An Addiction to OPMby Art Jacobson on Oct. 31, 2011, under Capitalism, Corporate Tax Benefits, Development Tax Policies, OPM, Other People's Money, Politics, Tax Policy, Tucson Politics
Read more carefully, that’s Other People’s Money, not OPiuM. This addiction is common to many business enterprises, whether business start-ups, real estate development, or plant expansions. It’s a normal part of doing business. Start-ups won’t start up without lines of credit from banks. Bigger operations go to the public money markets with stock offerings or bond issues. It’s all perfectly legit
In these cases the lenders study the aspiring entrepreneur’s pro-formas, weigh the risks and take an ownership position. There are risks, of course. The operations may fold, in which case the bank earns no more interest and gets stuck with empty buildings or undeveloped land.
Stockholders, who are seldom in first position in a bankruptcy, will take a bath; but that’s a risk they know to expect.
When a municipality needs a hospital or library or a new slammer it issues long term municipal bonds (if the rating companies judge they can ‘service the debt.’) Municipalities rarely or never default on their bonds and the purchasers get a nice tax free cash flow.
So far we can live with all of this.
But there is a kind of OPM which is so one-sided that it ought to be avoided and that’s when it’s the people’s tax money. When the Magnifico Corp hits town with alluring tales of a job-creating factory or luxury hotel development it takes its dog and pony show to the city or the county or the state.
“Sounds great, go for it!” say the Pols.
“Well, there are certain conditions. We need sales tax forgiveness, or property tax forgiveness, and we’d like you to give us the property, too. Do you expect us to put in our own infrastructure? Hmm?”
The deals requested differ, but they are all the same in one respect: They expect the city, county, or state to spend future tax revenues…which are, after all, real money. And it never occurs to the pols that if these projects had a reasonable chance of success they would have obtained private financing.
I think we should be pretty skeptical of such deals. All across the fruited plain corporations use up their tax bennies and then move on.
But we may really really really need a new hotel. What to do? The next time one of these hustlers comes to town let’s offer to make a deal. Demand an ownership position in the hotel corporation, or manufacturing corporation, or sales group.
The ownership position should be percentage of the company’s total capitalization “bought” with the future value of the offered tax benefits.
If the company pulls out we’d at least retain our partial ownership (and maybe some dividends) and we’d get back whatever it leaves behind.