Just say “NO” to the ThyssenKrupp subsidy
This may come as a surprise to many Alabama citizens, but there is a statewide vote this Tuesday, June 5th, 2007. There are two constitutional amendments on the ballot, one of which is an authorization to increase the amount of money the state can borrow so that a massive subsidy can be given to a German company named ThyssenKrupp. The very act is an affront to free market principles, is not needed due to our robust economy, and penalizes companies that have called Alabama home for years and have invested heavily in our state. As further cause for opposing this subsidy, Governor Bob Riley’s office has shown considerable arrogance by stating that this subsidy is going to be paid whether or not the amendment is passed, but refusing to discuss how OUR money would be used to accomplish that. I will be voting “NO” to Amendment 1 and I encourage you to do the same.
The text of the proposed amendment follows:
Proposing an amendment to the Constitution of Alabama of 1901, as amended relating to the Capital Improvement Trust Fund to increase the amount of the General Obligation Bonds authorized herein and to provide for competitive bidding of said bonds. (Proposed by Act 2007-005)
I could write at length about the ills of this proposal, but I’m going to cheat a bit and paste a memo that Mo Brooks wrote on the matter. Brooks is a Madison County Commissioner, former state legislator, and (aptly in this case) earned a degree in economics with distinction from Duke.
I would like to add that the current unemployment rate in Alabama is 3.3%, which is well below the national rate of 4.5% and is bordering on full employment. The most current unemployment rate in Mobile County, where the plant will be situated is 2.8% (Source: Alabama Department of Industrial Relations). Given those healthy employment statistics why should the state borrow an additional $400 million that will have to be repaid - with interest - with taxpayer money?
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JUNE 5, 2007 REFERENDUM:
AMENDMENT 1: $400 MILLION SUBSIDY OF FOREIGN STEEL MANUFACTURER
Why I will vote “No”
By Mo Brooks
May 20, 2007
(Feel free to forward this memo to anyone you wish)
Background
On June 5, 2007, Alabama voters decide the fate of “Amendment 1″, which increases Alabama’s debt capacity by $400 million to subsidize, build infrastructure, and otherwise entice ThyssenKrupp, a foreign steel manufacturer, to northern Mobile Bay. ThyssenKrupp, in exchange for this and other subsidies, hopes to employ roughly 2,500-3,000 people at its steel plant (2,700 being the usual estimate). ThyssenKrupp claims there will be many “spin-off” jobs in Alabama and surrounding states (estimates vary wildly but are often in five figures). No estimates consider Alabama jobs that will be lost (as is more fully explained below).
Total planned ThyssenKrupp subsidies exceed $1 billion! In addition to Amendment 1’s $400 million subsidy:
i. Local governments near the plant are asked to add another $60 million to the pot.
ii. The Alabama legislature is passing legislation that gives ThyssenKrupp huge competitive tax advantages over existing (and competing) steel manufacturers in Alabama. They are:
A. Income tax credits for thirty (30) years that shift all or a significant part of ThyssenKrupp’s plant construction costs to Alabama taxpayers;
B. A ten-year exemption from payment of utility taxes; and
C. A twenty-year exemption from payment of non-education property taxes.
Notably, the vast majority of existing Alabama businesses are denied the competitive benefits of these income tax credits and utility tax and property tax exemptions.
Why I will vote “No” to Amendment 1 . . .
and encourage you to do the same.
As an overview, let me emphasize that I welcome good, responsible employers to Alabama. What I don’t welcome are huge taxpayer subsidies of powerful, politically connected employers.
With that in mind, let me share with you why I will vote “No” to Amendment 1:
1. Alabama Has Changed. Perhaps there was once a need to subsidize Mercedes, Honda, Hyundai, and the like to overcome and change Alabama’s image. In my judgment, that need no longer exists. Alabama enjoys a good reputation for business and industry and we no longer must subsidize businesses (to the detriment of taxpayers) in order to overcome a bad image. Times have changed. So should our methods for recruiting industry.
