It appears that the company figured out how to secure tax credits from the state government without increasing the level of employment. Ford is sending one line to Kentucky, but it is starting a new line in Kansas City. Although the number of jobs will remain constant, the company will continue to receive financial assistance from the state. Failing to deliver on promises, in terms of job creation and economic activity, is unfortunately a pervasive problem in Missouri. From an article in the Kansas City Business Journal:

The automobile side of the Kansas City Assembly Plant will cease production sometime during the fourth quarter of 2011, soon after the Louisville Assembly Plant in Kentucky begins production of the next-generation Ford Escape.

The effect on the 3,700 hourly employees in Kansas City remains unclear. However, Missouri state officials seem to expect some downtime at the Kansas City Assembly Plant in Claycomo, Mo., creating an opportunity for a big retooling in preparation for a new product.

Ford has a long history of pitting states against each other, so this news is not particularly surprising. The company has a pattern of securing millions in incentives from state governments, then shutting down operations and leaving the state unless it can secure additional incentives. Taxpayers, of course, are left to pick up the tab.

Don’t forget that the state of Michigan issued $909 million in incentives to Ford in October.

I find it disconcerting that the state government has a working relationship with the company in its operations. According to a statement from Gov. Jay Nixon’s office:

We have been working closely with senior Ford officials for months to make sure the vehicles of the future are manufactured at the Claycomo plant, and it’s clear that our hard work will pay real dividends for Kansas City and suppliers in communities across Missouri. We look forward to putting the finishing touches on this agreement in the coming weeks. Automotive manufacturing has a bright future in the Show-Me State.

Government officials can attempt to anticipate what the most efficient solution to a given problem will be — but, in all likelihood, they will get it wrong. This is because no individual has access to perfect information. As the Show-Me Institute’s editor Eric Dixon explained in the comment section of a recent post, the likelihood that an individual is wrong increases as he becomes further removed from the decentralized feedback loops that markets provide. Nixon and state policymakers are too far removed from the business of manufacturing vehicles to know the optimal state of the market. Missourians would be better off if the state government stayed out of this particular market, and instead allowed market forces to work.

This reminds me of the following concept that Henry Hazlitt describes in Economics in One Lesson. I cite this classic work frequently because it relates to many public policy issues in Missouri. I referenced this passage in a recent post in which I argued that government non-intervention is the optimal job creation strategy. Hazlitt wrote:

When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only where bridges must be built, the government spenders begin to ask themselves where bridges can be built.

Would the Claycomo plant stay open in the absence of the subsidy from the state of Missouri? If it would not, then the plant is, essentially, an invented project that is maintained because it can be, rather than because it satisfies a market demand. The fact that the new line has yet to be determined makes me wonder whether the project is in the process of being invented.

The post Encouraging Job Creation in Claycomo, Mo. Louisville, Ky. appeared first on Show-Me Institute.

Here’s one of the editorial‘s major points:

It’s understandable that lawmakers would want to do something to protect the Claycomo jobs in the face of competing offers from other states that are equally shameless. Yet the whole process, despite the studied silence of Ford, had the feel of extortion. Ford never had to say a thing, but everyone knew the company was expecting something.

Ford expects handouts from other states too, despite the fact that it’s a profitable, private company. Ford is playing a game, and it is one that a state like Missouri can’t win. Unfortunately for taxpayers, Ford is not the only company playing — many other companies in other industries also pit states against each other in search of the biggest handout.

Additionally, from the editorial (emphasis mine):

“[Offering incentives] always has an unsavory feel,” said economist Chris Kuehl of Kansas City-based Armada Corporate Intelligence. “It’s not unlike the sports guy, dangling six different teams.” Kuehl said he actually heard someone compare the Ford deal to the bidding war over NBA star LeBron James.

Is Kuehl a Show-Me Daily reader? Perhaps the someone he refers to was Joseph Steelman, who made that exact comparison in a recent blog post. Or perhaps that person was myself, because I also previously discussed how the bidding war over James is an example of how taxes can incite people and businesses to change their behavior.

The post Missouri’s “Subsidies-for-Development Disease” appeared first on Show-Me Institute.

