COVID-19
States that boost billionaires with incentives could harm post-Covid recovery
Don’t expect an end to the corporate sweepstakes
Amid the ongoing pandemic, Governor Kevin Stitt of Oklahoma rolled out the red carpet for a man who had made headlines flouting COVID-19 restrictions and whose decisions over the coming months would greatly impact the well-being of Oklahomans. The crowds gathered to see the larger than life figure with the golden hue.
No, I’m not talking about Donald Trump, but Elon Musk.
The Tesla Motors billionaire was looking for a location for a new ‘gigafactory’ and it was down to Tulsa, Oklahoma or Austin, Texas. To secure the new factory, Tulsa rallied the community by unveiling a repainted Golden Driller statue, made to look like Musk. Before the Tulsa and Tesla flirtation could evolve into a relationship, Musk decided to locate the new factory in Austin in part due to $60 million in local property tax rebates.
States and localities often use property, sales, and income tax credits and rebates, bonds, grants, reimbursements, and new infrastructure to entice companies to invest in their communities. These economic development incentives reduce costs to businesses by lowering their tax liability or providing public funds to aid private investment.
The vast majority of incentives flow to wealthy corporations like Tesla, Amazon, Chrysler, and Nike. These companies get states and localities, Democrats and Republicans, to bid for their business. For example, hundreds of localities competed for Amazon’s HQ2 in 2018, with Virginia winning with $750 million in incentives.
These incentive megadeals serve as transfers of wealth that benefit the rich. My research shows that states that spend more on economic development incentives experience increased income inequality.
For example, when Oregon awarded billions in incentives to Intel and Nike in 2012 and 2014, respectively, it saw spikes in inequality the following year that lasted over time. In fact, the effect of incentive on inequality is relatively large. An incentive package worth $200 million or more exacerbates economic disparity more than increased welfare spending mitigates disparity, and results in up to $1,000 more per year for wealthy households.
Incentives increase inequality by reducing resources for broadly redistributive public programs through lower taxes on wealthy firms, and by redistributing resources up the economic ladder by providing public assistance to wealthy firms. States shrink their tax base and provide resources to those least in need, directly benefiting the relatively wealthy over the poor, working, and middle class.
The risk of increased inequality, though, is rarely considered when states decide whether or not to offer large incentive packages. Further, economic development policy is isolated from state-level efforts to reduce inequality.
Take New York, for instance, which is steadily increasing its minimum wage to $15 per hour, has a generous and refundable Earned Income Tax Credit (EITC), but also offered $700 million in incentives to just two companies in 2019. As the federal government remains divided, polarized, and engaged in inequality-boosting policy drift and tax cuts, the states are a critical venue to watch for policy innovations and their effect of income disparity.
This is especially true given the stark increase in inequality we are likely to see as we slowly rebound from the COVID-19 recession. While Jeff Bezos’ and Elon Musk’s fortunes have swelled, scores of others line up at food banks this holiday season. Don’t expect an end to the corporate sweepstakes post-COVID. Incentive spending reached new heights after the Great Recession. An unequal recovery could further exacerbate inequality, hampering growth, mobility, health, and democracy in the United States.
