The business of giving public money to big corporations to secure development or relocation projects has always had an air of brinksmanship to it. The company conducting the shakedown insists it couldn’t afford to come without help; the governmental entity tries to figure out how much is a reasonable use of the public treasury to benefit the city and how much represents a big handout for the wealthy.
Nashville has certainly had a big enough dose of the spectacle after tax breaks for Dell, the Oilers cum Titans, and Columbia/HCA. And with the new administration of Mayor Bill Purcell now discovering that money is extremely tight, the thinking behind those deals will come under new scrutiny at City Hall.
The recent decision of the Bertelsmann Corp. to throw back a $28 million tax break in New York City as not worth the trouble raises questions about how much is really necessary. The publishing giant negotiated the agreement with the Giuliani administration to help build a 30-story office tower in midtown Manhattan with a total price tag of over $300 million.
The Giuliani administration has agreed to over $2 billion in such deals over the past six years to keep key employers in New York, and the break for Bertelsmann helped the company end a protracted search for a site for a new headquarters. However, when the city asked in the final stages of negotiation that the company agree to a full environmental review as a condition of getting the tax break, Bertelsmann balked. The review, which is not required by law, would have delayed the project by at least a year, and the company decided the cost of the disruption would be greater than the benefit the city would provide.
The obvious question that lingered as a result of the deal was why the city made its promise to Bertelsmann in the first place. If the company ultimately decided that the money was not worth the strings attached, the claim that the tax break was necessary to make the deal work is undermined.
Indeed, under New York law, in order to get such tax breaks, companies must sign a statement saying that they could not locate in New York without the assistance. That assertion certainly sounds dubious.
Clearly, justice is served in this instance. Other taxpayers in New York without Bertelsmann’s clout aren’t faced with having to make up the taxes that Bertelsmann doesn’t pay. Nashville should be so lucky.
The trouble is that cities generally don’t hold strong hands. While it generally costs less to keep a current business from leaving than to attract a new one, there are usually plenty of other places willing to bid more than they should to get what they think they need. In some abstract sense, turning down all the deals in order to provide lower across-the-board taxes and a general sense of greater fairness might seem advantageousbut it’s harder to stand by that general principle when a concrete opportunity is at stake.
In that circumstance, it becomes like the tale of the man who approaches a woman at a party and asks if she would be willing to sleep with him for $10 million. Since the question seems so obviously abstract and the fellow seems reasonably attractive, she says that she would. Then he asks if she would do it for $2.
“What do you think I am?” she demands, outraged.
“I think we’ve already established that,” he replies. “We’re just haggling about the price now.”
During the recent controversy in Nashville over the Dell incentive package, many of the critics argued that it was just wrong in principle for the government to give special breaks to private businesses. And while some critics would probably adhere to that line regardless of how mild the cost, most would probably have been willing to make some concessions to bring Dell to town. One can work through the cases: Would you go along with some intersection improvements? How about some sewer concessions? How about a one-year tax abatement? How about two years?
At the low end, insisting that special breaks are wrong in principle is largely a shot in the foot. At some point as the price goes up, the balance tips the other waysuggesting that it’s not so much the principle as the price.
The other factor is accumulated resistance. The unpleasant nature of the whole business carries over from deal to dealand opponents start to accumulate. Dell, which may have been the best of the various major deals, got the toughest scrutiny and touched off the hardest political fight.
During the past decade, Nashville has made five major economic development dealsthe deals that brought in the Oilers, the Predators, Columbia/HCA, Dell, and the Opryland expansion. In the wake of Bertelsmann’s decision, many New Yorkers are no doubt wondering about how many of the other deals in their city were unnecessary. The answers probably vary, as they no doubt do in Nashville:
♦ The sports teams: Of all the recruitment efforts Nashville undertook under Mayor Phil Bredesen, neither the NFL nor the NHL entries would have come to town without the major city commitments. Although both teams spared the city the spectacle of publicly shopping the team around, there is no question that there were other cities that would have made similar offers. The Oilers deal was in line with the commitments made at about the same time by Baltimore, St. Louis, and Oakland. Notably, on the sports deals, nobody honestly made the argument that the teams represented a full payback on the city’s investment. Rather, what the city gave up represented the market price for amenities many people in the city wanted. Bredesen supported the deal because he felt there were enough other advantages to justify the price.
♦ Dell: In this instance, Dell had already made a public commitment to come to Middle Tennessee with the only remaining question being which county. If all of the counties around Nashville had abstained from offering anything to Dell, it is doubtful that Dell’s level-playing-field decision would have been for a site in Davidson County. Dell was certainly uninhibited in its requests as it shopped itself around the region, reflecting its accurate understanding of the public perception of what it had to offer. Dell’s aggressiveness pushed the price upward, but Nashville was clearly not alone in its willingness to pay a steep price.
♦ Columbia/HCA: This deal in 1995 met the least resistance in the Metro Council of all the major development deals, although the case for it is somewhat weaker. Columbia had just completed the takeover of HCA a year earlier with the original intention of centering its operations in Louisville. When that plan didn’t work out, Columbia began looking for new suitors. Although there was a competitive option to move to Texas, Columbia already had a major presence in Nashville. Columbia might have chosen Nashville without the local incentivesprimarily because the most valuable part of the package was the agreement on some tax issues with the state and because of the number of executives already based in Nashville. However, that is not a sure thing.
♦ Opryland expansion: When Gaylord came looking for city incentives in 1992, company officials claimed that they were trying to decide between a major investment in expanding the San Antonio theme park or putting the money into an expansion of Opryland. Tax incentives would make the decision easier, company officials said. The city agreed to a package reducing property taxes on the Opryland complex for 10 years and pledging not to expand the downtown convention center. In return, Opryland moved forward with the expansion (which increased the overall taxes paid on the complex).
In retrospect, this is probably the most suspect of the deals. Opryland sold its San Antonio property within 24 months of the Nashville deal. The company may have been bluffing about deferring its expansion plans without a tax break.
Following one of the lesser deals, Gary Odomthen a member of the Councilasked the mayor to spell out the terms of the recruitment incentives the city would be willing to provide to businesses. Bredesen demurred, noting that anything he formalized would merely be the starting point for negotiations when the next company came along with its hand out.
Companies will inevitably ask for incentives. It’s their nature, just as predator beasts prey on other animals. For cities, though, it’s a much tougher game. Economic theory sometimes refers to the “Winner’s Curse” in auctions. Whoever wins losesbecause the winner is shown to have been willing to pay more than anyone else in the market. Cities are often confronted with a significant Winner’s Curseone that drains the value of the success in the bidding war.
Phil Ashford was a policy analyst in the administration of Mayor Phil Bredesen
How about two out of three workers be currently unemployed citizens? (The third one can…
This could be worse, Bruce. You could be standing out there in a dress with…
That shooshing sound you just heard was the point flying over Emmett Flatus' head. Go…
the Roadify app is live in Nashville- now on iPhone and soon coming to Android…
I'm sure all these pesky problems will be solved once Metro has the 175 million…