Subsidy Megadeals Out of Control Since Great Recession

The recent Good Jobs First report Megadeals is the most detailed compilation to date of the largest economic development incentive packages ever given by state and local governments. Defined as incentive packages of $75 million or more in nominal value, these deals have multiplied in both number and value in recent years as governments compete for a smaller pool of large investments.



 Starting with Pennsylvania’s 1976 $100 million deal for Volkswagen, the report details 240 megadeals through May 2013. The total cumulative amount of the deals comes to $64 billion. The report uncovers many deals of which I had been unaware, including a new number one subsidy of $5.6 billion for Alcoa in 2007 consisting of discounted electricity from the New York Power Authority, a state agency.




 Consistent with reports I have made on several occasions, but with a better database of incentive packages, Megadeals finds more and bigger deals than before the Great Recession. To be exact, since 2008 the number of such deals has doubled from about 10 per year (in the previous 10 years) to about 20 per year, with the average total of such deals doubling to about $5 billion per year over the same period.




 As Good Jobs First reported earlier this year in The Job Creation Shell Game, the number of significant investment projects as reported by Conway Data (publisher of Site Selection magazine) has fallen from a 1999 peak of over 12,000 per year to less than 6,000 per year in every year since 2005. This means that states and local governments are desperate to land the few projects that are available and therefore they are willing to pay more for them. Note that Conway Data reports projects meeting any one of three criteria: fifty new jobs, $1 million in investment, or facility size of at least 20,000 square feet. In particular, $1 million in investment is a low threshold.




 One thing we should realize is that while megadeals generate the most press coverage for obvious reasons, they are only the tip of the iceberg of total state and local investment incentives. The reason, of course, is that there are so many more smaller deals that collectively account for large amounts of money. The smaller ones receive little or no media coverage, which makes it hard to track them.




My only real criticism of the report is that I believe it would be more accurate to calculate present values for the subsidies that are given, rather than reporting only nominal values. Companies themselves will calculate the present value of an incentive package, and the European Commission does so as well in its supervision of EU subsidy rules. It should be more widely done in reporting in this country. $3.2 billion over 20 years (Boeing in Washington state) is not the same thing as $3.2 billion in cash; by my calculations, it is about $1.98 billion, as I first published in Investment Incentives and the Global Competition for Capital. Similarly, the $5.6 billion nominal subsidy for Alcoa comes to $3.22 billion present value, by my calculations. This is still more than 50% bigger than the Boeing incentive package and easily the largest single subsidy in U.S. history.




 In addition, I think it is a tossup whether to count Nike’s 2012 deal with Oregon for 30 more years of single sales factor (SSF) as a subsidy. SSF is already law in Oregon; Nike’s bargain only guarantees that it will not change. Still, Nike obviously thought it was important enough to bargain for, and it is possible to estimate the company’s savings relative to the pre-SSF apportionment formula, so its inclusion is certainly justifiable.




 Besides the great report, you can download a spreadsheet with all the data and sources at the link above.




 Disclosure: Good Jobs First shared its megadeals database with me in conjunction with a paper I gave in May, and I exchanged notes with authors Phil Mattera and Kasia Tarczynska as I prepared the paper and they finalized the report.


Cross-posted at Middle Class Political Economist.






Sign Up

Get the InvestingChannel
Free e-Letter Today

Learn More

Independent market opinion, analysis and ideas - delivered every business day

Premium market opinions, analysis, and ideas - delivered every business day

Editor's Picks