An expert breaks down Trump’s Carrier deal: ‘Ineffective’ and ‘very costly’

Announcing the deal, Trump also promised to scrap most business regulations.

President-elect Donald Trump at Carrier’s Indianapolis plant on Thursday. CREDIT: AP Photo/Evan Vucci
President-elect Donald Trump at Carrier’s Indianapolis plant on Thursday. CREDIT: AP Photo/Evan Vucci

After trumpeting a deal that his administration struck with the air conditioning and heating furnace manufacturer Carrier to avert the loss of some American jobs, President-elect Donald Trump on Thursday announced specifics of what he offered the company.

At an event in Indiana, Trump said he pledged to more than cut the corporate tax rate in half for all companies, lowering it from 35 percent to 15. While he falsely claimed the United States is the highest taxed country in the world, he said this would make us one of the lowest taxed.

He also pledged to take on business regulations, which he said was a greater priority for the CEO of United Technologies, Greg Hayes, the parent company of Carrier, in their negotiations. “Most of the regulations will be gone,” Trump said. “We need regulations for safety but most of the regulations are nonsense.”

Carrier also confirmed in a press release on Wednesday night that it is getting economic incentives from the state, which “were an important consideration.” Various outlets reported that those incentives will amount to $7 million over a decade, or $700,000 a year.

At the event, Trump claimed that 1,100 jobs will remain in the state, which he said could go up and “is a minimum number.” Yet at least half of the company’s Indiana jobs will still go to Mexico. United Technologies, the parent company for Carrier, is still going to move 700 at the Huntington plant, while not all of the 1,400 jobs at the Indianapolis job are being retained.

Meanwhile, Indiana residents will shoulder the cost of the $7 million incentive package. But if past evidence is any guide, they won’t get much actual benefit for it.

Nathan Jensen, a professor at the University of Texas, Austin, has conducted his own studies of such economic incentive programs in Kansas, Missouri, Maryland, and Virginia, as well as reviewed the best academic work on the subject. What all the research shows is that somewhere between two-thirds and three-quarters of the incentives don’t actually have an impact on companies’ decisions to expand or keep jobs in a given state.

“The big question mark is whether or not you’re incentivizing companies to do something they were going to do anyway,” he said. But what he’s found is that they have very little impact on changing company behavior. “In aggregate, we can say that they’re pretty ineffective and they’re very costly.”

He’s found them to be particularly ineffective when offered over a long period of time. “Many companies have shorten horizons than you’d expect,” Jensen said. “Only the first few years [of incentives] are affecting a company’s decisions, and the rest is gravy for the company.” In this instance, Carrier can reap the rewards of the agreement for a decade for what amounts to a much more short-term consideration about moving production.

When it comes to trying to keep jobs in-state, rather than hopping across a border, states usually find themselves falling prey to a con. “Companies that are smart enough to get an outside offer can use this as negotiating leverage,” Jensen pointed out. So they “are just playing the game to get a deal.”

And this particular deal may end up leading other companies to try to get their own. “When you open the door to this, you really give companies every possible reason to, ironically, start shopping around and looking at other locations,” he pointed out. At worst a company can’t pull off a cheaper relocation and ends up staying put, but in the best case scenario it gets itself a deal by threatening to go.

Trump promised the crowd in Indiana on Thursday that such deals wouldn’t have to be cut with lots of other companies. “We’re not going to need so much flexibility with other companies, because we are going to have a situation where they’re going to know, number one, we’ll treat them well, and number two, there will be consequences,” he said, explaining the consequences would be getting “taxed very heavily at the border if they want to leave, make products in different countries.”

But he did indicate that he will repeat the strategy he took with Carrier in the future. “We’re going to have a lot of phone calls made to companies when they say they’re thinking about leaving the country, because they’re not leaving this country,” he said. “The workers are going to keep their jobs.” He added that companies can go “from state to state and negotiate good deals with different states, but leaving the country is going to be very, very difficult.”

There are some indications that the state incentives, while costly to Indiana taxpayers, may have in the end played a minor role in the negotiations. After all, getting $700,000 a year in exchange for canceling a move that it estimated at $65 million, might seem like small potatoes. Former Indiana Lt. Gov. John Mutz, chairman of the Indiana Economic Development Corporation, which handles economic incentive programs, told the Indiana Business Journal that United Technologies’ main motivation in striking the deal was keeping its government contracts, which bring it $5 billion in revenue a year.

These dollars are also increasingly going to big, often profitable corporations that seem less in need of a government subsidy. United Technologies has already gotten $483 million in state subsidies since 1993 and $398 million from the federal government. Yet the company is quite profitable, earning $4 billion in net income for the year as of September. According to research by Good Jobs First, 90 percent of economic incentive money goes to big business.

Then the state’s residents are all on the hook to pay the piper. Even if the state is handing out tax breaks and not direct grants, it will hit the budget and have to be balanced out elsewhere. “What do you cut?” Jensen noted. “Do you raise more debt, cut funding in other ways?”

Despite all this evidence, however, these deals remain incredibly popular, according to Jensen’s research. “Voters really do reward politicians for this,” he said. “Previous work says that Pence and Trump will get political credit for doing this.” It’s a quick fix: governors, and now the president, can point to the deal they cut for promised jobs retained or created as a short-term accomplishment.

Yet the policies that are most effective at stimulating a job-friendly climate are the long-term ones, such as investments in fostering an educated workforce or developing good infrastructure. “Investment in these sorts of things are very long term, much longer than the average politician’s political calculus of the next election,” he said.