The Washington Post‘s Steven Pearlstein takes on corporate welfare at the local level today and shows how such a column should be done. Thomas Friedman, as usual, shows how not to.
Northrop Grumman, the giant defense contractor, is moving its headquarters to Washington from Los Angeles and is playing the District, Virginia, and Maryland off each other to try to squeeze cash out of one of them. It’s an old game by now and taxpayers always come out the losers.
Pearlstein punctures the idiocy from the top of his piece:
Never mind that virtually every credible study finds that using taxpayer subsidies to chase after corporate locations rarely pays off. These testosterone-filled contests are never really about money so much as pride and ego and political bragging rights. By the time the competition ends, the benefits from winning have been pretty much bargained away and everyone comes off looking rather silly.
But Friedman, already the foremost proponent of trade policies that force American companies to compete with those whose countries have 19th century labor conditions, wants us to race to the bottom on corporate welfare, too:
…the U.S. is badly lagging in developing the next generation of scientific talent and incentives to induce big multinationals to create lots more jobs here…
“The things that are not conducive to investments here are [corporate] taxes and capital equipment credits,” (Intel’s CEO) said. “A new semiconductor factory at world scale built from scratch is about $4.5 billion — in the United States. If I build that factory in almost any other country in the world, where they have significant incentive programs, I could save $1 billion,” because of all the tax breaks these governments throw in. Not surprisingly, the last factory Intel built from scratch was in China. “That comes online in October,” he said. “And it wasn’t because the labor costs are lower. Yeah, the construction costs were a little bit lower, but the cost of operating when you look at it after tax was substantially lower and you have local market access.”
The implication is that we should give giant multinational corporation Intel a billion-dollar tax break rather than, say, slapping a tariff on them for accessing their home market from overseas. I’m just saying.
Pearlstein, meanwhile, has a sharp look at how arbitrary Northrop Grumman’s final decision will actually be as they bat their eyelashes to fleece taxpayers:
For starters, all three jurisdictions are now so invested in the competition that they all will agree to match the highest offer in the end. That means the final decision will be based on other criteria, such as the cost and quality of the headquarters building; the prestige of its location; the proximity to the airport or to customers; and, most important, the ease of commuting for the chief executive and his top associates, who live in Potomac, McLean and Georgetown.
This is important context:
Notwithstanding this fiscal distress, local officials are tripping over themselves for the privilege of handing over $25 million or more to a giant corporation with annual revenue of $34 billion — roughly on a scale with the budgets of Virginia and Maryland — that last year posted an operating profit of $2.5 billion. At $25 million, the handout comes down to about $75,000 for each job that Northrop promises to move to the region.
Friedman, by contrast, would hand over everything to the corporations (he’s quoting Intel guy here, but it’s approvingly):
If the government just boosted the research and development tax credit by 5 percent and lowered corporate taxes, argued Otellini, and we “started one or two more projects in companies around the country that made them more productive and more competitive, the government’s tax revenues are going to grow.”
Yes, because lowering taxes is definitely the best way to increase taxes. The Laffer Curve has been discredited, you know.
Pearlstein meticulously makes his case for why Maryland and D.C. are just wasting their time. Here’s how he shows how particularly foolish it is for D.C. to be chasing after Northrop Grumman with a fistful of taxpayer dollars:
For the District, which is looking at a $200 million budget shortfall next year, getting into this bidding war is particularly loony. Virginia and Maryland officials can argue at least that the winner of the headquarters sweepstakes would collect income taxes on all those highly compensated executives, even if they commute home elsewhere. That’s the way the tax system works in most places, but not in the District, which is prevented by Congress from imposing an income tax on employees who commute in from Virginia, Maryland or any other state. Without that, it would take decades for the District to recoup the $24.5 million that the mayor and D.C. Council have offered Northrop over the next 10 years.
And Pearlstein lands more than a glancing blow on a politician while also tweaking the company for its larger government dependency:
But it’s more than ironic that, having spent the past year lambasting Democrats for taxing and spending, Republican Bob McDonnell now can’t wait to lavish millions of taxpayer dollars on a Fortune 500 company that makes all its money selling stuff to — who else? — the government.
It’s not too late, however, for McDonnell to renounce this kind of socialism, call up Gov. O’Malley and Mayor Fenty and, in the name of fiscal sanity and regional unity, propose a financial disarmament treaty.
I’ve long thought the states ought to go in on a kind of mutual nonagression pact regarding corporate welfare. Until that happens (which it won’t, of course) they’ll keep bidding themselves into a corporate corner.
Which is how Tom Friedman likes it.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.