2. Free Enterprise. America enjoys the most powerful economy the world has ever seen because we have, by and large, shunned socialism and government economic dictates. We adhere to capitalism and the free enterprise system. America reaps the benefits of 200+ years of economic Darwinism, where only the best and fittest businesses survive (i.e. – those that deliver goods and services better, faster, or cheaper).
$1+ billion in subsidies for ThyssenKrupp distorts capitalist and free enterprise principles. ThyssenKrupp should be successful on its own merits, not because well-placed money and powerful politicians decide ThyssenKrupp should be subsidized and given competitive advantages that help put American steel producers out of business.
3. Breeding Ground for Corruption. It is dangerous for the citizenry to give politicians the power to determine which businesses make millions in profits (because they were subsidized) and which businesses go out of business (because they weren’t subsidized and could not overcome the subsidy advantage given to competitors).
Anytime a few politicians are given the power to determine which businesses live, and which die, a breeding ground for legal and illegal corruption is created. The lure of buying profits by “greasing political skids” is just too great. It has happened before. It will happen again.
It is not in Alabama’s best interest to teach companies that the best way to become rich is by reaping the greatest subsidies one can buy from hiring the best lobbyists and placing political money in the hands of the most politically powerful.
Do we want to create an environment that encourages money to flow to lobbyists, lawyers and politicians who can “make the subsidy happen”? I don’t.
It is not the place of politicians to intervene in the market place and use tax dollars to decide which businesses thrive and which fail. This is true because politicians simply are not smart enough to determine which businesses are in our collective best interest (it is impossible for politicians to be as smart as the collective knowledge of everyone in the market place).
There is an old saying, “those who do not learn from history are doomed to repeat it.” In Europe, subsidies of politically connected businesses are the norm. Yet their collective unemployment rates and per capita income fall far short of what we enjoy in America. And their cost of living and tax rates (to pay for subsidies) place a heavy burden on their citizenry. Do we want to copy the failing economic policies of Europe’s socialist democracies? Do we want to march backwards down that path? I don’t.
4. Equal Opportunity. Alabama should not create a George Orwellian economic system in which “some businesses are ‘more equal’ than others.” Rather, Alabama should have a plan for industrial recruitment and economic growth based on equality. Everyone should be treated the same. Our goal should be the creation of an economic environment in which everyone has an equal opportunity to thrive.
Hence, if ThyssenKrupp receives tax credits that can potentially eliminate any income tax payments to the State of Alabama for thirty years, then all Alabama employers should receive similar tax credits to spur similar capital improvements, large and small.
While ThyssenKrupp is a potentially large employer, they are miniscule compared to the collective size of all Alabama employers.
5. The Subsidy Is Too High. $1+ billion in taxpayer subsidies to ThyssenKrupp equates to over $300,000 in subsidies for each ThyssenKrupp job! That is an astonishing figure.
There is a reason why no other state in the union was willing to match Alabama’s bet for ThyssenKrupp. Perhaps Alabama voters would be wise to consider the cost/benefit analysis of our sister states. If we do, there is but one conclusion that can be reached: $1+ billion in taxpayer subsidies to ThyssenKrupp is too great a gamble and voters should reject Amendment One.
6. Job Losses. ThyssenKrupp will produce a lot of steel. Is there a sudden new market for steel that has heretofore gone unmet? No! ThyssenKrupp will market its steel to American businesses that are already consuming steel . . . much of which is being produced by American (and Alabama) steel manufacturers.
What is missing in the media frenzy and economic analysis supporting ThyssenKrupp is the adverse effect on existing American and Alabama steel manufacturers. If subsidies of ThyssenKrupp allow it to sell steel at a lower price and take business from other American and Alabama steel manufacturers, then the resulting effect is lost jobs by American and Alabama steel manufacturers.
I often wonder why our elected politicians are so willing to risk and discard existing American and Alabama steel worker jobs. It doesn’t make sense to me.