Pitting states against each other is one of the more significant negative consequences of offering generous incentive packages to single companies. It encourages states to offer incentive packages in ever-increasing amounts, in a desperate attempt to entice these companies to locate within the state. Then, the company tells each state government that other states are offering huge incentives for it to invest there, and that they must meet or exceed these offers in order for the company to stay.

In the case of Ford, it’s a confusing mess. After Ohio gave Ford $83 million in incentives during 2002 to expand in the state, Ford moved its production to Missouri. Because Illinois gave Ford an undisclosed amount of incentives in January 2010 to open an assembly plant in Chicago, the company moved its production of Explorers from Kentucky to Illinois. Just last month, the state government in Michigan awarded $10 million in Brownfield tax credits to Ford to redevelop a section of the Michigan Assembly Plant complex in Wayne. Meanwhile, Ford told the Missouri state government that it needs $150 million over 10 years to keep its Claycomo plant open, or else it would move production of its Ford Escape and Mercury Mariner to Louisville. At the same time, Ford seeks tax incentives from the Kentucky state government. They say that, in order to remain in Kentucky, they need financial assistance. Ford secured up to $180 million in incentives from Kentucky in 2008, and $66 million in 2007.

Now that Ford has secured $150 million from the Missouri state government, will the company ask for still more, or will it pack up and leave the state? How do we know that Ford won’t demonstrate the same behavior in Missouri?

When a large company like Ford pits states against each other, other groups are negatively affected. For example, it causes taxpayers to face a higher tax burden because the state has to pay for these incentive packages. It also forces small businesses that lack lobbying power to compete at a competitive disadvantage.

It’s a very expensive game, and taxpayers everywhere would be better off if their state governments stopped playing.

The post Pitting States Against Each Other: Ford’s Expensive Game appeared first on Show-Me Institute.

The GOP should take positive action to keep jobs in Missouri. Look at Michigan. It offers numerous incentives to corporations to move to Michigan. And it works.

[…] With unemployment in Missouri at more than 9 percent, what exactly does the GOP have to offer?

From this letter, it is apparent that the writer measures success in terms of job growth. However, the writer ignores the fact that Michigan boasts the second-highest unemployment rate in the union — certainly higher than the rate in Missouri. According to the Local Area Unemployment Statistics (LAUS) from the Bureau of Labor Statistics, the unemployment rate in May 2010 is 13.6 percent in Michigan and 9.3 percent in Missouri.

Moreover, the unemployment rate in Missouri is historically much lower than Michigan’s. Using the Show-Me Institute’s IDEAS application, I produced the following graph:

Trend of Unemployment Rate In Michigan and Missouri

Why are there calls to emulate the public policies in Michigan? Its economy is in terrible shape! To paraphrase Catherine Aird, Michigan would be better viewed as a horrible warning than as a good example.

Furthermore, targeted tax credit programs do not work in Michigan. The Mackinac Center for Public Policy in Michigan has produced many studies that demonstrate this. As Audrey Spalding recently wrote on this blog, tax credits fail to deliver on their promises — particularly in terms of job creation, and particularly in Michigan.

The post “If You Can’t Be a Good Example, Then You’ll Just Have to Serve as a Horrible Warning” appeared first on Show-Me Institute.

On July 9, after awarding a multi-million-dollar tax credit package to a company that produces a sugar substitute, Gov. Jay Nixon’s office issued a press release claiming that 612 new jobs will be created in Missouri. The governor said:

These jobs will be a significant boost to Missouri’s economy and our manufacturing sector, and they’re another positive sign that our economy is beginning to move forward. I am pleased that my administration was able to provide a competitive package of strategic economic incentives to help bring these jobs to Missouri.

Statements from proponents of the tax credit for the Ford plant in Claycomo, despite the political finagling being done to push it through, sound reasonable. Sen. Victor Callan (D-Independence) told the Kansas City Business Journal that up to 3,700 jobs could be lost if the state doesn’t award Ford a large amount of state tax money.

But, although the claims can sound reasonable, they are only claims.

The problems of using tax credits to encourage economic development have been discussed at length: Tax credits often don’t create economic activity, but instead merely shift it to another location; tax credits are a form of centralized economic planning, which has a bad track record of encouraging economic growth, whereas lower tax rates do a better job of stimulating the economy; government officials have no special ability to predict future economic growth or success; and, of course, tax credits allow elected officials to play favorites.

