Home Depot (NYSE: HD) made over $6 billion in profit last year, but the do-it-yourself home-improvement warehouse is forcing taxpayers in Cobb County, Ga., to pay $200 million to fix up its corporate headquarters, as well as tax breaks over the next 10 years.
Under the threat of Home Depot uprooting its offices and jobs from the Marietta area and moving to a neighboring community, the county government unanimously approved the measure.
Feeding at the public trough
Home Depot isn't the only profitable business to loot the public treasury for its own good.
- Volkswagen is trying to wrangle $300 million out of Tennessee to support production of a new midsize SUV.
- Tesla (NASDAQ: TSLA) got over $1 billion from Nevada last year to build a battery factory in the state.
- Boeing (NYSE: BA) got some $8.7 billion in tax breaks from Washington state to build the new 777X there, a deal now being scrutinized by the World Trade Organization for violating global trade rules.
These are all highly profitable businesses, so it's reasonable for taxpayers and investors alike to ask why this is allowed to happen.
In less polite company it might be called blackmail, but in the world of government and business negotiation it's called "economic development."
Trading tax breaks for jobs
Under Home Depot's new agreement with Cobb County, the retailer can borrow $200 million to help renovate a 250,000-square-foot building it plans on converting into an information-technology center that will employ 675 existing staff while creating 525 new jobs. The money would also pay for the renovation of two other buildings Home Depot owns that it says could bring as many as 3,000 new jobs to the county over the next decade.
In return, Home Depot pinky swears it will spend the money locally, saying it will use approximately $20 million a year buying furniture, computers, and other equipment.
The tax breaks come from the county forgoing having the DIY warehouse pay taxes on the equipment as it normally would during the first year. It would pay just 10% of the taxes owed in the next year, adding 10% each subsequent year until Home Depot finally pays it in full.
A failure to communicate
Yet the failure of these economic agreements to work out as originally planned has led many governments to include what are called "clawback" provisions that allow the locality to recoup the tax breaks it gave the company if it doesn't meet the agreed-upon performance standards, such as providing a certain number of jobs or generating a certain amount of sales.
Home Depot would merely have to pay fees to the county if it doesn't generate all 525 promised jobs.
Particularly during difficult economic periods, local governments feel pressured to retain and help create opportunities for jobs; but by using tax breaks and having their willingness to compete against other communities taken advantage of, municipalities are really playing a zero-sum game.
Home Depot and other companies receiving the taxpayer assistance understand this and play on local governments' fear of missing out on ratables -- properties that provide tax income to municipalities.
A costly bet on the future
Yet oftentimes in net, they end up costing taxpayers, and it doesn't even have to be on the scale of the Solyndra boondoggle that cost U.S. taxpayers $500 billion. Former Red Sox pitcher Curt Schilling cost Rhode Island taxpayers $112 million after his state-backed video game venture 38 Studios went bankrupt. Michigan pensioners were put on the hook for Disney's (NYSE: DIS) disastrous Oz the Great and Powerful movie after investors in the movie failed to materialize, despite receiving $40 million in funding from the state.
A study by Georgia Institute of Technology found keeping Home Depot in Marietta would result in a $283,000 loss to the city's economy.
The Pew Charitable Trusts says state and local governments need to determine whether such tax breaks are actually worth the money. It pointed to one North Carolina study that found the $30 million the state provided to the film industry created just 55 to 70 jobs (at best a pricey $400,000 per job) while cutting business tax rates by a like amount would have created between 370 and 450 jobs.
Should we be paying for this?
Even if there was more economic sense in such corporate subsidies, there remains an ethical problem. Companies such as Home Depot, which can more than afford to pay the cost for sprucing up their corporate offices, are strong-arming taxpayers to foot the bill for such work.
Of course, that won't stop local governments from competing against one another with incentives, grants, and bonds, but it might be an issue investors, who are also taxpayers, ought to raise at annual shareholder meetings.
Follow Rich Duprey's coverage of all the retailing industry's most important news and developments. He has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Tesla Motors, and Walt Disney. The Motley Fool owns shares of Tesla Motors and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.