7. Lost Income Tax Revenue for Education. Alabama steel manufacturers pay income taxes to Alabama on the profits they make. As with job losses, each sale of ThyssenKrupp steel that formerly was made by existing Alabama steel manufacturers means lost profits for those Alabama companies. And less (or no) profits from existing Alabama steel manufactures means less (or no) income taxes for education paid by those Alabama businesses.
I do not understand why Alabama politicians wish to shift steel sales from Alabama businesses that pay income taxes to a foreign business that, to a large degree, is exempt from income taxes.
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While there are many other factors that play in my decision to vote “No” on Amendment One, I hope you find the foregoing sufficient.
I welcome feedback from anyone who wishes to extend it. My office phone number is 256-539-6000. My mailing address is 200 Randolph Ave., Suite 200, Huntsville, AL. My e-mail address is mbrooks@leo-law.com.
Sincerely,
Mo Brooks
May 30th, 2007 at 9:28 pm
I will pass the word.
May 31st, 2007 at 3:13 am
I’ve had some thoughts about this, and I think I’m with you on this one.
May 31st, 2007 at 10:11 am
I’ve got a lot of respect for Comm. Brooks, and have voted for him every time possible. Even though I agree with much of Mo’s statement (industrial justice), I’m probably voting ‘yes’ for the incentives (based on perceived cost-benefit and trust in Billion Dollar Bob).
Brian, I’m also disturbed by Gov. Riley’s pronouncement that it will be paid no matter what - I’m tempted to vote ‘no’ just to see how he does it.
Nitpick - wasn’t Louisiana’s bid for the TK plant $1 billion higher than Alabama’s (Mo: “no other state in the union was willing to match”).
TK says it plans for the plant to receive steel from TK-Brazil, process it in Mt. Vernon, then send it to TK-Mexico. If true, then it is not directly competing with Alabama producers.
About half of the State’s $811 million incentive package is for infrastructure improvements and training. Are these types of incentives appropriate?
It seems to me that the incentive package offered by each level of government is basically paid for by the taxes (income, property, sales) of the workers in the new jobs (construction, regular, indirect). I think that as long as the state breaks even in the cost-benefit analysis over the life of the incentives that the deal is a fair investment in the state (as long as TK sticks around after the incentives run out).
May 31st, 2007 at 11:00 am
While glad that ThyssenKrupp has chosen to come and compete in Alabama, I do have resevations about the selective recruitment of business. I don’t actually begrudge TK tax breaks but I think that they should be universally applied. If we can afford to give such tax breaks to stimulate this growth then why can’t we expect the same from other businesses that do not happen to be the soup du jour?
I was unaware of the vote and linked here through DegreeofMadness, so thanks go to both of you.
May 31st, 2007 at 11:28 am
There is no doubt that the best way to promote commerce within our state (and our nation - i.e. the FairTax) is to eliminate all corporate taxation. Corporate taxes are merely expenses that companies incur that are passed on to consumers. In the end real people pay the taxes, but they hidden from consumers since they are embedded in the cost of products and services. I would wholeheartedly support Alabama giving every company that sets up shop in our state the same tax breaks, but I cannot in good faith support such selective benevolence.
Reactionary, I wish I shared your faith in our governor. I’m appreciative that our governor has run a corruption free administration, other than that he has been less than impressive. He proposed (as you alluded to) the largest tax hike in the history of our state, increased two successive budgets by 10% in real per capita terms (which earned him an F from the Cato Institute), and has now proposed to more than double our debt limit so that he can subsidize a private corporation.
May 31st, 2007 at 11:33 am
[...] Flashpoint has a good post up about it where he shows us a letter from Mo Brooks that urges citizens to vote no. It follows the same line as the two crazy coots, Christopher Westly and Robert Lynch. There are a variety of arguments against the incentive, and incentives in general. I personally wish I had line-item veto power on constitutional amendment ballots. Here’s how we’re going to spend the $810.4 million. [...]
May 31st, 2007 at 11:56 am
Why is it considered “arrogance” to live up to a commitment? The state made a commitment to the steel company. Louisiana offered almost $2 BILLION and we won it for less than half that amount. I’m voting yes because this doesn’t go just for the steel plant.
