Assault and Batteries? We may never recover the tax dollars we use to lure a new factory

On April 18 Oklahoma Governor Kevin Stitt announced the state had an opportunity to land a facility that would be a Panasonic electric car battery factory, if not for non-disclosure agreements. (At this point I suspect Panasonic has joined Oklahomans who wonder if this guy is really as dumb as he appears). In addition to the name of the company, Stitt suggested the new facility could yield 4,000 new jobs, at the low, low cost of $698 million in state subsidies.

This facility would be an economic benefit for Oklahoma

A new factory making complex and in-demand products and employing 4,000 employees directly would be a boost to Oklahoma’s economy. Roughly 130,000 Oklahomans work in manufacturing occupations, down from 160,000 just 20 years ago. Like everywhere in America, we need more well-paying high-skilled jobs that don’t require a college degree, and this facility would contribute. The need is particularly acute in petroleum-producing states like Oklahoma, since even our current 30,000 jobs in that sector are undependable at best and endangered at worst. Alternative energy may be just what we need to finally limit our exposure to oil and gas prices, demand, and technology. And electric vehicle sales have grown and are likely to keep doing so for a few decades.

So having the battery factory and the related businesses that follow it is worthwhile. The question is whether and what public subsidies are worthwhile, whether they are necessary, and whether they are the best use of our tax money. (Hint: they aren’t.)

When it come to subsidies, promises often exceed reality

States spend billions of dollars each year on targeted subsidies to corporations that promise to locate or expand facilities, “create” new jobs, and bring in other companies that will do the same. That’s good for corporations but not for the states subsidizing them. The fact that corporate subsidies are bad choices for states is universally agreed by libertarians, conservatives, and liberals. While subsidies may in some cases attract jobs from the new firm, they often don’t promote overall economic growth and, if they require cuts in public services, they may make the economy less productive.

Incentives can also be wasteful, because they pay corporations to do what they were going to do anyway, they don’t always result in job growth, the jobs mostly go to new residents, not existing ones, they increase costs for state and local governments, and they crowd out spending on public services. I could go on, but I’ll stop with my favorite incentive tidbit: incentives increase significantly when a governor is up for re-election (oh, hey Kev!).

As incentives go, the one approved by the state legislature has some positive attributes. Many incentives can grow out of control over time, eroding tax bases without any oversight. House Bill 4455, which would authorize the battery incentive, limits the public spending and depends on upfront funding from the state’s reserves for the entire subsidy, as opposed to after-the-fact tax forgiveness. That means there’s no commitment for future funding. Weirdly, it also means Governor Stitt is proposing to pay now for benefits that will not be fully realized even in his second term. That’s the opposite of normal governor behavior. Again, what is this guy thinking? The bill also prevents this subsidy from being combined with one, but not all other state and local subsidies. Of course like all laws, this one can be changed by future legislatures if those who benefit get more demanding.

But this incentive pays for itself, right?...

Stitt noted correctly that the new plant will have significant impacts on both state and local government revenues. Here’s the quote:

"Companies don’t drop billions and billions of dollars on the most advanced manufacturing facility in the country and then pick up and move shop in five years or 10 years,” Stitt said. “These companies will pay taxes. They will have employees that pay taxes. There will be vendors who pay taxes. There will be property taxes. There will be homes with employees that live there who pay taxes."

But whether the investment “pays off” in future revenues is a case-specific question. And to show how uncertain that is, let’s look at two scenarios.

...well, maybe eventually…

In the best case, Oklahoma state and local governments would recover the cost of the incentives in about 10 years. This case assumes the best possible outcomes from the fiscal point of view, including:

• all 4,000 jobs are filled and remain so,

• the average pay for the new tax-supported factory and its suppliers is $50,000, which is somewhat above the union wage for battery assemblers, to allow for managers and specialist staff,

• the factory has the huge multiplier effect envisioned by the state,

• 60% of the direct and supplier jobs and 75% of secondary jobs are filled by current Oklahomans, which is typical in the early years of new facilities, but much higher than in later years,

• those who move to Oklahoma for jobs have relatively small households,

• the tax-supported factory and its suppliers pay state and local taxes typical of established manufacturing firms, do not receive additional incentives, and

• our state elected officials quit cutting taxes and spending.

