TCS Daily


What Left and Right Both Miss About the Wal-Mart Debate

By Stephen Bainbridge - September 13, 2006 12:00 AM

Once again, Wal-Mart is being used as a political football. On the left, politicians and pundits use Wal-Mart as the poster child for living wages and mandatory health care benefits. On the right, Wal-Mart is held up as a paragon of corporate efficiency.

Interestingly, however, both the left and right implicitly cast Wal-Mart in the role of free market capitalist. What's missing from the debate is the extent to which the Wal-Mart story really is the antithesis of laissez-faire capitalism. When you look under the rug, it turns out that Wal-Mart is a beneficiary of corporate welfare.

When Wal-Mart plans a new store, it typically asks local and county governments for an array of benefits, principally in the form of various economic development subsidies:

  • Infrastructure assistance in the form of new or expanded roads and utilities servicing the store location.
  • Sales tax abatements.
  • Property tax abatements.
  • Income tax credits.
  • Enterprise zone treatment for the store location.
  • Eligibility for job training programs.
  • Eligibility for tax exempt industrial revenue bond financing.
  • Economic development loans and grants.

In some cases, Wal-Mart benefits directly from such subsidies. In others, the benefits initially go to the real estate developer who owns the land on which the store is built, but are then passed on to Wal-Mart in the form of reduced rents or a lower land sale price. In 2005, for example, the Dallas City Council approved a plan "to grant the developer half of the sales tax revenue that the Lake Highlands Wal-Mart produces specifically for the city of Dallas, up to $1 million."

It's hard to find reliable numbers on the total value to Wal-Mart of such subsidies. The leading report is Shopping for Subsidies: How Wal-Mart Uses Taxpayer Money to Finance Its Never-Ending Growth by Philip Mattera and Anna Purinton was published by a left-leaning advocacy group and funded in part by one of the very unions trying to unionize Wal-Mart's work force, which will suggest to some a need for caution. Yet, even if one applies a substantial discount to Mattera and Purinton's results, Wal-Mart is still doing quite well at the public trough:

  • In a sample of subsidy deals for individual stores, they found subsidies ranging from "$1 million to about $12 million, with an average of about $2.8 million."
  • In a survey of Wal-Mart regional distribution centers, they found that "84 of the 91 centers have received subsidies totaling at least $624 million. The deals, most of which involved a variety of subsidies, ranged as high as $48 million, with an average of about $7.4 million."

In a very real sense, Wal-Mart thus is in part a creature of big government. From this perspective, Wal-Mart's recent hiring of long-time Democratic operative Leslie Datch and significant increase in contributions to Democratic politicians comes as no surprise. (Of course, as Timothy Carney has argued, it may also be that Wal-Mart is now using big government not just to boost its own growth but as a tool to squash competition.)

Wal-Mart's defenders likely will argue that the long-run benefits to local communities outweigh the costs of the subsidies. On this question, reliable data is almost impossible to find. Yet, there are a couple of arguments against giving this defense too much weight.

First, it's clear that Wal-Mart plays off one community against another. When it comes to locating a new store, one city can be played off against another (or against unincorporated areas). As with any auction, the resulting inter-jurisdictional competition may lead cities to "over-pay" by giving Wal-Mart excessively large subsidies.

The problem is not just that competing cities bid up the price. Rather, if there are enough competing jurisdictions, one may see the so-called "winner's curse" come into play. In any auction, the winner will be the party with the highest reservation price. By definition, the winner thus is not only the party that puts the highest value on the item being auctioned, but also is the party most likely to over-value the item. After all, if the universe of bidders looks like a bell curve, is the bidder further to the right likely to be the one with the best estimate of the item's worth?

Second, we know that cities often over-estimate the economic benefits to be gained in return for such subsidies. A leading analysis of convention center feasibility studies, for example, found "consistent over-estimates of convention and tradeshow growth." As a result, "the competitive situations of new or expanded centers may be more difficult than predicted" by their boosters. There's no reason to think city or county analyses of the economic benefits of a Wal-Mart store or distribution center are any more reliable.

