October 5, 2022

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.

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