In addition to the list above, casual readers should be skeptical of the future job claims made when state tax credits are doled out, because they are merely promises and forecasts. Studies have shown that job claims are often very different than what is ultimately accomplished with taxpayer money. A study by the Mackinac Center for Public Policy compared job promises made in press releases issued by Michigan’s economic development agency as it awarded tax credits to the actual outcomes of those programs. During a 10-year period, Mackinac found that of 127 projects that promised fully produced facilities, only 10 projects were completed on time and produced the number of jobs promised.

A report recently published by the Columbus Dispatch showed that Ohio is still waiting on some jobs and investment promised. In fact, as reporter Mark Niquette found, of the $1.6 billion in tax credits initially awarded in Ohio, only about 40 percent were ultimately redeemed. This disparity, as explained to me by Niquette over the phone, can be attributed to two factors: First, many tax credits awarded are never redeemed at all by the company, and second, some of the outstanding tax credits awarded may be redeemed in the future.

Of the companies that did manage to redeem Ohio state tax credits, roughly 1 in 10 jobs promised were not created.

Interestingly, one company that’s also dominating Missouri tax credit news failed to deliver on promised job creation in Ohio. Niquette writes:

Still, there are more than 100 projects that fell 50 jobs or more short with no action reported. At the top of the list is Ford, which received more than $1 million in tax breaks for a 2002 project to create 800 jobs for production of the Escape and Mariner in Avon Lake.

The data show “zero” jobs actually created because Ford moved the production to Missouri, officials said. The state said Ford stopped getting the tax breaks when the production left Ohio.

Only additional research can show whether Missouri’s Department of Economic Development has a tax credit track record better or worse than that found in Michigan, or that found in Ohio. But we all have to keep in mind that promises made in press releases about job creation and about the investment that will take place as a result of tax credits are only promises. In other states, those promises have a tendency not to bear out.

The post Tax Credits: Often Not the Panacea Promised appeared first on Show-Me Institute.

The jobs were lost when healthcare costs of cars built in American plants like Claycomo became uncompetitive with those of Toyota and Honda.

This statement illustrates how, in the game of picking winners and losers, the government almost always picks losers. This is because the government chooses to protect companies and industries that the market has already rejected to some degree. If they were successful and viable on their own, they wouldn’t need to seek the favor of the government.

A knowledge problem exists. When the government picks winners and losers, it asserts that it knows the optimal level of something. In practice, such a level is impossible to determine. I do not know the socially optimal mix of any set of products and services, and neither do government officials. No one has access to perfect information. It would be beneficial if the state government stayed out of playing favorites in the market and instead let individuals determine their own optimal levels by engaging in unrestricted trade.

In the profit-loss system of our economy, the prospect of profits encourages individuals and firms to take risks and to innovate, and the losses weed out failure. By picking losers to subsidize, the government penalizes success and rewards failure, reversing to some degree the incentive structure that the profit-loss system would otherwise provide.

Instead of competing in the market on an even playing field, groups that are short-sighted and self-serving petition the government to tilt the field in their favor. We witness this behavior all too frequently in Missouri (in the form of targeted tax credits, rebates, sales tax exemptions, property tax abatements, occupational licensing requirements, and mandates, etc.). As a negative consequence of performing favors for a few losers, the government places winners at a disadvantage by making it harder to compete in the marketplace.

Government should cease offering incentives to losers in the market, and instead return the money to taxpayers to spend in the private sector on the goods and services that they desire.

The post In the Game of Picking Winners and Losers, the Government Picks Losers appeared first on Show-Me Institute.

First, I realize that the caller suffers from “make-work bias,” a concept developed by Bryan Caplan, a professor of economics at George Mason University, in his book The Myth of the Rational Voter: Why Democracies Choose Bad Policies. In an excerpt published in Reason, “The 4 Boneheaded Biases of Stupid Voters,” Caplan writes (emphasis mine):

The public often literally believes that labor is better to use than conserve. Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress but as a danger. I call this the make-work bias, a tendency to underestimate the economic benefits of conserving labor. Where noneconomists see the destruction of jobs, economists see the essence of economic growth: the production of more with less.

