Corporate Welfare: Five Ways Out

What's a mayor to do? A major employer wants to expand or build anew. Rather than simply doing so, the corporation stirs up a bidding war to see which city and state will pony up the most cash, loans and tax breaks in the form of economic incentives. If you're the mayor and the facility means jobs and income for your town, do you play hardball and risk losing the plant and the jobs? Or do you give in and hand out tax money, only to face a never-ending string of similar demands from others?

Right now it's not much of a debate: the mayors cave.

The eagerness with which many states and cities routinely cancel taxes and distribute free services and grants to corporations puts enormous pressure on every other public official to do the same--even those who don't want to.

TIME has found many public officials deeply upset at the ultimate cost of the giveaways to their communities. Inevitably, tax rebates to a selected few lead to higher taxes for others and to cutbacks in essential services.

Can anything be done to stop the inequities? Absolutely.

But first, forget about cooperative agreements among states to stop the war of incentives. They've been tried, and they don't work. In October 1991, New York City, New York State, New Jersey and Connecticut agreed that a series of costly bidding wars to attract corporations was ruinous for all concerned. The four governments signed what was described as a nonaggression pact. Less than a year later, the truce was in tatters. New Jersey fired the first shot; among its targets was the New York Mercantile Exchange, which it tried to entice across the Hudson to Jersey City. Piqued New York City officials groused that because of New Jersey's wooing, the city was forced to come up with an extra $30 million to keep the exchange in Manhattan.

Next, in January 1994, New Jersey's newly elected Governor, Christine Todd Whitman, and New York's new mayor, Rudolph Giuliani, both Republicans, promised to end the border war. "We're not interested in stealing from each other," Whitman said.

But then, in September of that year, in what a deputy of Giuliani's called a "shameless raid," Connecticut lured Swiss Bank Corp. from Manhattan to suburban Stamford with $120 million worth of incentives.

Today, seven years after the first cease-fire, there isn't even a pretense of a truce. The latest poker game revolves around the new home of the New York Stock Exchange. Now in cramped quarters on Wall Street, the exchange has hinted that cheaper New Jersey real estate looks awfully good to it. In a knee-jerk spasm, New York City and State offered $600 million in incentives--more than twice the amount ever offered to keep a company in New York--to keep the exchange in Manhattan.

Which brings us to:

SOLUTION NO. 1 for ending corporate welfare at the state and local level: the levying of a federal excise tax on incentives. Under this proposal, Congress would enact a law imposing a tax equal to the value of the economic incentives granted to a company. In other words, if New York City and State governments were to give $600 million to the New York Stock Exchange, the Federal Government would hit the stock exchange with a $600 million federal tax. Hence no more value to economic incentives. No more bidding wars among governments.