In sum, informed debate requires one to view Wal-Mart not as a rugged free market capitalist, but as a leading recipient of corporate welfare. If one is on the left, one thus might insist that Wal-Mart provide a so-called living wage in return for its subsidies. If one is on the right, one might call for abolishing such subsidies. In either case, however, we at last will be debating the real issues.

Steve Bainbridge is a TCS Daily Contributing Editor and a Professor of Law at UCLA. He writes two popular blogs: ProfessorBainbridge.com and ProfessorBainbridgeOnWine.com.

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23 Comments

Why defend Wal-Mart??
Why do the right "implicitly" cast Wal-Mart in the role of free market capitalist, as the article says? It almost seems like the author think this is an uninteded effect - it is not!

Wal-Mart is defended by the right 'because' it plays the role of the free market capitalist and the positive effect is noticeable. When Wal-Mart acts like Timothy Carney describes, they cast aside the very reason the right supports them and that is a shame.

Besides, the description of the "winner-curse" is a but rediculous. Wal-Mart can in no way be blamed for the incompetence of local communities. It is argued that there is a risk that the winner of these "auctions" will loose. On the other hand that risk also reflects the chance of a gain for the winner. If not, then blame the local politicians!

Wal-Mart deserves neither praise nor blame.
Why blame or praise Wal-Mart when it takes advantage of the system our elected officials have created? At least Wal-Mart spends its own money for construction of the facility and employees dozens of people all year long.

Owners of professional sports teams demand that the city give them the land and build them a multi-million dollar complex – all at taxpayer expense – then they charge people an idiotic amount to visit the site a few times each year. If you don’t count the salary for the team members, most of the workers earn very wages for only part of a year and have no benefits while the team owners get richer.

Yes Wal-Mart is the focus of both the left and the right – but only because the people we elect to lead us don’t want you to see the real corporate welfare for the rich and powerful that takes place behind the curtain.

In an election year we all must remember the original purpose of Government and stop asking our elected leader "What will you give me?"

Paying less taxes is NOT a subsidy or welfare
Isn't a proper definition of a corporate subsidy or welfare a direct cash transfer to a company or the govt paying for something instead of the company?

Paying less sales or property taxes is not a subsidy unless you assume that the govt "owns" everything and that what they LET us keep is through the govt's benevolence.

Granted the roads and other infrastructure improvements, along with the govt paid job training could be considered a subsidy and/or corporate "welfare". However, doesn't the Left mostly say that when the govt spends our tax dollars the left calls it "investment"?

Masters of the game
It's not as though WalMart has a lock on this kind of behavior. All corporations play off one jurisdiction against another in gaining tax breaks and incentives to move their plants. WalMart merely plays the game a little better.

For instance in NC Wally typically gets local tax relief over a five year period following the opening of a new store. But big boxes are just a pile of block and concrete-- they don't cost that much. So frequently a WalMart will close after a five year period, and a new one will magically appear down the street. The municipality still doesn't get to tax them, while local retailers who had huddled under the wing of the old Wally are now defenseless and exposed, in the center of a vast sea of newly emptied parking lot.

The game is also artfully played by the tech, biotech and pharmaceutical industries, whose pockets are deep enough to permit them to hopscotch around the country, opening new plants to gain advantages and closing old ones as their advantages are played out.

The net result is that the hosts, in their pursuit of industry, are being denied the tax base necessary to provide infrastructure-- roads, schools, water & sewer, etc. This deficit has to be made up by the remaining taxpayers in the locality-- wage earners for the most part.

Corporate socialism
More precisely, tax abatements are not exactly a subsidy but an income transfer, where taxes not paid by a corporation to a state or municipality are made up for by the rest of us, who don't have the clout to evade taxation.

As far as cash flow is concerned, though, it still walks like a duck, quacks like a duck and looks like a duck.