May 31st, 2007 at 12:07 pm
It’s arrogance because Mr. Main (the finance director) won’t tell us how he will use OUR money to pay for it if the amendment fails. The key word is “OUR.” This isn’t some state secret like intelligence funding. He is so sure that this amendment will pass that he thinks he doesn’t have to tell us what “Plan B” is. Furthermore, what the hell is he doing making commitments that he is not yet authorized to keep? I believe the popular phrase is that “his mouth is writing checks that his ass can’t cash.”
May 31st, 2007 at 9:43 pm
Comm. Brooks responded to my above questions (via email). He wrote a principled, detailed, and kind response. I think he would approve posting these excerpts:
Me - wasn’t Louisiana’s bid for the TK plant $1 billion higher than Alabama’s
Mo - “Louisiana disputes this claim by Alabama officials. Here’s how Alabama’s officials get away with what they are claiming. Alabama claims a $811 million subsidy . . . by not including any of the up to $3.7 billion value of promised income tax credits.”
Me - directly competing with Alabama producers
Mo - “According to U.S. Steel, the competition is very much direct. That’s why their chief operating officer asked Governor Riley not to do the deal because the subsidy puts 2,200 U.S. Steel jobs in Birmingham at risk.”
Me - infrastructure improvements and training
Mo - “ok (if by infrastructure improvements you are talking about roads off-site, utilities off-site, etc.). As for “training”, if we are training workers to work on ThyssenKrupp equipment/machines (and not skills generally usable by other businesses), then that, in my view, should be a “doing business” expense of ThyssenKrupp, not Alabama taxpayers.”
May 31st, 2007 at 10:17 pm
Reactionary, I don’t know if Mo swayed you, but as usual he dots his i’s and crosses his t’s.
June 1st, 2007 at 5:43 am
[...] Jim Main is not somone that Alabamians can trust to give us the full story. Despite lording over OUR tax dollars, he doesn’t think that we need to know how the ThyssenKrupp subsidy will be financed if Amendment 1 fails. He says that the subsidy will be paid regardless of the outcome, but that he doesn’t want the vote to be a referendum on how to pay it. If the decision is already made then why are we voting? Does he think the compliance of Alabamians is a mere formality? [...]
June 1st, 2007 at 5:52 am
As usual, Mo doesn’t get his facts straight. Louisiana officials do not dispute they put up almost $2 billion in incentives for the steel plant. They admit it. Read on:
New Orleans Times-Picayune
State reveals details of Thyssen offer
sMay 15, 2007 08:00AM
BATON ROUGE - Right up until the last week of negotiations, Louisiana’s economic development team was hammering out the details of a nearly $2 billion package of state incentives in its failed attempt to lure a German company’s steel plant to Convent, according to documents released Monday by the Department of Economic Development.
As the talks entered their final stages, the state did not have all the property for the potential plant site locked up in option contracts, an issue that appeared to concern officials with ThyssenKrupp AG, according to state documents and one of the property owners.
An agency attorney, however, said the property acquisition was not an obstacle to a deal.
The company on Friday picked a site north of Mobile, Ala., over the St. James Parish location for the coveted $3.7 billion project, which will employ 2,700 workers.
Once freed of its confidentiality agreement with ThyssenKrupp, the Louisiana Economic Development Department on Monday released copies of correspondence and of the proposed agreements traded between state and company officials.
The documents provide the most details to date of how far state officials were willing to go to win the plant and reveal some of the proposal’s hang-ups.
The overall state incentives could be described as a $1.7 billion to $2 billion package, depending on how its components are counted.
Combining state incentives with corporate investment, the overall project in Louisiana would have been valued at $5.5 billion, according to department figures.
The company was ready to guarantee that it would employ at least 1,700 full-time employees plus 300 contract employees by 2013 or else pay a penalty to the state of $550,000 for each job below that threshold.
