The astounding mediocrity of Ohio's job tax credits

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The astounding mediocrity of Ohio's job tax credits

Four major companies in the Dayton area announced layoffs in the first half of 2012

Collectively, Eastman Kodak, Appleton Paper, Computer Sciences Corporation and  Supevalu Inc. sent 637 Ohioans to the unemployment line.

All four also share the distinction of receiving money from Ohio through the years via the Job Creation Tax Credit (JCTC), an underwhelming (to put it charitably) state program that's been annually handing out millions of dollars in taxpayer cash to corporations on the promise of job creation without producing appreciably better results.

The JCTC is Ohio's main driver of economic development. It is for many conservatives what social programs are for liberals—something to throw money at with too little regard for results, simply because it feels right.

"It's not that it doesn't work at all, it's just an expensive way to get fairly small results and there's a lot better things they could do with their money," says Dr. Peter Fisher, a professor of Urban and Regional Planning at the University of Iowa. Fisher has studied state tax incentives and consulted for the State of Ohio.

Between the JCTC's origin in 1993 and 2003, the state issued breaks totaling $230 million (in 2011 dollars) and approved deals creating around 70,000 new jobs.

Since then, the state's spent over $623 million and signed off on agreements producing about 30,000 new jobs (as of the 2011 annual JCTC report, released in late October).

While it's not a one-for-one comparison decade-over-decade—that $623 million includes ongoing expenditures from those earlier agreements - the question remains: How much bang are we getting for our buck?

Lately it sounds more like a paper popper than an M80.

The question becomes even more relevant as money that could be ticketed for local firemen, teachers and policemen is diverted into a program inextricably tied to the new, quasi-private JobsOhio organization, which promises even less transparency and apparent accountability. On top of it all, many economic studies indicate the effects of state tax breaks on hiring are small, costly and ergo tremendously inefficient – often paying corporations to do what they already planned to do.

Take for example IBM's November announcement that the company was opening a state-of-the-art data center in Columbus creating 500 jobs. What role state tax credits may have had in IBM's decision will forever be colored by the fact that they weren't announced until three weeks later. While it was noted in November that they were in ongoing negotiations with the state, you don't come away with the impression their arrival hinged on it.

Or consider the December announcement of a JCTC credit for King Nut's expansion in Solon. The deal was approved about two weeks before the new distribution center opened, and apparently after they'd ordered $1 million in machinery and hired 25 new employees. If plans were in place before a deal is finalized doesn't that make the taxpayers' money more like a Welcome Wagon than a jobs incentive?

"It's become something of an entitlement," says Zach Schiller of Policy Matters Ohio, noting the record 181 agreements approved in both 2010 and 2011. "This has not been a program where [the money] was given out as judiciously as it should be, or enforced as much as it should be."

Chasing the Hatfields

The JCTC began, ironically enough, just as the feds were tightening requirements on social welfare programs. It was spurred locally in part by Kentucky's passage in 1988 of the Kentucky Rural Development Act. It offered, in addition to breaks on corporate income tax, a new gambit which diverted part of their workers' payroll taxes to the employer.

Worried about losing jobs to border-hopping companies, Ohio inaugurated in 1992 its own corporate tax credit tied to employee withholding. Indiana followed suit two years later, and now half the country offers some payroll-diversion job creation tax break. The rationale is that there's nothing wrong with giving away money you otherwise wouldn't see.

While this is true, a lot hinges on "otherwise wouldn't see." A 2002 study comparing employers who did and did not receive a similar Georgia job-creation tax credit over a three year period concluded that 75 percent of the jobs would still have been created otherwise. But as Jimmy Kimmel says, who doesn't like more money?

The Ohio program requires that applicants maintain current job levels and add at least 10 new hires at 150 perecent of the federal minimum wage ($10.88) within three years.

The credit is fully refundable, meaning it can reduce the company's tax liabilities to where the state has to write them a check. This is important because studies have shown anywhere from 44 percent (Indiana) to 65 percent (North Carolina) to as much as 88 percent (Georgia) of corporations may not pay any state taxes. (Little information is available on Ohio corporate taxes since 2005's massive reform.)

JCTC is administered and enforced by the Ohio Department of Development. They work in concert with Governor John Kasich's new non-profit private organization, JobsOhio. They're tasked with finding companies and facilitating their application for the credit.