Second, I failed to point out that the caller focuses on the needs of a select group rather than those of everybody in the economy. This is a common error that people make when evaluating policies, as Frédéric Bastiat discussed in “What Is Seen and What Is Not Seen.” On the subject of subsidizing employment, Bastiat writes (emphasis mine):

[I]t is clear that the taxpayer who will have been taxed one franc will no longer have this franc at his disposal. It is clear that he will be deprived of a satisfaction to the tune of one franc, and that the worker, whoever he is, who would have procured this satisfaction for him, will be deprived of wages in the same amount.

Let us not, then, yield to the childish illusion of believing that [a vote in favor of subsidy] adds anything whatever to national well-being and employment. It reallocates possessions, it reallocates wages, and that is all.

When arguing in favor of tax incentives for the Claycomo plant, the radio caller considered only the benefit to the 3,700 plant workers who will keep their jobs. He doesn’t consider the unseen cost that, if the state legislature approves the proposal to provide $150 million in tax credits, the rest of the tax base (a much larger group) will be $150 million poorer. This policy doesn’t increase income; it merely displaces it. As a related unintended negative consequence, the organizations that may have employed these factory workers, had they been laid off, will be restricted in their growth because they would face a smaller supply of labor.

This brings me to my third point. Subsidizing the Claycomo plant would contribute to a higher level of unemployment in the long run, negatively affecting all of the workers in the Claycomo region. Caplan explains this too:

The hard lesson to learn is that giving people “rights to their jobs” is a drain on productivity—and makes employers think twice about hiring people in the first place.

The fact that Claycomo Ford plant will close if unsubsidized indicates that the area no longer has a comparative advantage in manufacturing Ford cars. The area would be better off if its resources — human and otherwise — were employed in activities that do not require subsidies. As a direct consequence, the region would have the capacity to produce more, and the individuals in the market would be able to keep a greater percentage of their income.

The post Why Closing Ford’s Claycomo Plant Would Be Good for the Economy appeared first on Show-Me Institute.

• Make it easier for counties to lower the surcharge if they want.
• Require the surcharge to roll back like all other real property taxes.
• Sunset the entire tax in five years.

Counties would be able to adjust to the sunsetting of the tax without unduly putting the burden on residents by adopting the St. Louis County system of setting different rates for different property classifications. First, they would have to adopt that system, and legislation might be required to reopen that option. These surcharge changes would be terrific for the economies of Missouri’s larger counties, and I am excited that they will again be considered in special session.

The post A Different Strategy for Manufacturing in Missouri appeared first on Show-Me Institute.

Economic development tax incentives, no matter how they are packaged, are not effective. They allow government officials, who have no special knowledge of how to maximize growth, to pick winners and losers in the market. As Show-Me Institute Executive Vice President Joseph Haslag has written before, lowering broad tax rates is a much more efficient method of stimulating the economy than targeted tax credits. This allows everyone to benefit, rather than a few select industries chosen by the state.

Empirically, studies analyzing the benefits that development tax credits deliver in comparison to their costs show that such tax credits have not worked. A recent Missouri state audit report found that tax credits are less effective (and more expensive) than their proponents claim. Yesterday, St. Louis Public Radio broadcast a segment featuring a study that examined another form of tax incentives in Missouri, tax increment financing (TIF). Kenneth Thomas, a political science professor at the University of Missouri–St. Louis, recently coauthored a study that found the use of TIF is not effective in most cases. He noted that the St. Louis area uses TIF more than nearly every other area in the nation. In the interview with St. Louis Public Radio’s Matt Sepic:

Sepic: That’s one longstanding criticism, is that TIF pits communities against one another. A prime example is that tussle between Bridgeton and St. Anne over a Walmart. Is that a bigger problem in the St. Louis area than elsewhere, with this panoply of municipalities that we have here?

Thomas: Oh, yes, certainly having more municipalities makes the competition more intense.

The study argues that, although many economists have found TIF to be ineffective, this method of funding continues to be used because of the competitive nature of tax incentives. When one area offers a tax incentive, other areas nearby often try to “win” a company’s business by offering competitive tax incentives. The result is a bidding war in which the taxpayers lose. This can be seen in the Claycomo Ford tax credit situation, as well — other states, like Kentucky, have offered tax incentives to Ford in an effort to persuade them to relocate their plant. In order to compete, Missouri would have to offer a better deal, while recognizing that this game will be played again the next time the credits run out.

