Wednesday, December 5, 2012


An old joke tells us, “Only schmucks pay retail”, a humiliation you know if you’ve had a vacation ruined by some twerp sitting next to you at a cruise ship bar delightedly boasting that he paid only half of what you did for the cruise. Sometimes schmuck abuse is elevated to a moral principle. I used to have a boss who would raise prices on foolish clients – charging “stupid fees” he called it – on the grounds that doing so reallocates money to those who use it wisely – meaning himself – thereby increasing economic efficiency.

But, to be a really big schmuck, that is, someone who squanders huge sums of money unnecessarily and without benefit, you have to be either really rich (however briefly) or a state – West Virginia for instance.

The New York Times recently published, "United States of Subsidies: a series examining business incentives and their impact on jobs and local economies”, by Louise Story, Tiff Fehr, and Derek Watkins. The centerpiece of the series is a study that quantifies the amounts that states lavish on businesses in the form of incentives, subsidies, loans, grants, and other inducements ostensibly to generate commerce and create jobs.

Not surprisingly, the results of these inducements are frequently less than those predicted by the politicians and bureaucrats who promote them and the businesses that receive them. That may explain why West Virginia, a state with zero net job growth since the year 2000, is second among all states in per capita subsidies.

According to the Times study, West Virginia provides $1.57 billion – yes, that’s “billion”, not “million” – in subsidies and tax abatements to businesses every year. That’s $845 for every man, woman, and child in the state. It’s equivalent to 37% of the state’s base budget and more than we allocate for education, or Medicaid, or roads, or prisons. In short, if business tax incentives were listed as an expenditure, it would be the state’s single largest item in the budget.

By way of comparison, none of the states that border West Virginia spends even half as much. Pennsylvania is the next highest at $381 per person. As for the others, you have to add together Maryland ($96), Virginia ($161), Ohio ($281), and Kentucky ($324) in order to match West Virginia’s generosity.

And West Virginia’s use of tax incentives isn’t necessitated because we start with unusually high tax rates. The Tax Foundation’s 2013 ranking of state business tax climates rates West Virginia 23rd in the nation, ahead of all those neighboring states except for Pennsylvania, which comes in 19th.

So, what has our munificence won us, what has it cost us, and what does it mean?

As mentioned earlier, West Virginia has had no increase in the number of jobs in the state in the last 12 years. That’s the period during which the state became most aggressive in cutting business taxes and extending incentives. While one can argue that conditions might have been worse in the absence of these measures, there’s a stronger argument that the measures made little difference.

Peter Fisher, Research Director at the Iowa Policy Project, recently published an analysis showing state and local tax rates are not significant determinants of business growth. The reason is that these taxes make up a tiny fraction of business’ operating costs. Business decisions about where to locate and whether or not to expand are far more influenced by factors such as demand for products and services, the availability of a qualified labor force, access to raw materials and suppliers, and infrastructure.

In fact, unless those needs are met first, the question of taxes doesn’t even come into play. And, when it does, it’s in the context of operating costs. In that area, West Virginia already offers wage and utility rates that are 20% below the national average – a market-based financial incentive that far outweighs any advantage to be offered through tax incentives.

Meanwhile, the loss of $1.57 billion a year in prospective business tax revenues has dire consequences for the rest of us. First, it’s forcing West Virginia to make significant cuts to education and infrastructure at a time when, if we hope to attract and grow businesses, we must figure out ways to meet companies’ needs for a skilled workforce, infrastructure, and an improved quality of life.

Second, West Virginia’s tax burden is being shifted from businesses, many of which are out-of-state interests, to individual taxpayers. Since 2005, while the portion of state revenue collected from business income and franchise taxes has dropped from 13% to 4%, the portion collected from West Virginia families has risen from 30% to 42%.

And for what? Economic development? Or is it just corporate welfare? The problem is we can’t tell the difference.

