How the Tax Subsidy Game Is Played: A Consultant Shares Corporate Secrets

This article marks the first of a series of articles co-produced by Good Jobs First and NPQ, titled Checking Corporate Welfare, Stories from the Front Lines. In this series, we take a hard look at the current system, which enables corporations to write off $95 billion from their state and local tax bills each year—and how local groups are organizing in cities across the nation to challenge this system. In these articles, you will hear from community leaders who, armed with data, are developing innovative public campaigns that are beginning to contain these corporate tax abatements—and restore funding for public schools and local public services.

For the first article in this series, however, we begin on the other side of the street—the corporate “site consultant” side. In the interview below, former corporate site consultant C.J. Girod discusses with Good Job First’s Greg LeRoy how the corporate site consultant industry works—and how it should be changed to enable cities and states to collect corporate tax revenue effectively and thereby rebuild their local tax base.

When Amazon staged its public auction for its second headquarters (“HQ 2”), starting in 2017, hundreds of communities were suddenly swamped with boosterism of every kind. (Here’s the embarrassing featuring Washington, DC, Mayor Muriel Bowser—and, of course, Alexa).

Unreported was the fact that hundreds of auctions occur every year, secretly, although they are typically far smaller. . Most tax-break auctions are staged by secretive site location consultants, publicity-averse operatives who demand public officials sign non-disclosure agreements (NDAs) and who leave as little public evidence as possible of their work. Their business model—which depends on absolute secrecy so that corporations have maximum bargaining power with public officials in a “prisoners’ dilemma”—has everything to do with why so many Americans feel disempowered and angry with the way economic development deals shut them out from meaningful participation. The deals they broker strip communities of revenue that could support small business growth, expand education, or improve mass transit.

The site consultant profession was born in 1937 when a Chicago industrial real estate salesman named Leonard Yaseen moved to New York and created the Fantus Factory Locating Service. Felix Fantus was his father-in-law and former boss, who gave away site location advice for free. Yaseen was adamant that help could be commodified. For the next half-century, the firm dominated the business, helping thousands of companies expand or relocate—often to the South or the exurbs, and sometimes overseas—extracting billions of public dollars in the process. Today, Fantus is a division of Deloitte—and there are about 300 active US-based site location firms.

Since its founding in 1998, Good Jobs First has been critical of the profession, especially because some site consultants are paid on commission, pulling down as much as 30 percent of the discretionary subsidy packages they negotiate for their corporate clients. C.J. Girod of Pittsburgh-based Responsible Incentives is a contrarian in the profession and has agreed, for the first time publicly here, to explain the ethical and legal problems he sees.

LeRoy: C.J. first, can you thumbnail where you have been and what kinds of projects you helped site?

Girod: Thank you, Greg. I have over 20 years of site selection and economic development incentive consulting experience, the vast majority of which has been spent with large professional services (i.e., “Big 4”) and tax consulting firms. This experience spans more than 40 states, multimillion- to multibillion-dollar projects, many industries (e.g., manufacturing, transportation/distribution, oil and gas, telecommunications, retail, hospitality, for-profit education, etc.), and a variety of project types (i.e., new facilities, expansions, relocations, consolidations, and retention projects).

Around 18 months ago, I founded a different type of consulting firm called Responsible Incentives. Our primary goal is to use our experience in the trenches to help states and localities stop being hoodwinked into handing out billions of dollars of incentives every year for things companies are going to do anyway; to put it simply, to help eliminate or at least curb this massive and unnecessary amount of wasteful spending.

LeRoy: Some site consultants have confided to me that commissions—or contingency fees derived from subsidy packages—don’t really benefit the clients. Do you agree?

Girod: I would agree in that, in most cases, and this is unfortunate, companies could likely secure similar offers from states and localities without the assistance of consultants, so they are paying an unwarranted contingent fee on a large portion of their incentive package. I say this because it is not difficult in any way, shape, or form to secure incentive offers. In fact, some government/economic development officials will even coach companies on what to say, or not say, to maximize and not jeopardize the company’s incentive opportunities. As I’m sure you and most others would agree, this should not be the case; the onus should be on the company to prove why the subsidies are necessary, and the focus for the state and locality should be on “winning” the project at the lowest possible cost for the community.

Contingent fee arrangements also result in a large portion of the incentive value that is supposed to be offsetting incremental costs associated with the company locating at the proposed site, thus swaying the company’s decision, ending up in the consultant’s pocket. Consequently, if a certain incentive value is actually needed to “win” the deal (it likely isn’t), the fact that a contingent fee is involved almost certainly drives up the required total incentive value and cost to the community.

In my experience, companies prefer contingent fees for a few different reasons: (1) they are so far along on their project and have very little time left to negotiate a deal before they stick a shovel in the ground that they either feel uncomfortable about directly pursuing incentives for what they view as a “done deal” and/or they don’t think it’s possible to secure anything; (2) their project is a dog (i.e., no new jobs, no truly viable other options, etc.); and/or (3) their industry isn’t typically incentivized (e.g., retail, natural resource extraction, etc.). In these cases, if incentives are secured by consultants on a contingent fee, and the company either didn’t have the heart or time to pursue them on its own, perhaps the company feels like it got a windfall.

That said, contingent fees for economic development incentive projects are for the most part bad all around, especially if the individual employee(s) of the consulting firm negotiating the deal receive a cut of the contingent fee in the form of a commission. It’s not hard to see how that type of pay structure could provide even further motivation to inflate the value of the incentive package as much as possible (regardless of company wants/needs).

LeRoy: Sometimes site consultants work “both sides of the street.” That is, they also may work for governments looking for companies, like when a state or locality commissions a study on how best to attract XYZ kinds of businesses. What is your opinion of such contracts?