The applications are approved by the five-member Ohio Tax Credit Authority which sets tax credit rate (usually kicking back 50-65 percent of employees' total withholding) and term, based on JobsOhio recommendations. The Authority is paneled by the ODOD director (or their designee), and four members appointed by the Governor, House Speaker and the Senate President.

"I don't think they take a serious look at every company that walks in the door and...negotiate something based on whether it's necessary and whether the state can provide the minimum assistance to get the maximum bucks and maximum development," Schiller says. "Instead it's like here's all we have to offer, what do you want?"

JobsOhio didn't respond to multiple requests for comment from Scene.

The High Cost of Mediocrity

The JCTC is like a .200-hitting middle infielder. They do a passable job, but don't get the kind of results that warrant significantly greater investment.

During JCTC's first 19 years, its companies promised to create more than 250,000 jobs and wound up coming through on fewer than 100,000.

Historically, only about two-thirds of approved projects are actually executed. Of those, more than a third are terminated by the state for failure to meet benchmarks. Another 10 percent are canceled or closed by the company before completing the project's term. That means just 37 percent of approved projects are either active or completed.

The numbers are even worse of late. Until 2003, three-quarters of approved agreements were executed. From 2004 to 2010 just 63 percent of those approved were ultimately executed.

Meanwhile, investment has decreased over time both in what's been promised and actually realized. Just twice before 2005 did total committed investment for executed agreements fall below $850 million. It's reached that just once since. Actual investment during that period (excluding 2011) has been around $600 million, less than half what it averaged in the years prior when it nearly always substantially exceeded the commitment. And this comes at a time when they've approved more projects then ever?

Job numbers are equally disconcerting going back to before the Great Recession. Using a three-year rolling average (because of the lag time for projects to ramp up), JCTC helped create an average of more than 6,000 new jobs annually until 2003. Since then it's averaged less than 4000. This despite receiving more job commitments the last five years than almost anytime earlier. (That shortfall's driven in part by the even lower execution rate of approved agreements recently).  

"There are other factors to consider," says Darryl Hennessy, ODOD's Assistant Chief of Business Services and sometime chair of the Tax Credit Authority. "Part of it is driven by wage commitment, part of it by investment, some of it by location in the state, others could be by targeted industry. So there are many factors that will affect an agreement, not just job creation."

Unfortunately, recent wage numbers aren't any better. After spending the entire '90s under $20/hour (in 2011 money), JCTC started creating better jobs. Average promised wage of new hires peaked at around $25 in 2002 and 2003. It's been in decline since, bottoming out under $21 in 2009 and 2011 for the second and third times since the millennium.

There's reason to wonder whether the JCTC is even headed in the right direction. In September, Kasich signed a JCTC exclusion into law for companies with "home-based employees." The six-year trial program will reduce the wage requirement to 131 percent of minimum wage ($9.50), presumably opening the door for Convergys, the Cincinnati-based call center operator. The company has reportedly been implementing "home agent" programs and testified in favor of the exception.

It's a nice thank you gift for Convergys, who last year had to pay Cincinnati $14 million for failing to meet the job requirements of a 2003 deal to keep them from moving their headquarters to Kentucky.

Toledo had its own run-in with Convergys, offering tax abatements to open a south Toledo call center in 2000 that had been shipped overseas by February 2004. JCTC also had a deal on the Toledo phone center and terminated the agreement with clawback of some state monies.

At times it's unclear whether they even care what industries they promote. For example, in 2004, the JCTC approved a tax credit for Buckeye Check Cashing Services, now generally known CheckSmart. They promised to bring 159 jobs to Dublin for which they would receive a tax credit valued at $2 million.

Though the plan fizzled out and the agreement was terminated, one wonders what role the nearly $200,000 owners Michael Lenhart and James Frauenberg and their family made in political donations might have played in the initial offer. The state also offered them a $7 million loan offer they passed on. (Maybe the interest rate was too high?)

"[These tax credits] are getting to be like Enterprise Zones. Everybody wants a piece of the action," says Fisher. "Now they're all over the place, not just in a few depressed areas."

And Still You Say Goodbye

Drill down beneath the numbers and you find numerous examples of broken promises and changing fortunes that belie the difficulty of betting on commercial businesses. Simply put: shit happens.