The jobs guarantee was well below the total number of workers the company was saying publicly it would hire. State officials said they expected ThyssenKrupp would create at least 2,700 jobs, but the company wanted a cushion on the guarantee.
The state was prepared to pay $1.1 billion in so-called cash incentives, which would have been used to pay for a variety of infrastructure components, including: $462 million toward the company’s capital budget and site preparation; a new $210 million port terminal on the Mississippi River at the site; $100 million in nearby road improvements; $261 million in electricity infrastructure and power lines; and $49 million in site acquisition.
The state would have been responsible for most of those projects. If the final costs of the projects list came in under $1.1 billion, then the company could keep the difference in cash. If the projects exceeded $1.1 billion, the company would have had to reimburse the state for the difference.
In addition, the state was offering an industrial tax exemption and Quality Jobs tax credits worth $700 million over time. State attorney Richard House said the value of those tax breaks measured in accounting terms was $500 million in current-year dollars. The state was also offering $40 million toward job training.
The state ran into a obstacle when the company wanted the 10-year tax exemption extended to 20 years, according to the documents. Louisiana law would not allow the extension in the manner the company wanted, so the state came up with a twist to make up the difference.
For years 11 through 20 that the plant was in operation, the state would have set aside the tax payments in an economic development trust fund up to $200 million. The company would have been able to use most of that money toward a plant expansion.
Although the company was allowed an industrial tax exemption that included a 10-year waiver on property taxes, including school taxes, state officials were attempting to convince ThyssenKrupp to make a contribution to the St. James Parish school system. State officials recommended either $5 million annually or one-fourth of the amount the company would have paid if property taxes had been applied.
State officials said this amount was comparable to what the company was likely to pay toward schools in Alabama, according to the documents. It was not clear from the documents whether the company would have agreed to those terms.
The company was demanding that the plant site be elevated to the 500-year-flood plain, requiring compacted soil to add up to 10 feet of higher land, and certain levee and other measures to prevent flooding and to accommodate drainage. The documents show that state officials were concerned about these and other demands by the company that were driving up the cost of simply getting the site ready for the plant.
In a letter to the company, state Economic Development Secretary Michael Olivier said considerable costs to the project could be saved if the company were willing to consider “slight adjustments to site elevation” and “alternative flood protection means” as well as different piling length and load specifications, a reduction in port requirements and changes to specifications in “many other areas.”
Company officials said Friday they were unable to compromise their standards on the site preparation.
The state was dealing with three landowners who held the great majority of the nearly 4,000 acres of property for the plant site. The state intended to buy the land through the Port of South Louisiana. One of the property owners was the port itself.
Another was Entergy Louisiana, which owns 2,891 acres formerly known as Wilton Plantation. The company bought the land for $15 million in 1980. House with DED said negotiations were still under way with Entergy on a final price, but there was no concern about obtaining the land. Port Executive Director Joel Chaisson said the state had reached a price point with Entergy.
Another land owner was Schexnayder Industrial Services Inc., which holds about 900 acres near Convent. The company is owned by Carroll Schexnayder, who runs the business from his home address in nearby Paulina. Schexnayder said Monday he had agreed to an overall purchase price of $15 million. But he had asked the state for $25,000 to secure a six-month option to purchase his land, and the state would only offer $2,500, so the option contract was never signed, he said.
“The state was too cheap to put up a couple of dollars to show they were serious,” Schexnayder said.
He said his attorney had told him that ThyssenKrupp officials wanted the land locked up with an option.
House said the lack of an option was not an obstacle to a deal and that the state would have immediately bought the Schexnayder’s land.
Chaisson said all the major properties for the plant site were in his opinion secure. Some minor properties were left hanging without a purchase agreement, such as Hymel’s Seafood Restaurant on the plant site, he said.
During the plant talks, Louisiana officials knew they were bargaining for a project bigger than the $2.9 billion investment that the company had revealed publicly in the months before the final decision. State documents refer to Project Compass, which was the code-name of the initial plant, as well as Project New Start, an expansion upon the originally announced facility. In fact, the company on Friday said its investment would be $3.7 billion, reflecting a larger plant facility.
