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"Race, Poverty and Corporate Welfare,"

by Greg LeRoy www.goodjobsfirst.orgMarch/April 2000 issue of Poverty & Race

The last two decades have seen an explosion in the number and value of state and local “business incentives” enacted in the name of economic development. Often, these subsidies are promoted as a way to alleviate poverty or reverse urban decline.

However, many such programs have become so deregulated that their original targeting intentions have been subverted. Some very disturbing evidence is now emerging that instead of reducing poverty or discrimination, taxpayer money some call “corporate welfare” is actually subsidizing poverty and fueling racial inequality.

While the evidence is disturbing, news from the organizing front lines is heartening. Armed with breakthrough disclosure data and a trickle of foundation support, a small but determined network of non-profit groups is aggressively rewriting the policy dialog about development. Coalescing with many diverse movements, these groups are winning dozens of accountability precedents. Their breakthroughs suggest that “back to basics” – raising workers’ living standards – is winning the day.

Development Subsidies: Mushrooming and Loose

It’s not possible to place a dollar figure on state and local spending for development, because very few states report development budgets that combine spending in both appropriations and the tax code. Even fewer have centralized records about local property tax abatements.

But the spending trend is undeniably up. Twenty years ago, only 21 states granted corporate income-tax credits; today, 37 do. Then, only nine states granted tax credits for research and development; today, 36 allow them. Only 20 states provided low-interest, tax-exempt bond financing; today, 44 provide it.

It’s not at all unusual now to find deals worth more than $100,000 per job; five of our “Terrible Ten Candy Store Deals of 1998” exceeded that price – including one at $8.8 million per job!

If such spending benefitted needy workers, perhaps it could be justified. But many such programs have become so deregulated as to moot anti-poverty intentions. For example, Louisiana, Arkansas and Ohio now have a total of 2,360 enterprise zones. Turning an anti-blight program into a “gimme” cancels the original targeting intent.

Other subsidies undermine public services critical to equal opportunity. For example, the Louisiana Coalition for Tax Justice found that the state’s industrial property tax exemptions for the 1980s cost schools $941 million. Louisiana has one of the nation’s lowest high school graduation rates. (Almost three-fourths of the projects created no new jobs!)

So the boom in development spending not only is poorly targeted but is extremely expensive. The bottom line: real wages for average working people have declined about 15% since the late 1970s, and the share of working poor has increased by 5%. How could so much be spent for such bad results? The answer: most development subsidies still lack basic safeguards, such as real targeting, wage floors, employer-paid health care or full-time work requirements.

Job Subsidies and Equal Opportunity

There is also a small but disturbing body of evidence that development subsidies are being used by employers with discriminatory employment practices or by industries that are moving good jobs away from people of color.

For example, a 1984 analysis of industrial revenue bonds (IRBs – low-interest loans supported by tax-free bonds) by the Illinois Advisory Committee to the U.S. Commission on Civil Rights found an adverse effect on workers and minority entrepreneurs. They examined 104 IRBs in the Chicago area. In fully one-fifth of the deals, either the recipient company or the bank that bought the bonds had recently violated the federal fair employment rules of the Equal Employment Opportunity Commission.

The study also found that only three IRBs went to African Amer–ican-owned firms, one to an Asian-owned firm, and none to Hispanic-owned firms. At one-third of the companies, Black workers were far underrepresented compared to the area’s overall labor market. Two-thirds of the companies also had disproportionately small Hispanic employment, and more than half had disproportionately small female workforces.

The auto industry presents a troubling multi-state story. Since the mid-1980s, there have been massive auto investments in the U.S. by foreign car makers, especially Japanese firms, building more than 300 plants. Virtually all received multiple state and local development subsidies. This new “auto belt” is concentrated in Kentucky, Tennessee, southern Indiana and Ohio, South Carolina and Alabama, far away from traditional metal-working cities such as Detroit and Cleveland with large minority workforces. A 1988 study by University of Michigan professors Robert Cole and Donald Deskins on three early assembly “transplants” (Honda, Nissan and Mazda) and 51 Japanese parts plants or “subplants” found that African-American workers were significantly underrepresented at almost all of the 54 plants.

A few transplants have been charged with discriminatory practices, such as defining recruitment territories that excluded urban areas with minority populations. Cole and Deskins found that Blacks comprised 2.8% of Honda’s Marysville, Ohio workforce, although they made up 10.5% of that area’s available workforce.