Later in the interview, Thomas notes an important misunderstanding — the idea that tax incentives like TIF “create” jobs:

Thomas: [T]hose estimates never take into account the fact that, well, yes, we are going to create 200 jobs here, but what’s going to happen is we’re going to knock out 180 in the next mall over.

Tax credits and TIF tend to shift economic activity from one area to another, without creating wealth. Missouri’s tax dollars would be much better spent in the hands of individual Missourians than on enticements for companies like Walmart or Ford.

As Milton Friedman pointed out on his PBS TV series “Free to Choose,” even if other nations, states, or localities offer tax incentives to lure businesses, we’re better off if we don’t do the same — because we benefit from the lower prices their subsidy creates. Missouri will experience better economic growth if it unilaterally removes itself from the tax incentive bidding wars.

The post Tax Incentives Are a Game We Can’t Win appeared first on Show-Me Institute.

The post Tune In Soon! appeared first on Show-Me Institute.

Only two weeks ago, though, the governor advocated an incentive package for Ford Motor Co. worth $15 million per year for the next decade, aiming to keep Ford in Missouri. Ford’s Claycomo plant employs 3,700 Missourians, jobs that no politician wants to lose to another state, especially when Missouri is facing unemployment between 9 and 10 percent. The governor said he may call the legislature into a special session to pass the the package, even before receiving assurance from Ford that the plant will stay if the bill passes.

Tax credits generally entail some amount of dead-weight economic loss, as has been extensively discussed on this blog before. By subsidizing those industries or companies that state officials view as most important, tax credits will tend to distort natural aggregations of supply and demand. And no matter how carefully they choose which companies or industries should be the recipients of tax credit policy, public officials have no special ability to choose the right mix of industries or predict which one might maximize economic growth.

Many companies have come to rely on maintaining their profits through use of those tax credits that have been subject to recent cuts. Telling them to tighten their belts while at the same time handing out $150 million in incentives to Ford just isn’t fair. Tax credit cuts are necessary, and more cuts are needed, but simultaneously crafting a piece of legislation full of tax incentives for Ford makes it look like the state is just playing favorites.

The post Playing Favorites With Tax Credits appeared first on Show-Me Institute.

Nixon proposed to “right-size” government by merging agencies, eliminating state holidays, laying off more employees, getting rid of state vehicles, scaling back employee pension and health benefits, privatizing child support collections and curtailing Missouri’s expansive tax credit programs.

He may talk the talk, but he doesn’t consistently walk the walk — he has continued to support giving tax credits to specific businesses. Here, I reference the $28 million in state incentives that the Missouri government is giving to IBM to locate in Columbia, Mo., or the proposed $15 million in tax credits to support the Ford plant in Claycomo, Mo.

Even though the incentive package for Ford’s Claycomo plant didn’t pass the state legislature, the governor strongly supported the proposal. According to the Kansas City Star:

The bills’ failure was a disappointment to Democratic Gov. Jay Nixon, who had pushed hard for both the jobs bill and retirement reform, and worked through the day Thursday and Friday to make a deal on their passage.

“Unfortunately, the General Assembly missed a critical opportunity by failing to pass this package,” Nixon said.

The recession has provided a new opportunity to evaluate the appropriateness and the effectiveness of specific government programs. I do give credit to the governor for communicating his commitment to reduce state expenditures. However, I wish that he would advance a consistent message regarding tax credits.

The post Mixed Message About Tax Credits appeared first on Show-Me Institute.

Be that as it may, I still think I have a better idea. If you want to help the Ford plant in Clay County, make it easier for officials there to lower the enormous commercial property tax surcharge that county businesses pay. Clay County levies the third-highest surcharge in Missouri, at $1.59 per $100. Compare this to the GM plant in St. Charles County, which pays only $0.53 per hundred. Making it easier for the Clay County legislature to lower that rate, and changing the surcharge so that it rolls back as assessments increase, would benefit all the businesses in Clay County — the Ford Plant in particular.

For more background on the commercial surcharge in Missouri, check out this article, this testimony, and this House Resolution, which has been introduced in an attempt to make these important changes.

The post A Better Idea for the Claycomo Ford Plant appeared first on Show-Me Institute.