That’s because, while handing out corporate goodies, West Virginia does almost nothing to track the results, either to hold companies accountable on those rare occasions when they actually make commitments to get the incentives, or merely to determine the state’s return on investment.

In a way that’s the worst aspect of the fiasco because, by itself, trying and failing to nurture business growth through tax incentives doesn’t make our political leaders schmucks. It just means they’ve made mistakes. They become schmucks when, because they require no accountability, they don’t know they’ve failed and, consequently, go on repeating the same mistake indefinitely or, in West Virginia’s case, about 1.57 billion times per year.


Sue Thorn said...

I spent 3 years working in economic development in the Northern Panhandle during the late 90s. Everything I learned about economic development was that growing already existing businesses was much more successful than recruiting a new business to the area. Yet the focus was primarily on trying to hit a home run by giving large tax breaks and there was never a metric developed on what we needed to make so the giveaways were beneficial in the long run. Not only was this costly, it also angered long-term business owners who always paid their fair share.

Sean O'Leary said...

"it also angered long-term business owners who always paid their fair share"

Great point, Sue. I don't think folks appreciate the political pressure to "level the playing field" that ensues.

Anonymous said...

I fail to understand two parts of your blog, reprinted as a column in The Spirit of Jefferson... One, just what the use of the obscene Yiddish word "schmuck" has to do with economics and, two, why you would use a subtle anti-semitic reference?

My grandmother emigrated from Russia and fluently spoke several languages - including Yiddish. Even after living in the United States for more than 60 years, she considered Yiddish her native language. She often explained to me that Yiddish is a language of subtleties, much more so than English. There are a number of Yiddish words with very similar meanings, making the choice of which one to use in which situation extremely important. When I made the mistake as young teen of using the word "schmuck" inappropriately, she told me there was an easy way to keep them straight: "Hitler was a schmuck, Mussolini was a putz; Stalin was a schmuck, Lenin was a putz." I never forgot the shades of gray implicit in that example.

As to your hopefully unintentional anti-semiticism: Had you correctly used the "old New York joke" of 'only suckers pay retail', you would have been just fine. It certainly has a connection to the points you were trying to make in your treatise. However, by using a Yiddish word in your "joke", you connect the dots to the negative Jewish stereotype that Jews are cheap. That makes your opening sentence anti-semitic and taints your entire column.

Sean O'Leary said...

Anonymous -- I'm sorry. I take your point. The implication you suggest -- that Jews are miserly -- was certainly not intended. The use of "New York" as an adjective was merely an attempt to place the term in the historical context of the remarkable and quintessentially New York "Borscht Belt" comedians whose routines dating from the era of restricted resorts and clubs migrated to TV in the fifties and sixties.

Anonymous said...

Really? First, I cannot fathom how there is any historical context between the old "Borscht Belt" comedians of the 1950's and 60's and fiscal waste in WV. Second, I cannot imagine there are more than a (very small) handful of your local readers who would even know what the "Borscht Belt" was and then be able to connect your "old New York joke" to it. Dude, I grew up in a suburb of NYC and went to one of those hotels as a young person, and *I* didn't make the connection.

Seriously, you should have simply stopped after ..."not intended".

Sean O'Leary said...

Anonymous -- So be it. But, I am sorry.

Anonymous said...

I have one final comment to make on this topic... Actually, it's more of an accumulation of comments. I forwarded a link of this blog and our comment exchange to several people, some Jews (including a Rabbi), some not. Every single one responded back with a negative overall opinion both of the original blog/column and your subsequent explanation. One said, "This plonker doesn't even realize that he's a bigot." Another, the grown child of a Christian Holocaust survivor, said "Mr. O'Leary needs to stick to the things he knows about and leave those he has no experience with alone". Lastly, IMO the most poignant comment was made by my next-door neighbor: "When I read that column in the Spirit last week. I was shocked to see a word I knew was obsceen (sp) not only in the headline of a column, but used repeatedly in the column. How far have we slumped that not only can cuss words can be published as common, but also that prejudice like this is not censored out of our local newspaper?"