In this scenario, Oklahoma would see around 35,000 jobs, using the very high multipliers for manufacturing from the liberal Economic Policy Institute. Nearly 25,000 of these would be filled by current Oklahoma residents. In that case, these workers would pay $145 million in taxes every year. But that’s not the whole picture. Those coming in from outside Oklahoma don’t just pay taxes, they also consume government services. If every worker moving here for one of these jobs has one other person in the household, they’d consume an additional $170 million in public services like police, fire, schools, and streets. They would, however, contribute roughly $52 million in non-tax revenue to governments for utilities, tuition, fees, and tolls. Estimating taxes paid by the factory and supplier owners is difficult, but if they make average profits and pay current Oklahoma tax rates, for established manufacturers, they’d pay about $60 million annually.

On the net then, Oklahoma governments would see a net increase in revenue of $85 million per year ($145 + $52 + 60 - $170). Assuming it takes five years to complete the factory and fill the promised jobs, it would take roughly ten years for the government to recover the initial cost of the subsidy.

…but probably not

A more realistic picture that is based on both Oklahoma and national experience with incentives suggests we’d never recover the cost of the corporate subsidy. Most reviews of targeted incentives show they fall short of expectations, and that could be the case here, too. This evidence-based scenario assumes:

• all 4,000 jobs are filled and remain so,

• the average pay for the new tax-supported factory and its suppliers is $45,000, assuming that Oklahoma wages would be lower than midwestern union pay,

• the factory has lower multiplier effects, similar to the ones estimated by Oklahoma’s Incentive Evaluation Commission for the Ad Valorem Reimbursement Fund and the Quality Jobs program, envisioned by the state,

• 40% of the direct and supplier jobs and 50% of support jobs are filled by current Oklahomans, which is roughly the experience with new firms over their first ten years in operation,

• those who move to Oklahoma for jobs have slightly larger households,

• the tax-supported factory and its suppliers pay the lower state and local taxes typical of new firms because they receive additional tax incentives, and

• tax revenues and government spending decline by four and one percent respectively, continuing recent trends.

In this case, Oklahoma governments would never recover the cost of the incentives. With lower multipliers, we’d expect 7,500 total new jobs, about 3,000 of which would be filled by current Oklahomans. All of these workers would pay about $32 million in new state and local taxes per year. Non-Oklahomans moving in for these jobs would pay an additional $26 million in government fees but it would cost an additional $83 million to serve their additional demand for schools, transportation, and public safety. The tax-supported firm and its suppliers would pay $9 million each year in state and local taxes after receiving additional incentives. Oklahoma governments would thus lose $16 million per year (32+26+9-83). In this case, we’d all have to make up the difference through higher taxes or reduced public services, and we’d never recover our initial investment.

Is this the worst case? Not at all. Jobs could dwindle below 4,000 over time. They could be lower-paying than I’ve assumed here. There could be additional costs of public infrastructure like roads and water systems and of private infrastructure like electricity and broadband services, as well as environmental regulation. And worst of all, it’s likely that the company has decided its best location and is just seeking subsidies to cut its costs. In that case the incentive is just a waste of money and we’ve been duped into increasing their profits.

This decision shouldn’t have been made in a vacuum

Spending has opportunity costs. If we spend $700 in subsidizing one corporation we can’t

spend it on schools, infrastructure or broader tax cuts. As shown above, using that money for a subsidy will take years to pay even a modest rate of return, if it ever does. We know there are large positive returns from spending on early childhood education, public education, higher education, broadband, and many other public services. Oklahoma falls near the bottom of the states in funding for and performance of all of these except for early childhood education, so why are we rolling the dice on investing in a battery factory, particularly one that may land here anyway?

We may even have to cut services in the future if we spend the money for anything now. That’s because Oklahoma’s state budget is notoriously volatile. If the past is a guide, we’re due in the next couple years for a revenue failure, where we’ll have to cut services unless we have enough in reserve to keep budgets stable. If we give away $700 million of reserves now, we can assume we’ll see cuts in school, health, public safety, and infrastructure as a result of this incentive in the near future.

We don't have to keep doing this

This was a done deal before it was announced. The Legislature took three days with minimal debate and no public input to spend $700 million tax dollars on a secretive and dubious adventure. Stitt signed the bill just four days later. Oklahomans lost out on this one. In the short run, we need to use this year’s election campaign to hold legislators who voted for this accountable in every way we can. In the long run, we need to elect leaders who will invest our tax money in actual Oklahomans.

Data and sources for this post are here.