The Cost of Doing Business

The Cost of Doing Business

Philadelphia and the Commonwealth of Pennsylvania reward for-profit businesses with billions in tax forgiveness, grants and low-interest loans each year under the pretense of safeguarding and creating jobs. But do these programs actually work, or are they just handouts for the politically connected?

The mammoth Comcast Center was built with millions in state subsidies for one of the city’s most profitable companies. Credit: Maggy Maffia on Flickr

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This week, the New York Times published a three-part series on tax incentives and public subsidization of for-profit businesses. Amongst volumes of other data, the Times found that American taxpayers spent over $80 billion in credits, low-interest loans and other forms of — for lack of a more all-encompassing term — corporate welfare.

In Philadelphia, where Next American City is based, businesses received over $200 million in credits, loans and abatements for for-profit enterprises. Pennsylvania as a whole, when all local and state giveaways are accounted for, distributed $4.84 billion in tax credits in 2011 alone. These programs have put the state in the country’s top tier of incentive providers, behind only Texas and Michigan for sheer incentive volume. Nearly a quarter of Pennsylvania’s largesse, $1.64 billion, went to Royal Dutch Shell, the fifth-largest company in the world, and one of the most profitable.

To put that into perspective, the combined business taxes collected by the Commonwealth of Pennsylvania totaled only $4.89 billion in the last fiscal year, according to the Pennsylvania Budget and Policy Center. It’s difficult to estimate exactly how much the diversion of businesses tax money affects the state, but the drop in revenue is particularly notable in a state that cut $860 million from its educational programs last year to balance the budget.

Notable recipients of incentive programs include PNC Financial, which received $6 million in “Opportunity Grants,” potato chip maker Herr Foods, with $5.2 million in grants and tax credits, and pharmaceutical giant Pfizer, which absorbed $8.06 million in Research and Development credits. Late-night television fans may be interested to know that home shopping channel QVC wasn’t left in the cold. The West Chester, Pa.-based Comcast subsidiary took in $7.05 million in tax credits from the state’s film incentive program.

The problem is that Pennsylvania is not uniformly reducing business taxes, said Kevin Gillen, Senior Research Consultant at the University of Pennsylvania’s Fels Institute of Government. “If you have to offer special tax breaks and special subsidies,” he said, “that tells you that your cost of business in general is already too high.”

But he feels cities should compete with one another to attract businesses by “offering a generally fair business climate instead of favoring certain businesses over others.” Gillen said that while specialized incentive programs may attract one particular business or type of industry, they can actually push other potential employers away.

“The problem with favoring certain industries or employers is that it creates a very uneven playing field, and that is a deterrent to other businesses,” he said. “You may attract one business, but you won’t attract other businesses because you’re favoring their competitor over them.”

Gillen referred to Comcast as an example. The politically connected Fortune 500 company benefited from $42.75 million in government subsidies for the construction of new headquarters in Center City Philadelphia, along with $18 million in assorted credits and grants last year — the most of any business in Philly. Gillen believes this special treatment makes it extremely unlikely that competitors, like Verizon, would be attracted to the city.

“Philadelphia becomes known as this city that likes to play favorites, those who are politically connect get the favoritism and others do not,” he said. “In the long run that becomes a deterrent.”

While there is no surefire way to measure the impact of subsidies, or know how a city like Philadelphia would fare without them, incentives programs have numerous defenders who say that the programs are necessary evils.

“I say all the time, ‘I wish we didn’t have to exist.’” said John Grady, director of the Philadelphia Industrial Development Corporation.

PIDC is a citywide economic development agency that manages real estate assets at the former Philadelphia Navy Yard, home to city’s largest Keystone Opportunity and Keystone Innovation tax abatement zones. Shuttered by the Defense Department in the ’90s, the enormous brownfield site was plastered with tax incentive districts to spur redevelopment as an office and manufacturing campus.

As Next American City touched on in a recent Forefront story, the revitalized Navy Yard is widely viewed as a success. Although Grady’s organization doesn’t manage the incentive programs, he said it has helped PIDC grow the employment base at the Yard to over 10,000 workers. There are more workers there today than there were when the naval shipyard closed. Grady stressed that about 70 percent of the companies at the Navy Yard exist outside of the abatement zones, which only cover vacant sections of the facility, and that many came from out of state.

“The idea of the zones is to attract new investment and new jobs to vacant or underutilized areas,” he said. “It’s about attracting investment in places it would not occur otherwise.”

But how an agency can know that the investment wouldn’t be made without the incentive is a question that hasn’t been definitively answered. In Philadelphia, critics charge that several of the Yard’s banner companies, like Urban Outifitters, Tasty Baking and GSK, were poached from less-incentive laden areas of the city. The Navy Yard, they say, may be a success, but Philadelphia as a whole has continued to bleed jobs.

Grady disagrees.

“I don’t think I’ve dealt with one company that was trying to decide between being downtown or in the Navy Yard,” he said. “They’re typically deciding if they should be in the Navy Yard or the suburbs.”

Yet Grady said he doesn’t believe that tax breaks alone can keep businesses. He credits the Navy Yard’s highway access and campus-like atmosphere as draws just as important as a subsidy.

“Fundamentally, I don’t believe that a decision to locate or expand a business in one place or another is going to be based on one element, like a tax abatement,” he said

Even so, economists like Gillen say that while location-based incentives are better than company-specific tax breaks, they are still less desirable for cities than simply lowering tax rates across the board for individuals.

“Generally, policies that help people rather than places work better because people are mobile,” the Gillen said. “When you target places you can end up with scenarios where you are reshuffling your economic activity rather than expanding it.”

Ryan Briggs is an investigative reporter based in Philadelphia. He has contributed to the Philadelphia Inquirer, WHYY, the Philadelphia City Paper, Philadelphia Magazine and Hidden City.

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Tags: philadelphiaeconomic developmentgovernancetaxes

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