The Loony, Wrongheaded Race for Northrop Grumman

Steven Pearlstein, the Washington Post’s Pulitzer-prize winning business columnist, called the District’s offer of at least $25 million in tax breaks and other financial incentives to lure Northrop Grumman’s headquarters to the city “particularly loony.”

Research on these tax deals leads to a similar conclusion. Here’s what Professor Robert G. Lynch said in his report, Rethinking Growth Strategies: “Studies that examine why firms locate where they do show that state and local taxes play only a minor role in investment decisions and that lower taxes fail to generate a significant number of new jobs.”

Ever since Northrop announced its intention to move the Washington area, leaders in the District, Maryland, and Virginia have eagerly courted the defense contractor. Legislation currently before the DC Council would give Northrop $1.95 million per year in property tax abatements for 10 years’ a total of $19.5 million’ plus $5.5 million of taxpayer dollars for relocation costs. Plus, the company would also qualify for very large tax breaks under the city’s Net2000 legislation. This includes:

  • No corporate income tax for 5 years, reduced rate after 5th year
  • Reduced capital gains taxes
  • Sales tax exemptions on products the company sells
  • A 10 percent wage credit (max. $5,000 per employee)
  • Credits for company employees that relocate to DC
  • Property tax abatement for 5 years on increases in property tax

What will the District get in return?

Northrop will employ 250 people within the District. It is presumed that a good number of those positions will be executives and staff relocating from the company’s current headquarters in Los Angeles.

Supporters have said the company will bring subcontractors. According to public documents, Northrop has approximately 30,000 employees in Virginia, 10,000 in Maryland and 600 in the District. How many subcontractors will come to support 250 workers?  The supporters have offered no concrete figures, even estimates, of this impact.

At a hearing on the legislation Monday, several District small business owners questioned why the District was so eager to give Northrop so much money for so few jobs. Their businesses, including Busboys and Poets and Chateau Animaux on Capitol Hill, employ scores of DC residents and have not gotten such treatment, they said.

They also questioned if the city had the $5.5 million slated in the bill to hand over to Northrop for relocation costs. Later in the hearing, John Ross of the Office of the Chief Financial Officer testified that a funding source had not been identified.

“The most fundamental problem is that many public officials appear to believe that they can influence the course of their state economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence,” said professors Peter Fisher and Alan Peters of the University of Iowa in their paper, “The Failures of Economic Development Incentives.”  We need to begin by lowering their expectations about their ability to micromanage economic growth and making a case for a more sensible view of government’ providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems”¦”

Or as Pearlstein says, “These testosterone-filled contests are never really about money so much as pride and ego and political bragging rights. By the time the competition ends, the benefits from winning have been pretty much bargained away and everyone comes off looking rather silly.”