In Absolute Agreement.
End corporate welfare as we know it. I'm so sick of politicians calling spending an "investment" and carrying big novelty checks, with conspicuous benefits and hidden costs.

Paying less taxes IS a subsidy or welfare
If that taxpaying entity is paying less taxes due to a special break, given to one or a few entities.

Whats the difference between increased inflow and reduced outflow.

I'd love a five year property tax abatement. I might even "Create" a job and pay the kid down the street to cut my grass.

Subsidies are stupid, but Wal-Mart is hardly the only company to benefit from them.
The problem is local govts who believe that they can improve the lives of their citizens by spending ever more money.

paying less taxes than everyone else, is a subsidy
...

Don't forget eminent domain
Often when Wal-Mart comes to a community, it goes to the planning commission or redevelopment commission and gets them to use eminent domain to coercively seize land from the current owner at a price far below they would have to pay if they tried to acquire it voluntarily.

Also, Wal-Mart (or should we call it China-Mart) takes advantage of cheap oppressed labor in China to keep the price of its goods down.

What happens to the empty box?
Does Wal-Mart raze it to the ground? Or does WM sell it to someone else?

Defending Wal-Mart against left-wing nuttiness, is not equivalent to defending everything WM does.
Just because we don't think Wal-Mart should be forced to raise it's wages, etc., is not equivalent to saying that we approve of the way govt hands out goodies to businesses of all types, including Wal-Mart.

Tax Cuts are Not Welfare
However, differential tax cuts, given to certain businesses rather than across the board, are neither good policy nor truly a free market solution.

Silly article
This is a silly article. Of COURSE Walmart takes advantage of the legislative/political/economic environment in which it finds itself. Duh! That's what self-interested actors do.

I wonder if Professor Bainbridge takes advantage of the various tax deductions available to him on his tax return... He should! I mean, I would appreciate it if he paid more than he has to, as it would ultimately reduce my tax burdern, but that's kind of silly, don't you think?

If local subsidies for business are part of the socio-economic environment, then so be it. If enough of us don't like it, we can legislate against it. You can't blame the wolf for eating the sheep.

"Corporate Welfare"
The term "corporate welfare" is a misnomer. People who receive welfare payments contribute nothing to their community. Businesses who benefit from "corporate welfare" contribute plenty.

In the case of Walmart, it's nonsense to claim that because it pays less than the full rate that it is being subsidized by the community. There is no transfer of capital going to Walmart. Walmart pays taxes directly into the community and generates taxes indirectly through its payroll and purchases.

Lefty economic illiterates may think that the market does not apply to government, but it does. Cities have to compete for business, just like businesses do. A normal citizen may not be able to negotiate a better tax rate since the city has a monopoly on government services, but a person or business who is looking for a place to set up shop certainly should consider the comparative taxes of one community versus another. It's one of the few things that restrains taxes. Such shopping is why Texas, with no state income tax, draws so many corporations from overtaxed New York City.

Communities cut deals with corporations to lure them in because it's profitable for them. Whatever infrastructure they must create will be paid back in a few years with increased tax revenue from the business and from customers passing through. Walmart's dickering with communities for the best deal is capitalism at its best, finding the optimum profit for its resources.

It is a win-win-win situatiion. Walmart wins, the community wins, customers win.

Tantor

Differential Taxes
I disagree. Differential pricing is the essence of free market capitalism. In the case of differential tax rates, the community is simply selling its services to different customers at the highest rate they each can stand. It's no different than customers paying different prices in a grocery store because some are transient and pay full price, some have grocery store cards, some clip coupons.

Tantor

public vs private
the level of taxes and the cutting of them are government, not private pricing. Its not free market because the government is not in the business of buying or selling services in a free market (except the basic services of protecting rights of the governed).

Free market government
"The council voted unanimously, 9-0, to approve the 20-year deal, which city officials estimate will result in about $101,000 in savings to Motorola over its duration while netting the city over that same period nearly $820,000 in property-tax revenues it would not otherwise have received. The deal is scheduled to begin Jan. 1."

http://www.lowellsun.com/front/ci_4330116

Some business is better than no business.

