New York and Louisiana are two examples of high corporate incentives aligning with high inequality, writes Joshua Jansa.
New York’s offers to Amazon to open a headquarters in the state faced significant opposition. (AP/Karen Matthews)
By Joshua Jansa
The Conversation
Income inequality made big headlines recently, after the U.S. Census Bureau released new data showing that the gap between the richest and poorest Americans is at its highest level in at least half a century.
Less reported was the significant variation among the states. New York and California had the highest inequality in 2018, while Utah and Alaska had the lowest. In addition, states as diverse as Alabama, Texas and New Hampshire experienced large increases from the prior year.
Why are some states more or less equal than others?
It usually comes down to policies. States with more generous welfare programs and higher minimum wages often have lower inequality, while those with weaker unions and lower taxes on the rich have higher levels.
My research suggests there’s another, less-noticed reason behind the disparities: corporate welfare.
Incentivizing Inequality
States offer economic development incentives to businesses in order to encourage their investment and expansion in the state.
Famously, hundreds of states and cities offered Amazon property and income tax credits, bonds, grants, reimbursements and infrastructure assistance in their efforts to convince the Internet giant to open a “second” headquarters in one of their cities. One of the finalists even offered to provide Amazon with a private train car. New York and Virginia won the sweepstakes with a combined $2 billion in incentives – although Amazon dropped New York after it met political resistance.
But the amount of incentives states offer can vary significantly. For example, New Hampshire spent just $9.9 million on incentives, or 75 cents for every state resident, per year from 1999 to 2014, while Louisiana paid out an average of $1.2 billion a year, or $267 per capita.
I wanted to know if how much a state spends on corporate incentives affects its level of income inequality. So I analyzed incentive spending using Good Jobs First data and income inequality as measured by the Gini coefficient from 1999 to 2014.
The Gini coefficient measures inequality by assigning a decimal number that can range from 0, which represents perfect equality, to 1, meaning perfect inequality. New York had a Gini of 0.513 in 2018, while Utah’s was 0.426. A change in the Gini coefficient of as little as 0.01 means the top 10% of households earned $1,500 to $2,400 more per year, depending on the state.
I found that when states spend more on incentives, their level of inequality tends to spike within a year or so. This holds true even when controlling for other economic and demographic factors and other public policies.
The data showed that, on average, for every $180 per citizen that a state spends on incentives, the Gini coefficient increases by 0.004. In other words, $600 to $1,000 more winds up in the pockets of people from wealthy households.
In big-dollar terms, $180 per citizen is the equivalent of a state spending $200 million to $2 billion a year on incentives, depending on its population. To put it in context, states frequently give billion-dollar incentive packages to individual companies, such as Tesla, Nike, Intel, Boeing and Nissan.
Incentives serve to redistribute funds to the wealthy and reduce resources for broadly redistributive policies over the long run.
The Whole Story
Incentives, of course, do not explain everything. New Hampshire, for example, has growing inequality but doesn’t spend much on incentives.
Yet, looking at incentives can help explain why states that are leaders in mitigating inequality through higher minimum wages or welfare spending on the poor, such as New Mexico and New York, are still seeing growing inequality.
So the next time you hear an elected official cite big returns on investment as their reason for offering a company billions in incentives to open a factory or office, remember they aren’t telling the whole story. Those big returns come at a cost: higher inequality, which in turn can hamper economic growth.
Joshua Jansa is assistant professor of political science at Oklahoma State University.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
I live in New Mexico and a number of years ago the state offered incentives to Virgin(I believe) and subsequently spent a lot of money building a space-port for the commercial suborbital space flights that Branson was going to sell the rich people wanting a thrilling ride to space. e.g. Leonardo DeCaprio was a ticket purchaser. Well one of the test flights crashed and killed the pilot. It was in the ‘news’. Well we still have a nice space-port that’s unused to this day. So much for subsidies. We do have a thriving film industry because of tax incentives. Besides, New Mexico is a breathtakingly beautiful state.
I have always thought that the incentives offered to sports teams for arenas and so on were the worst; but I ‘d like to know how they fit into this scenario. Might construction jobs and lower-paying support jobs like food and cleaning make them less equality-inefficient than those which bring in higher paying jobs?
It is quite possible that this useful article is inaccurate in the way it sees cause and effect. States with a lot of corporate welfare are often where corporations have too much power and that also makes for other policies that lead to income inequality i.e corporations get to steal more from both workers and taxpayers.
A timely article. The reality is that the typical incentives that states offer to companies to relocate to their state are property tax relief/income tax relief/sales tax relief. The thing that seems to get forgotten is that taxes pay for government goods and services. This is especially true for states which as a general rule cannot carry debt and, therefore, don’t have a major debt service tab. Those taxes pay for very real government services – fire, water, transportation, police, trash, infrastructure, etc etc. A business will use all those services and won’t pay a penny for them. Who pays for the government services that they aren’t paying for by virtue of the various tax reliefs? Why we are. Up here where I live the local rag which is ever so slightly to the left of Genghis Khan is over the moon at the relocation of a company after incredible incentives are handed out claiming that the agreement will result in all these jobs and the problem here is that (a) any taxes that the new state residents pay because they moved in to get the jobs that the company offered will only be paying their fair share of those taxes. The company will not be paying for what they consume in government goods and services. We, the residents will be paying that. And (b) there’s no guarantee that company A will stay in the state. In all likelihood, the company will wring the tax breaks dry and then move on to the next sucker state.
The Federal Government is a special case. The only thing you get from the feds is social security/medicare/medicaid which have a separate payroll tax to fund them. The only things that the US government spends money on that it funds from the general fund (i.e. your income taxes) is shiny toys for the military and debt servicing. The US government could literally stop funding everything except what’s funded by payroll taxes (i.e. the military, debt service, and the government itself) and we’d still be running a deficit.
Notwithstanding the merit of the rest of your comment, but for the Federal Government, that is backwards. The Federal government creates money when it spends. That is what the deficit is – the record of money creation. Taxation from the private sector doesn’t fund the government. The private sector needs the money that the government creates/prints in order to pay its taxes. Look at the dollar bill in your pocket. The government printed it. And it will take it back if you want to get something from the government – like remission of tax liabilities.
Taxes don’t pay for government goods and services. What they do is create and maintain a demand for government money. Everybody used to know this, although it was explained in an unnecessarily complicated way. It’s an amazing success of propaganda that everyone believes an entirely insane thing – that reverses the actual direction. Comparable to a crazy theory of digestion that posited the direction of digestion was uhh from one’s hind quarters to ones mouth.