Girod: Consultants should pick a side or be forced to do so by states and localities. Helping states and localities design tax credit and incentive programs that the consultants are later going to come back and help their clients exploit is a conflict of interest.

LeRoy: When I wrote a book chapter on Fantus and its descendants in 2005, I went to great pains to recognize the legitimate value they provide to companies looking for places. But I drew the line at commissions, working “both sides of the street,” and what I think is a flagrant violation of state ethics laws. I consider site location consultants to be lobbyists, and I think they should be registered and regulated as lobbyists. (That would effectively ban their commissions, since lobbyists cannot charge contingency fees, which would be an overt incentive for bribery.) Do you agree? If so, explain.

Girod: I too agree that true site selectors provide a legitimate value to companies that are trying to determine the best place to locate, particularly from an operations perspective and for foreign direct investments (FDI), which involve foreign companies establishing their first US facility. However, there are not 300 of these firms out there. Most firms that claim to offer “site selection” or “location advisory” services are primarily economic development incentive shops. They have no or very little real estate, engineering, supply chain, or logistics expertise or likely seldom utilize it for incentive-driven engagements. Rather, they are finance, tax, or former economic development professionals housed in accounting, tax, law, and boutique specialty firms that many times simply work alongside companies’ real estate, facilities, and operations personnel to maximize the subsidy package for the company’s preferred or, truly only, targeted location.

On the lobbyist question, I agree entirely. The pursuit of discretionary state and/or local economic development subsidies should fall under the definition of lobbying in every state and locality across the country. In fact, there are states and localities that define it this way, and there are some firms that (1) require certain personnel to register as lobbyists in specific states and (2) appropriately prohibit contingent fee arrangements for economic development incentive negotiation engagements with clients in these locations. However, I imagine there are hundreds of other firms (and their corporate clients) that have not done their homework, have not registered, and are illegally entering into contingent fee agreements for economic development incentive work in these states, thus exposing themselves to significant risks.

LeRoy: Is there an appropriate time for a community to award a subsidy? If so, when and under what conditions?

Girod: I do believe in “economic development assistance”—that is, states and localities helping to implement something that will benefit the community that otherwise would not occur but for the assistance. My view is akin to gap financing; it requires complete transparency and a much more rigorous evaluation process, given there are very few projects where the company behind it does not have a preferred location. And again, there are even fewer projects where the incentive package is going to be the deciding factor in the location decision.

LeRoy: How would you describe the skill level of local government officials you negotiated with for your corporate clients? How rigorously were they vetting the company and the deal? Were they as helpless as the “prisoners’ dilemma” analogy suggests?

Girod: Most state and local government officials that I’ve worked with were skilled in terms of their knowledge of their various economic development incentive programs, required application and approval processes, and the need to coordinate these items with other necessary project approvals (e.g., permits). However, while I certainly did encounter a few folks that thoroughly evaluated the “but for” requirement of discretionary incentives and competitive aspect of projects, the use of wishy-washy language as to how the availability of the incentives could or may impact a company’s location decision was typically sufficient. In addition, very few state or local officials asked the right questions or required relevant documentation that would have assisted in validating the necessity of the award.

LeRoy: You have joined the “bansecretdeals.org” coalition to prohibit non-disclosure agreements. How would such a ban disrupt the site location consulting industry?

Girod: In addition to preventing the community from having an opportunity to voice their opinions on a proposed project and/or the associated incentive offer until the very last minute when the items are being considered for approval at a public meeting, and in some cases not even then due to the use of project code names, NDAs also support companies’ ability to play states and localities against one another in an often-fake competition. In many cases, the “competing” jurisdictions do not know the identity of their competition (if there truly is any) and are left at the mercy of the site selector or company representative to share whatever information he or she chooses to divulge (which typically isn’t much).

This information asymmetry is often followed by vague statements as to how your location is more costly and/or the other state/locality is offering more (a meaningless apples-to-oranges argument), which then leads to how your incentive package needs to be improved if you want to win the project. Eliminating NDAs in economic development deals would not necessarily solve all the problems that plague the industry, but it would be a great starting point, and would provide states and localities with the ability to perform a more thorough analysis to determine if they truly need to up the ante or perhaps even offer anything at all.

LeRoy: Besides designating the pursuit of discretionary economic development incentives as lobbying and banning NDAs in connection with economic development deals, what else should states be doing to rein in the power of site consultants?

Girod: Funny you should ask, Greg. I have a laundry list of recommendations for states and localities to protect themselves from predatory incentive hunting (i.e., the pursuit of incentives when they will make no difference in the location decision whatsoever). I’ll just touch on a couple primary ones here.

The first key reform is to require transparency from the company: the exact status of the project; all sites under consideration; a full gap analysis/location comparison including all start-up and operating costs, taxes, and incentives over a 10- to 30-year period; copies of incentive offer letters from competing location(s); and the name of the consultant(s) involved and their fee structure.

The second involves enhanced corporate accountability. Any company requesting a subsidy must have its CEO and chief legal counsel certify under penalty of perjury the accuracy of all information submitted (incentive applications, gap analysis, and so on), the incentive award is a material factor in the company’s location decision, and the project will not move forward at the respective location without the incentive award.

LeRoy: Thanks, CJ. I am curious to see what kinds of reactions we get from site locators and from public officials!

Girod: Me too, Greg. I have friends in the industry, and they are certainly not bad people. Rather, it’s the broken system that provides the opportunity for companies and their consultants to take advantage of it. Thus, I wouldn’t expect much blowback for simply speaking the truth. On the public officials’ side, hopefully they are willing to take a tougher stance and help put an end to some of the economic development incentive shenanigans that occur on a daily basis.