Nathan M. Jensen and Steven Pedigo: Why laws meant to create jobs can be so destructive for our cities

The federal government should incentivize innovation. But the unfair local matching requirement should be removed, and measurable goals should be required.


President Biden and Vice President Harris recently announced their re-election campaign, with the president saying “Let’s finish this job.” Among the accomplishments they will be running on are the CHIPS and Science Act and the Inflation Reduction Act, which are designed to help the nation restore its domestic supply chain for semiconductors, promote renewable energy and improve climate resilience.

This legislation may be necessary and will yield benefits and jobs for years to come, but it has had an unintended consequence, which is to trigger an expensive incentive war between localities — with taxpayer money as the sweetener for corporations. Some programs, like the CHIPS Act, require state and local subsides to access federal dollars. Other programs are indifferent to bidding wars across states and cities.

Offering tax breaks and other incentives to corporations has been proved to be one of the least effective ways for localities and states to grow their economies. Yet the Biden administration and Congress may incite destructive races to the bottom — unless they make some sensible tweaks to the laws.

The bidding wars started in August 2022 in Lockhart, Texas, which was competing for a new semiconductor factory for Micron. After comparing Lockhart’s proposal — which offered billions in tax exemptions and utility subsidies — with those from cities in North Carolina and New York, Micron chose to build in upstate New York. The state offered a staggering $5.5 billion in tax credits over the life of the project, assuming Micron meets employment targets.

This type of gamesmanship is bad for cities. It is grossly expensive, costing local and state governments that “win” upward of $95 billion annually, according to inflation-adjusted 2011 data — far more than they are likely to gain from hosting the new facilities. The federal government can afford to incentivize innovation across the country, and it should. But the unfair local matching requirement should be removed, and measurable goals should be required.

For a long time, local economic development amounted to the care and feeding of big corporations, which often built their new manufacturing facilities, branch offices, warehouses and data centers within the jurisdictions that offered them the richest incentive packages to do so — tax breaks, the right to build on public land, zoning variances, subsidized utilities and more.

As costly as the new investments were, elected officials reasoned that they would reap significant returns in the form of jobs, expanded tax bases and the kind of placemaking that big corporations often do, like building work force housing and providing extra support to schools and hospitals.

The problem was that in most cases, they didn’t. Companies would renege on their promises or call the localities back to the bargaining table and demand more when their incentives ran out. State audits and independent evaluations of these programs found poor targeting of incentives, weak oversight and excessive costs that harmed rather than benefited local governments.

Cities and states had begun to reform their practices after the Amazon HQ2 “contest” made a mockery of the tactic. For example, Kansas and Missouri agreed to stop paying incentives to the companies that had been hopping back and forth between Kansas City, Kan., and Kansas City, Mo. Numerous states have introduced interstate compact bills that would limit the use of federal subsidies if enacted.

But just when it looked as though the incentive monster was being cut down to size, the CHIPS Act and the Inflation Reduction Act are threatening to give it an enormous infusion of steroids.

The CHIPS Act, at least, requires companies to do some good in return. For example, it mandates the provision of affordable child care for workers who build and operate their facilities, limits stock buybacks and requires companies to share a portion of excess profits with the government. It even includes explicit language about how a “race to the bottom” should be avoided, stipulating that companies that accept tax breaks, as opposed to other forms of local support, will be disadvantaged in their requests for federal subsidies.

But the I.R.A. does few of those things; worse, it allows companies to trade and sell incentives, effectively releasing themselves from whatever conditions they might have agreed to. As a result, the new projects the act has enabled have come with staggering price tags. In February, Ford agreed to build its new electric vehicle plant in Michigan, but only after extracting a promise of as much $1.75 billion in state and local incentives. If Michigan doles out the full amount, it would be enough money to pay all the new workers’ salaries for around 15 years.

Tesla got an additional $330 million in subsidies in March to expand its Nevada “gigafactory,” adding to the over $1 billion in incentives it has already been promised. Ford’s BlueOval SK Battery Park will be in Glendale, Ky., thanks to the $250 million in upfront incentives it was offered.

To limit the damage to state and local budgets and ensure meaningful community impacts, there are a few things we can do. First, Congress should consider amending the U.S. CHIPS Act to ensure that there are no requirements that projects receive any state or local funding in order to obtain federal dollars. At the very least, it should take certain types of incentives — like tax abatements that diminish funds which would otherwise go to public schools — off the table. Second, let’s require pragmatic and well-documented community engagement in the process, just as we would with any local zoning variance or land use change. The lack of community engagement and consultation is widely acknowledged to be an unintended consequence of earlier development efforts like the Opportunity Zones and EB-5 programs.

Third, residents of cities should see greater transparency in the trading and selling of federal incentives by requiring public notices of any such transactions. The public is entitled to know how its tax dollars are being utilized. Fourth, the federal government should set a cap on incentives (inclusive of any state and local dollars). This would put the brakes on runaway spending.

Fifth and maybe most important, city officials should mandate the inclusion of measurable, transparent community service agreements in any incentive packages — agreements that explicitly outline job requirements, salary goals for line workers (exclusive of management and C.E.O. salaries) and commitments to job training and other programs. Some cities like our home of Austin, Tex., make public economic development agreements and audit their job promises. Cities can use this opportunity to go even farther to push for transparency and community benefits. The federal government should require the Office of Management of Budget to audit CHIPS and I.R.A. beneficiaries, ensuring that they are delivering what they promised and cutting them off if they’re not. The lack of accountability is why incentives have failed to deliver in the past.

The Biden administration’s efforts to encourage domestic investments in resiliency and sustainable energy should be applauded. But the danger both acts pose to state and local governments and our communities must be addressed, lest they do more harm than good.

This article originally appeared in The New York Times.