Forging a different path

Original Reporting | By David Noriega |

Specifically, small cities in the South Bay with powerful tax bases benefit from the fact that many of the people who work in their cities, contributing to those tax bases, live in San Jose, which has to pay for their services. “A city like San Jose says, ‘Look, we’re the bedroom community. We’re going broke because of it. Share your taxes with us.’ What do you think those other cities say?” Brownstein asked. “It’s the worst idea they ever heard.”

 “If an entire area is stronger, and the citizenry is stronger, then everybody’s better off.” — Myron Orfield

But, Orfield said, this resistance doesn’t change the fact that tax-base sharing results in far greater equity and economic well-being throughout an entire region, not just those jurisdictions that get a greater share of the pie. Beyond the principle of it, equitability makes economic sense: less race and class segregation translates into a broader base of workers and consumers participating actively in a regional economy. “If an entire area is stronger, and the citizenry is stronger, then everybody’s better off,” Orfield said.

Even in strictly fiscal terms, the benefits shared widely among a large group of people and jurisdictions are far greater than the relatively minor losses suffered by rich cities. Orfield prepared several specific scenarios for tax-base sharing in the Bay Area, in some of which as much as 70 percent of the region’s population would pay less in taxes but receive more in services. “There are just more people who win than lose,” Orfield said.

And even the losers are not actually losers. The insular, small cities that control bountiful tax bases would see such comparatively small drops in their resources that they would be highly unlikely to see any actual decline in services. This is especially the case within Silicon Valley, where the prosperous cities are very prosperous indeed — where a city like Palo Alto, in other words, can afford it. “Overall they would be better off, and in general they have a lot they could share,” Orfield said. “They wouldn’t even know it was missing.”


Just say no

The temptation to play the business incentive game has become deeply embedded in local and state decision-making, so much so that the offering of incentives seems more like a reflex than a considered decision. Nevertheless, there is another course. Chris Hoene, the executive director of the California Budget Project, pointed out that the jurisdictions that make up a region have the capacity to agree amongst themselves to refrain from offering any kind of incentive. This prevents them from competing against one another in the way that, for example, San Jose competes with Palo Alto.

Imagine, Hoene said, “if you took San Jose and Palo Alto and Santa Clara and the cities and counties in the region, and they all said, ‘Look, let’s agree that nobody’s offering sales tax rebates, nobody’s offering business tax incentives,’” and so on. The result would be a pact in which the region would collectively leverage the advantages it already has in a way that didn’t undermine the revenues of individual cities desperate to attract companies within their own municipal limits.

Such an alliance would have the potential to be particularly effective in Silicon Valley, since countless factors other than the tax system have long attracted companies to form, settle, and grow there. “It wasn’t a favorable tax system that led to the growth of the Silicon Valley,” Hoene said. “It was universities, clusters of entrepreneurs, venture capital…The tax system was a minor issue there.”


The war of the regions

There is great concern among area politicians in Silicon Valley that companies will choose other places to expand their operations, or that new companies will decide to settle elsewhere in the first place. Those fears are significantly exaggerated when compared with actual evidence. The Public Policy Institute of California, for example, analyzed detailed business surveys and concluded that these decisions are usually based either on macroeconomic conditions or on independent corporate strategies. California-based companies that choose to expand in other states, for example, usually do so because they want to operate in diverse locations, not because these locations offer better tax incentives than California.

“These are corporate lawyers and accountants — they’re very effective in saying, ‘We need the best tax deal you can give us.’ And local governments fall all over themselves in many instances to meet those demands.” — Chris Hoene

But it certainly is true that companies try to stoke fears of flight in order to get incentives, and that real poachers are out there hunting. “[Companies] will play that card up in the negotiations,” said Hoene, “They’ll look at three plots of land in three jurisdictions. These are corporate lawyers and accountants — they’re very effective in saying, ‘We need the best tax deal you can give us.’ And local governments fall all over themselves in many instances to meet those demands.”

As for poaching, it has become increasingly common for politicians to aggressively court companies before they even express any intention of moving. In February of 2013, as part of an ongoing campaign to lure companies to Texas, Gov. Rick Perry went on a California tour. The trip included a special stop in San Jose with the explicit purpose of convincing tech firms to defect. His pre-trip pitch included a radio spot claiming that, “Building a business is tough, but I hear building a business in California is next to impossible…Come check out Texas.”

One way to keep local and state officials from being so willing to play the incentive game is to reduce the pressures compelling them to do so — something that may well require action on the federal level. Greg LeRoy, the executive director of Good Jobs First, a group devoted to scrutinizing subsidy deals, said such an intervention could come in the form of withholding federal money.

“Our modest proposal is to use federal dollars as a kind of carrot to get the states to quit raiding each other actively,” LeRoy said, referring to job-poaching campaigns of the Rick Perry variety (which are common well beyond Texas). “It’s based on the precedent of the way the feds got the states to raise the drinking age by holding back 10 percent of highway trust funds,” LeRoy added. The federal government could do the same with block grants from Housing and Urban Development, or funds from the Departments of Labor or Commerce, “to certify that the state is not using the taxpayer’s resources to actively pirate from other states. That would cool off a lot of the direct solicitations, the targeted recruitment.”

There are different tacks such incentives could take, beyond simply putting a halt to active poaching. There could be strict requirements — far stricter than currently exist — for states to track and disclose the precise economic results of specific subsidy deals, like the number of jobs actually created (rather than moved from state to state). The hope is that these or similar moves would quell what LeRoy’s group has dubbed the Job Creation Shell Game, thus empowering states and localities to more actively pursue revenue measures without the paralyzing political squabbles over job flight.


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