his explanation of the site location consulting industry, which has driven the competition among states and cities for investments.

A single firm, Fantus Factory Locating Service, played a key role in developing the business climate ideology. By 1977, it had claimed to assist with more than 4,000 corporate relocations. Fantus is now an affiliate of the accounting firm Deloitte & Touche.

Fantus, and the other players in the small field of advising corporations on how to shift locations and blackmail cities into lavishing them with tax breaks and subsidies, realized their business had created another market niche: advising cities and states on how to make themselves attractive to investors. Thus they work both sides of the street -- instructing the corporate extortionists, and advising governments on how to make themselves appear desirable to the extortionists.

There's not a lot of subtlety in the business. In March 2004, the national director of Ernst & Young's Business Incentive Practice and a former Boeing official led a workshop at a trade association of corporate officers handling government relations. Their powerpoint presentation was leaked. Its title: "Turning Your State Government Relations Department from a Money Pit into a Cash Cow."

The combination of windfall subsidies for big business and low wages for workers represents the "low-road" of economic development, LeRoy says. It leaves communities poorer and more vulnerable. Louisiana and Mississippi have long traveled that road. It's not unrelated to why they were so poor before Katrina hit.