In December 2010, the Tax Authority announced an estimated $2.4 million in tax credits for Citigroup to add 300 new jobs to their investment consulting entity in Columbus, Citi Fund. (Never mind that at the time, an executive explained planning for the jobs had begun 18 months earlier.) Then in October of last year, Citigroup hired new CEO Michael Corbat, and in December he announced 11,000 in layoffs, including a quarter from the investment banking side.

In 2008 the Tax Authority approved a deal with Nexergy Inc. to add 75 jobs to a Columbus plant that made rechargeable battery packs. Few of the jobs had materialized when in October 2010, Nexergy merged with International Components Corp to become ICCNexergy Inc. Nine months later they announced plans to close the plant, laying off 86 full-time and 34 part-time employees. In 2007 Insurance.com signed an agreement to add 128 jobs at their Solon HQ. Three years later it was sold to QuinStreet Inc., who announced 144 layoffs within a year.

In 2006, Core Molding received approval for a plan to hire 69 new employees at its Columbus plant. Then Navistar Inc., who supplied 57 percent of Core Molding's revenues, shifted part of its production to Mexico. To better serve their best client, the truck parts maker Core Molding sent 90 jobs to Mexico, and the JCTC terminated the agreement. Other companies like Advanced Lighting Technologies, who had a deal with the JCTC for at least five years, simply decided to go with the cheaper labor, shifting manufacturing to India and laying off 100 at their production facility in Solon.

While the Job Creation Tax Credit was designed to encourage investment, it doesn't exactly ensure fealty, as history shows. The business cycle, technology and competition demand change, and companies must answer to survive. That offers far greater impetus for action than what the state offers. This is in essence why economists have little love or patience for these tax giveaways. Supply and demand are much bigger levers.

"The real issue is lack of consumer spending. It doesn't matter how cheap it is to build a plant, you're not going to build it if there's nobody to buy your products," Fisher says. "But that doesn't slow people down in their efforts to give more breaks and incentives."

Nor do these breaks tend to constrain large companies' desire to move plants or headquarters because they're so small in comparison. State and local taxes on business amount to 1.8 precent of total business costs, and corporate income taxes only represent around 10 percent of that. Thus even a 50-percent cut in state corporate taxes would save them less than 1 percent of their business costs. And for this we expect some allegiance?

If we were flush, perhaps we could afford to make an increasing number of these bets, but it's hard to ignore the $1.3 billion in cuts to schools and local government demanded by Kasich the last two years.

This is the very core of the argument. Whatever your quibbles about their craftsmanship, Cleveland firemen, teachers and policemen aren't going to go out of business or be outsourced to Asia, something for which the state would be left to pick up the pieces (i.e. unemployment, health care, job training and, perhaps eventually, substance abuse counseling).

Then again, public spending isn't nearly as sexy as giving cash to business under the auspices of jobs that often never show. And why not promise big?

A 2002 study of the Ohio's job creation program by Todd Gabe and David Kraybill not only found no employment growth by companies receiving the incentive, but that those companies overstated their anticipated hires by more than 40 prcent. They suggested the companies misrepresented their hiring prognostications to improve the level of the tax award. (The JCTC typically offers better terms as the number of jobs created and retained increases.)

For a politician, it amounts to an almost victimless crime. Promise companies grants and subsidies to come to Ohio, and if they don't, you tried, and if they do, you're a job-creator. Only rarely do people tend to look at the price tag or dig into the subject deep enough to find all the hidden costs. Hopefully you've moved on to a better job before it goes south, but even then, you can always shrug your shoulders and argue it's not your fault conditions changed.

"If you have a business that publicly announces they're thinking of coming to your state, the consequences of losing that business to the competition is pretty severe," says Fisher. "But if they come to the state, it doesn't seem to matter a whole lot to people how much you have to spend to get there. You can claim credit for it. You can claim it's a good use of money, and your opponent is going to have a hard time attacking you."

Just Stay the Way You Are

The JCTC is probably financially inefficient, and undoubtedly rewards companies for hiring they already intended to do, but at least you can argue that it doesn't take money out of the treasury; if they don't create any jobs, they don't get any tax break.

Not so with the Jobs Retention Tax Credit, which rewards companies for simply doing what they're already doing. It's the flipside of the JCTC, in a way, which was designed to lure companies to the state. This one's designed to keep them from leaving and as such is the very definition of a slippery slope.

"That one was started as an incentive that was going to be used very occasionally for the very biggest investments —originally it required a $200-million investment, so it was essentially for an auto assembly plant," says Schiller. "They watered down the criteria to allow a much greater range of companies and projects to apply for this tax credit after a state study that came out in 2009."