"In Massachusetts, a spokesman for Governor Mitt Romney's economic development secretary, Ranch Kimball, said that his office has been in talks with Fidelity to try to prevent the job losses. The administration proposed alternative locations for offices, ''but Rhode Island was in a position to offer them incentives," said the spokesman, Joseph Donovan."

http://www.boston.com/business/articles/2006/01/06/fidelity_to_shift_jobs_from_state/?p1=MEWell_Pos1

"The incentives of doing business in Nevada are expansive. Nevada boasts one of the most liberal tax structures in the nation and from a tax-planning perspective, the return on investment in the form of tax saving dollars can be enormous. Explore the numerous advantages of doing business in Nevada."
http://econdev.sierrapacific.com/nvp/taxes.htm

"n September 2003, Janos executives began evaluating new facilities for company relocation and eventual expansion in either Vermont or New Hampshire.

By December, Janos selected Keene as its new home, with occupancy scheduled for early next year with 75 new jobs.

“After more than 30 years of production at our [Vermont] location, our commitment to growth and customer service has brought forth this much needed move to a larger facility,” said Brett Rosner, president of Janos. “We are confident that Keene will provide a stimulating business climate that will infuse further growth into our company.”

The state-of-the-art facility will spur technological progress by providing streamlined manufacturing and production efficiencies, according to the company. The existing square footage will allow for additional employees to be added, as well as possible expansion to 50,000 square feet. "

http://www.expansionmanagement.com/statespotlights/New_Hampshire/16234


"With Wal-Mart out, neighbors are still left with a Home Depot to worry about. Two weeks ago Home Depot filed for a building permit. Meanwile, the owners of El Con told the paper that they were keeping the light on for Wal-Mart. "A tenant mix which includes Home Depot and other stores of that nature is very compatible with current zoning," the owners said, "and the location of El Con within the community.""

http://www.sprawl-busters.com/search.php?readstory=285

El Con Mall was practically dead with a large cinema, JC Penney and a Macys. Wards closed.

Now Home Depot and Target have opened and a large restaurant and Krispy Kreme have moved in.

But they kept those Wal Mart bas**rds out.

Another subsidy..
...is the fact that many Wal-Mart employees are on government assistance. Their low wages, less-than-full-time hours and lack of benefits make them candidates for welfare and medicaid, especially if they have children. So Wal-Mart gets away with low pay, and the rest of us make up the difference.

What if everybody did it?
Less taxes is NOT a subsidy as some guys above said. What would happen if everybody paid less taxes? It means people and companies could spend their money on what they wanted instead of what some snivvvling beaurocrat wants. Internationally the trend now is to lower business taxes, and those places that do find there is more economic acivity which benefit everybody.

Libery and taxes
Liberty above is right and let me try to explain more even if crap English. If it is indeed true that WM is a corporate welfare bum, it would still not be right to condem them for it. But we should condem the system that would enable any politicians to hand out and welfare in the first place. In a true free market there would be no corporate welfare for any company, and low taxes for all of them, not just some that are favoured by crooked, scum bag, sleazy, lying politicians. So if there existed a true free market situation, would WM still be a rich company? BTW, for those of you who complain about crap jobs there, why did all those employees leave better jobs to go with WM. If you say they didn't, but just had no job at all, then I would ask what you are complaining about. Then if you say it's just that the pay isn't enough, how much would you pay a guy in your store to stack shelves?

This just shows that govt assistance is too generous.
Regardless, the number of employees on govt asst at WM is similar to other retailers.

Wal Mart competitors
Does Target pay more and provide benefits?

How about Sears? They do not pay benefits for part time.

So your response is more government welfare and more government mandates like minimum wage. Which would be just another regressive tax.

Minimum wage laws are just another regressive tax. Who pays? The consumer. Who consumes the most/income? Those in the lower income brackets. So a minimum wage is a tax on the poor.

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