“If doling out tax incentives is a shopworn strategy, giving these tax breaks to bad actors such as United Technologies should be seen as an outright capitulation by the incoming Trump administration, rather than as a savvy deal.”
The Carrier Corporation Tuesday announced that it will not fully follow through on its threat to move 2,100 jobs from Indiana to Mexico, and instead will keep 1,000 of those jobs in the U.S.
The move comes in the wake of “wide-ranging policy talks” between representatives of the incoming Trump administration and Carrier officials. The New York Times reports that Carrier’s reward for this apparent change of heart will include new tax incentives from the state of Indiana and a commitment from the Trump administration to aggressively pursue federal corporate tax reform in 2017.
While this move is being described as ground-breaking by its supporters—incoming Treasury Secretary Steven Mnuchin said that he“[c]an't remember the last time” a president took such steps—this approach to keeping jobs is hardly new. For decades, footloose corporations have used the threat of moving jobs to different cities, states or even countries to extract special tax incentives from state and local governments, despite the lack of evidence that these strategies create jobs. Company-specific tax breaks reward companies for what they likely would have done anyway, give tangible benefits to companies in exchange for tissue-thin promises of job creation, and send a clear signal to other tax-avoiding firms that they will be rewarded for making similar threats.
And Carrier’s parent corporation, United Technologies (UTC), certainly fits the description of a tax-avoiding firm. The company routinely pays effective federal tax rates of 10 percent or lower, far below the 35 percent statutory tax rate its executives have complained about. UTC also has aggressively shifted its profits offshore, holding $29 billion in undisclosed foreign countries at the end of 2015. If doling out tax incentives is a shopworn strategy, giving these tax breaks to bad actors such as United Technologies should be seen as an outright capitulation by the Trump administration, rather than as a savvy deal.
What makes this deal especially worrisome is that UTC is among the multinational corporations that have been pushing for international tax “reform” focusing on a repatriation holiday. These firms routinely build up huge stockpiles of offshore cash in low-rate tax havens—presumably the reason for UTC’s subsidiary in the Cayman Islands—and threaten that they won’t bring the cash back to the United States unless they receive special tax breaks in exchange for unenforceable promises of domestic job creation. Sound familiar?
This move also raises the question of the opportunity cost of a state providing tax incentives to a corporation to keep jobs in the state. All would agree that keeping good, middle-class jobs is a commendable, worthy goal. But what about the flip side? What will be the cost to taxpayers per job? What will this mean in terms of state revenue, and will a corporate tax cut or tax subsidy mean less revenue for critical state services? Giving bountiful tax breaks to companies that threaten to move jobs offshore may preserve some jobs in the short-term, but it certainly isn’t a jobs creation strategy. Beyond the public relations spin, President-elect Trump and Vice President-elect Pence (who is still the governor of Indiana) owe the people of Indiana and the country answers to these tough questions.
It remains to be seen whether Carrier’s promise to keep jobs in Indiana will carry any weight. If these jobs evaporate in two or three years, or come with inadequate pay and health care benefits, the only real winner from the deal announced today will be the shareholders of United Technologies. But even if this deal results in the longer-term preservation of Carrier’s Indiana employment base, it suggests that the incoming Trump administration may be far too willing to give away even bigger tax breaks to United Technologies and its tax avoiding brethren at the federal level in 2017.