The cardinal problem is there's little way of knowing how honest they are about their intentions or if they're just extorting more money from the government. Schiller points to the recent deal with Marathon Oil as a prime example

The company, which began in Findlay over 125 years ago, makes over $2 billion in profits, and yet Ohio's offering a break worth 75 perecent of its 1,650 employees' taxes for the next 15 years. Despite the fact they made no noises about leaving.

"I think Marathon always wanted to be here," Kasich told reporters at the announcement. "All we're doing is helping them. Never take more credit than you deserve." (Excepting, of course, when that's none.)

In the eight years of the retention program prior to the Kasich administration, there were 14 approvals. In Kasich's first two years there were 17.  There are plenty of lowlights.

Last year Abercrombie & Fitch, which fired 220 people from its headquarters as recently as 2009, received a 10-percent job retention credit for consolidating two distribution centers in New Albany (one of which received a JCTC credit). This despite the fact that Abercrombie executives had told stock analysts since February of their intention to remain in New Albany.

There's Diebold, which also received a 75 percent credit last year to build a new $100 million headquarters in Green where it would retain at least 1,500 of their 2,000-person workforce. In April, it cut into that margin by shipping 200 of those jobs to India. In October of last year, Dibeold announced they'd changed their mind about building that headquarters, citing the challenging economic environment. (More so than two years ago?)

And of course there's American Greetings, which much like Bob Evans received a tax credit to move within the same metropolitan area. (Bob Evans received a job creation tax credit.) They'll receive a 75 percent retention credit for maintaining their 1,750-person workforce the next 15 years.

Fisher believes these kinds of agreements are particularly dangerous and foolhardy. "[They] produce no benefits for the state as a whole or for the local labor market," he writes in last year's paper, Corporate Taxes and State Economic Growth. "The incentives merely shift activity around, with no net gain for the region or the state, but with a loss of local tax revenue. State governments should not facilitate such beggar-thy-neighbor competition among their own local governments."

For its part, the ODOD seems to appreciate the gravity of paying for something you already have. "Each is considered on the merits of the individual case and we use the job retentions tax credit very selectively," Hennessy says. "People can question whether or not those jobs were going to be kept, but I can say for certainty that a lot of due diligence is done and [the credit] was a major factor in keeping those jobs in the state."

In the end job retention credits contribute mightily to the zero sum game of competitive corporate relocation. It's hard to advocate unilateral disarmament when "everyone's doing it," particularly when presented with individual cases. But as a whole they're a dodgy investment that drains revenues from government coffers for what's at best a threat and at worst blackmail.

"What that creates is a race to the bottom situation, where instead of just spending to bring in new jobs, you have existing companies saying well, where's mine?" says Leigh McIlvaine of incentives watchdog group, Good Jobs First. "These are examples of huge one-off investments in a relatively limited company to keep those big names in the state."

It's simply philosophically poor form because you're creating the very problem you hate.

No Daddy Warbucks

Like a reserve player, the Jobs Creation Tax Credit can be good in small doses, but tends to get overexposed the more you use it.

"The more careful and limited the amount of the incentives, and you tie them only to good jobs so taxpayers aren't subsidizing a reduction in the average wage, the better off you're going to be," Fishers says. "But there's no real way to guarantee that you're giving money when it's absolutely essential."

When Kasich came onto the scene it was like a sailor on shore leave. In 2011 he gave out more tax credits than any other governor, including $132 million in job creation and $242 million in job retention. During the last two years the Tax Credit Authority approved more than 362 projects, that mostly on top of more than 567 active projects, according to a report from Good Jobs First in April of last year.

However, in the last year Kasich has made noise about drawing a line on incentives and this year they only approved $70.5 million in job creation and $27 million in job retention credits. Maybe Kasich's arm got tired from signing all those checks.

Though he didn't show it here, Kasich had a reputation during his time in the U.S. Senate as being tough on corporate welfare. We can only hope so because so-called "economic development" has a strange tendency to resemble a hole in our pocket that they sell like it's air-conditioning.

"The line between a tax cut and spending is almost invisible. But it's much easier for legislators to generate tax credits because in some way it seems to be free money," says Schiller. "It doesn't seem the same as appropriating x amount of dollars that would be going to public schools or highways or whatever important public service we might need."

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