Beware of City Poachers in Wingtip Shoes

In the movie “City Hall,” Al Pacino quotes President Harry Truman: “The only thing new around here is the history we haven’t learned yet.” It’s a lesson that Los Angeles City Hall is about to learn the hard way.

Hidden in Mayor Richard Riordan’s budget message, and enjoying surprising support in the City Council, is a new corporate welfare program: $5 million a year for tax subsidies supposedly to attract new companies and create jobs. The mayor and council should know that back in the 19th century, politicians all over the country were giving away public money to railroads and other private enterprises in the name of civic improvement. Corruption flourished. Public coffers were depleted. Some business people got rich. And promised benefits evaporated like clouds of steam. This is why a provision in the California Constitution of 1879, still on the books today, prohibited gifts of public funds, and statutes were enacted allowing taxpayers to sue against “waste” of government money.

Using those laws, courts across the nation frequently invalidated government handouts to the private sector that lacked a quid pro quo for the community.

Then, some years ago, the judiciary became pliant, declining to second-guess legislators and deferring to the political process. Nowadays, only the most conscientious judge will insist upon seeing evidence of the quid pro quo. Lacking judicial scrutiny, business has become brazen, shaking down state and local governments across the nation for tax kickbacks, threatening to move to wherever the breaks are bigger. Politicians meekly comply, fearful of being labeled antibusiness in this era of pro-business boosterism.

Los Angeles has not been spared. A $70-million subsidy to the planned DreamWorks movie studio whizzed through the council without a serious study of costs and benefits to the city. Now comes the corporate welfare program backed by the mayor. As proposed by a City Hall task force, any retail business that creates 10 jobs or other business that creates 20 jobs will be eligible for tax rebates. At least $5 million a year is earmarked for the program, but since that probably will not be enough to accommodate all the applicants, the mayor and council members get to choose which companies will get the goodies.

The proposal is riddled with loopholes that invite corruption and bad deals. It would permit tax breaks to go to campaign contributors, to firms hiring non-Los Angeles residents and to companies guilty of labor and environmental violations.

An even more basic flaw exists: The tax rebates will bring no economic benefits to Los Angeles. The task force claims that the incentives will create jobs, each generating an average of $1,900 a year in sales taxes. So $1,900 a year per job is the amount that will be given to the employer for five years, along with large bonuses for certain businesses. This is not merely a kickback of all the city stands to gain, it is a giveaway of more than the city could possibly gain, for two reasons.

The $1,900 figure is contrived and it has been proved that tax incentives don’t work. The National Lawyers Guild has presented the task force with four pages of references to research that is summed up by a statement from the Council of State Governments: “A comprehensive review of past studies on the effects of incentives reveals no statistical evidence that business incentives actually create jobs.” Expert opinions across the political spectrum agree that incentives create no new jobs that wouldn’t have been created anyway, but do arbitrarily shift tax burdens from one group of taxpayers to another while unleashing a governmental race to the bottom to give away dollars that are needed for city services.

It does no city any good for cities to compete with one another to give away their tax bases. All the players get hurt, including businesses that don’t qualify for the breaks. It can only be stopped by leadership that is beginning to appear at the national level, where a bill has been introduced in Congress to stop tax break wars between states.

In California, local governments must agree on a similar antipoaching bill and take it to the Legislature, so that all will have immunity from welfare seekers wearing wingtip shoes.