The Carrier Deal Examined (Dec. 1)

As he begins his victory tour tonight in Ohio, President-elect Trump appears on the cusp of a deal with a large Indiana manufacturing firm that would keep 500-1000 furnace-making jobs in the state.

What’s the deal?   Is it a model for job creation and a tool for the four percent GDP growth that Trump is aiming for or an unscalable market intervention amounting to a drop in the bucket in terms of jobs and growth?   The agreement has not yet been signed but we apply some benchmarks and criteria for evaluation below.

Next time, the priorities and outlook for the House GOP budget and tax policy in the 115th Congress.

Best,

Dana

_____________________________________

The Deal

The core of the Carrier deal is a tax subsidy that will save the company $7 million dollars over the next 10 years. Carrier agrees to invest $16 million in its gas furnace plant in Indiana.  Carrier’s Parent company, United Technologies (UT) was concerned that a plant closure would imperil their $5 to $6 billion in government military contract revenue.

In return for the $7 million tax break, the company is keeping open its plant on the west side of Indianapolis and preserving close to 1,000 of the 1,300 jobs at the plant.  Company officials had planned to move about 800 jobs to Mexico.

Carrier had announced in February it would begin layoffs next year and gradually close the Indianapolis factory in several waves through 2019, saying it would save $65 million a year by relocating the jobs.

UT will continue its plan to relocate another plant 100 miles away in Huntington, Indiana which will cost 700 jobs.  Both of these factories were mentioned repeatedly by Trump on the campaign trail, but the net number of jobs saved at these firms will be under 500.

The Art of this Deal

While Trump has claimed most of the credit for this move, much of the ground work predates his involvment, and the details of the deal were drafted by his other delegates.

  •   Indiana officials and the Governor/Vice President-elect Pence have said that they were already in negotiations with Carrier before Trump intervened
  •  After Trump called Carrier executives earlier this month, the deal was struck between Pence, other state officials,  Carrier and UT

An Indiana state official said that Trump’s contribution was to sweeten the pot with the tax breaks and get the deal over the finish line.

Theory of the Case:

“If you actually create a climate where employers feel the incentives are good enough to stay here — the taxes will be lowered, the regulations won’t be so oppressive, they won’t be under the burden of ObamaCare, they feel like there’s a hospitable business climate — many of them may reconsider and stay.  What happened with Carrier is a great first example to the country, if not the world, that the US is open for business,” per Trump spokesperson Kelly Conway.

Baselines and Points of Critique:

  •  Rate of Return:   The deal to keep Carrier in Indianapolis will cost less than the average large-scale deal, about $8,750 per job, estimates an attorney who has negotiated incentives packages between companies and states. That figure is not out of line for deals of this kind.  Nevertheless, targeted tax incentives generally have negligible or even negative impact  on the broader economy or the state’s fiscal condition.
  •  Market Intervention:  The government winds up picking corporate winners and losers — and free-marketeers are likely to cry foul on behalf of the U.S. taxpayer.

 

  •  Term of the Deal:  If the agreement is in effect only for a few years, Trump’s efforts might give workers only a short-term reprieve.
  •  Moral Hazard:  The deal may signal to corporations that threatening to leave the country will result in tax breaks and personal attention from the presidency.
  •  Political Capital:  Trump has suggested that this is the type of job that he enjoys, and that he intends to do big name deals like this to gain support and boost his popular standing.  But it’s not replicable on more than an insignificant scale and may require more political capital per job saved than a president can afford.

Policy Implications

This deal could foreshadow Trump’s tax plans.  He has said that he intends to cut taxes drastically to keep businesses in the United States.  Deals like this might be used to show that lower taxes will keep businesses in the US.

Bottom Lines

The deal is what has become a conventional application of state  investment tools.  The $7 million total cost for the incentive package came from the Economic Development for a Growing Economy program, which weighs the incremental revenue for a state and shares that revenue with the company receiving the break.

But what probably made the Carrier deal work is its parent company.  If contacting firms like UT feed at the swamp, this deal enables more than it drains away.

A former Indiana lieutenant governor who sits on the board of the Indiana Economic Development Corporation said this week that the company was concerned about its access to Pentagon contracts.  “T[rump will] control defense contracts that are worth a lot more to the company than an air conditioning factory.  It’s a high-profile one-off to deliver on a campaign promise.”

 

 

Leave a Comment

Your email address will not be published. Required fields are marked *