The state and local government obligations toward the project included a variety of odds and ends, including: relocation of gas pipelines across the property; wetlands water mitigation at a cost of $16 million; water supply at a cost of $1 million; a waste-water discharge system; support for a fire station, with $10.7 million mainly for training over 10 years; and assistance with employee relocation expenses.
The state agreed to conduct a study on the impact of noise from the plant construction and to provide the names and addresses of all residents living within a 5-mile radius. The state would have assumed responsibility for dealing with historical and cultural resources and well as cemeteries on the property.
June 1st, 2007 at 7:25 am
Real Tim,
As Mo mentioned in his response to Reactionary, the $811 million subisdy number that Alabama has been touting is inaccurate. For example, they aren’t including the value of income tax abatements/credits (call them whatever you want) for the next 30 years. Louisiana included “industrial tax exemption and Quality Jobs tax credits” in thier total incentive number.
From AL.com (cached version):
June 1st, 2007 at 8:10 am
Brian, I’m certain that I didn’t sway him
June 1st, 2007 at 8:39 am
Here’s more of what Mo wrote, addressing the tax credit:
“Alabama’s officials don’t include this figure because there is no income tax credit available to ThyssenKrupp if they make no profit during any of the next 30 years. If there is profit, then the 5% in income taxes that would normally be paid to the State are instead kept by ThyssenKrupp to pay for plant construction and equipment costs. Personally, I have less of a problem with this . . . if the same tax credits are given to all businesses and employers in the State of Alabama. Not just those who are politically powerful enough to get them.”
Real Tim, It seems that the value of the AL income tax credit falls within a large range, so I’m willing to cut Mo slack for his number.
If TK estimates that the value of the credit makes Alabama’s offer better than LA’s, that would explain to me why TK went with AL’s ‘underbid’. I’ve been puzzled by why TK took our ‘lower’ bid.
I guess it comes back to having to trust that Gov. Riley would only agree to this if it was beneficial to the state. I’m uncomfortable voting for personality, but Riley does have a good record of leadership.
June 1st, 2007 at 2:13 pm
On the tax credits: we won’t be collecting taxes on a company that would’ve be paying taxes anyway if they had chosen Louisiana. We aren’t “missing” anything because if they had gone elsewhere, we wouldn’t be collecting the revenue anyway.
June 1st, 2007 at 4:01 pm
Real Tim, you’ve ventured off into a hypothetical situation. You can talk about how we wouldn’t “miss” the revenue IF TK went to LA, but they aren’t going to LA. They’re coming to Alabama.
Since we’re grounded back in reality, how can you suggest that giving TK 30 years of income tax credits (or any type of tax reducing incentive) doesn’t hurt Alabama? I guess the state should stop collecting taxes from all new businesses in the state. By your logic if they never came here in the first place we wouldn’t have missed the revenue. Same goes for any individuals who move to our state.
To reiterate, I’m all for eliminating corporate taxation, but it should be done fairly and without any preferential treatment.
June 4th, 2007 at 6:21 am
[...] (Flashpoint) I would like to add that the current unemployment rate in Alabama is 3.3%, which is well below the national rate of 4.5% and is bordering on full employment. The most current unemployment rate in Mobile County, where the plant will be situated is 2.8% (Source: Alabama Department of Industrial Relations). Given those healthy employment statistics why should the state borrow an additional $400 million that will have to be repaid - with interest - with taxpayer money? [...]
June 5th, 2007 at 5:16 am
[...] You can vote with Bob Riley, the big government Republican who once told you to vote for the largest tax increase in the history of our state. Or you can vote with me and Mo Brooks. By Brian, June 5, 2007, 5:16 am [...]
July 27th, 2007 at 1:54 am
[...] An eclectic group opposes them, including Roy Moore, Mo Brooks, and Jack Zylman, who is a former staffer for U.S. Rep. Earl Hilliard, among other things. (You can find a Word document with Zylman’s opposition here at Kathy’s post). [...]