Last week’s tax incentive package that would keep Nissan Motor Co.’s regional headquarters and its 1,300 jobs in the L.A. area was the latest proposal aimed at retaining key businesses and industries.

On Sept. 8, the state Public Utilities Commission voted to allow Pacific Gas and Electric Co. and Southern California Edison to grant rate reductions to companies that threaten to move out of their service territories. The previous week, a tax credit package for filmmakers to combat runaway production went down in flames in the state Senate amid concerns that it was too much of a giveaway. And the Los Angeles City Council just voted to forgive up to $270 million in hotel bed taxes for the developers of a downtown Convention Center hotel.

These packages have rekindled a long-running debate over whether the government should be in the business of granting tax breaks to specific industries and companies, especially those threatening to leave the region. Even if government subsidies are deemed appropriate, there’s the more basic question of whether they are effective.

Background


Governments long have given tax breaks and other incentives to attract companies. One famous local example: in the late 1950s, the city of Los Angeles gave land in Chavez Ravine to Brooklyn Dodgers owner Walter O’Malley, a gift that lowered the cost of building a stadium significantly.

The drive to put together incentive packages picked up steam during the recession of the 1990s. Companies fleeing high business costs in California for cheaper locales became big news, highlighted with the release in 1992 of a blistering report on California’s poor business climate.

Then-Gov. Pete Wilson formed special strike teams known as “red teams” of state and local officials to respond when a company threatened to leave. The stated goal was to cut through red tape; often, though, these teams ended up putting together state and local incentive packages usually consisting of tax credits or special utility rates as “sweeteners.” At the same time, local governments and utilities began putting together packages of rate reductions, tax breaks and other incentives.

During the late 1990s, the need for incentive packages lessened. But after the energy crisis of 2000-01, the economic downturn and a crisis with skyrocketing workers’ compensation costs, companies began thinking about leaving again.

Supporting Incentives


Economic development officials, local business boosters and some lawmakers say tax and other incentive packages are essential tools in keeping businesses with high-paying jobs in the region. In an era when companies are increasingly seeking to lower costs, California is much pricier than other states. Without incentives, what’s left of the state’s manufacturing sector and corporate headquarters will simply leave. This would lead to the loss of high-paying jobs and, ultimately, the demise of the middle-class.

“Targeted incentive programs that retain jobs that a region would otherwise lose are the highest food group among economic development incentives. They serve a dual purpose: they prevent losing jobs, and they keep high-paying jobs with benefits here,” said Larry Kosmont, an L.A.-based economic development consultant who has helped negotiate incentive packages on behalf of local governments.

Supporters also point out that if economic development officials fail to put together incentive packages to keep businesses from leaving, other states will lure the businesses away with packages of their own.

“Those who say that incentives are giveaways must understand that if Nissan relocates, we lose everything it contributes to the community,” said Rusty Hammer, president and chief executive of the Los Angeles Area Chamber of Commerce. “Giving back some economic incentives in return for keeping jobs here is nothing more than sharing in the economic benefits.”

Supporters concede that incentives are not appropriate in every case. For example, Kosmont said, trying to keep major retailers from shuttering stores might be counterproductive. “This is an area that’s over-retailed,” he said. “New stores that open end up cannibalizing existing stores. You’re not increasing the overall consumer spending pie or the job pool.”

Opposing Incentives


Opponents from both the left and the right say incentive packages amount to corporate giveaways that are often ineffective, create an uneven playing field, and invite companies to extort tax breaks from state and local governments.

“It’s like politicians hand industry the gun and say, ‘Aim it at us.’ They allow businesses to suggest they will leave the state in order to extort taxpayer gifts and subsidies,” said Douglas Heller, executive director of the Foundation for Taxpayer and Consumer Rights, a consumer watchdog group.

Opponents say governments are ill-prepared to ferret out when the threats to leave are legitimate. “Determining who is going to leave and who’s merely threatening to leave is a highly subjective process, not one on which sound public policy should be based,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association.

They also argue that even with incentives, there’s nothing to stop companies from moving in five or 10 years.

Often, they say, the company gets bought out by another firm, which then decides to consolidate operations outside the region.

What’s more, these incentives put other companies that do not threaten to leave at a disadvantage.

Outlook: Practice Continues


The impending loss of jobs is likely to outweigh these concerns at least on a case-by-case basis. Local governments, utilities and state officials will continue to put together incentive packages to keep specific businesses from following through on their threats to leave. Often, these packages will come with conditions (commitments to stay for a certain number of years, local hiring targets, for example), though there is no enforcement mechanism for these conditions.

Granting tax breaks for entire industries is proving more difficult, as shown by this summer’s experience with the tax credit for filmmakers.

There is great reluctance to giving such blanket incentives especially when some members of an industry do not need assistance.