The Woodstock Institute examined the geographic distribution of Small Business Administration loan guarantees in the Chicago area. It found that higher-income and outlying zip codes received more loans than lower-income and closer-in areas. Several studies have found that incentives such as IRBs, intended to benefit distressed areas, are used more often by prosperous jurisdictions.

Sprawl: A New Analytical Wedge

Although urban sprawl is often viewed as a suburban quality of life issue driven by environmentalists, there is a social equity wing of the smart growth debate focusing on race [see john powell’s article in the Sept./Oct. 1999 P&R, “Achieving Racial Justice: What’s Sprawl Got to Do With It?”] That wing views the new “metropolitics” as a way for advocates of traditional equity causes such as community reinvestment, affordable housing and fair employment to frame their work as part of a regional solution.

A new study by Good Jobs First links development subsidies to sprawl and concludes that taxpayer-financed corporate migrations are harming people of color in the Twin Cities. The study, “Another Way Sprawl Happens,” analyzes 29 companies with 1,600 jobs that relocated to a 300-acre industrial park in the distant suburb of Anoka, which gave the companies free land valued at more than $7.5 million.

The net result of the subsidized relocations was to move the jobs away from the region’s largest concentrations of people of color, away from pockets of poverty and away from households receiving public assistance. The migrations also had a devastating effect on transit accessibility. Before the relocations, more than 70% of the jobs were accessible by regularly scheduled transit. In the Anoka Park, they are no longer accessible.

This movement will especially harm inner-city workers, who are more likely to rely on public transportation. Only 40% of Black households in the Twin Cities region owned a vehicle in 1990. A report on the region found that 50% of the region’s employment growth will occur in the outer-ring developing area where nearly half the projects are inaccessible by transit. Many studies have shown that decentralization of employment from central city to suburban locations has disproportionately harmed minority and low-income workers because they face barriers finding housing in the suburbs.

A few journalists have made the subsidy-sprawl link. A 1995 Kansas City Star series cited several prosperous suburbs giving tax breaks to companies leaving depressed core areas. The paper found the deals particularly galling because the tools being used by the wealthy suburbs were originally intended to help central cities. “Created to combat sprawl, tax breaks now subsidize it,” the Star concluded. A 1999 Milwaukee Journal Sentinel series cited a mutual fund company in suburban Menomenee Falls which received a $3 million tax credit, justified because it is “close to Milwaukee County, which continues to have higher unemployment than the state average.” A state senator commented: “[I]t’s essentially a government subsidy to promote sprawl.”

Disclosure and Accountability: Hope on the Horizon

As mentioned above, a small but growing network of grassroots groups is working to rewrite the policy dialog about development. Building coalitions of organized labor, consumer, religious and civic groups, and living wage campaigns, these groups are literally redefining economic development.

The Minnesota Alliance for Progressive Action (MAPA) won the nation’s first comprehensive subsidy disclosure law in 1995. It requires annual, company-specific reports on job creation and wages. The data enabled Good Jobs First to analyze 525 deals and identify 38 deals valued at $100,000 or more per job. Despite such high subsidies, 65% of the subsidized companies were paying wages so low that a family of three would still qualify for Medicaid and 25% would still qualify for Food Stamps. Armed with these findings, MAPA won major reforms, including mandatory wage standards.

The Maine Citizens Leadership Fund and the Maine Center for Economic Policy helped win disclosure in that state in 1997; the data are being analyzed by the Cambridge-based Commonwealth Institute. Among the key findings: 27% of the subsidized jobs pay wages below a living-wage benchmark tied to the federal poverty line, prompting a reform debate.

The Los Angeles Alliance for a New Economy, the nation’s largest local subsidy-accountability project, analyzed that city’s biggest redevelopment deals of the 1990’s. It found that low-wage retail deals got 65% of the subsidies, and that 55% of those retail jobs paid less than $8 an hour, so little that a family of three would still qualify for public assistance.

Such pioneering efforts are moving the public debate. As Good Jobs First recently documented, at least 36 states, 26 cities and five counties now attach job quality standards such as wage rules, health care requirements and full-time hours to development subsidies – an eleven-fold increase since 1994!

Greg LeRoy directs Good Jobs First, a project of the Institute on Taxation and Economic Policy (1311 L St. NW, Wash., DC 20005; 202/737-4315). He is author of No More Candy Store: States and Cities Making Job Subsidies Accountable, published by ITEP, and 1998 winner of the Public Interest Pioneer Award of the Stern Family Fund. All of the Good Jobs First studies mentioned in the article are on their website and available (free) from the author.

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