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Thread: Sears and the incentive game

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    Cyburbian Cardinal's avatar
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    Sears and the incentive game

    Sears is threatening to leave its headquarters in Hoffman Estates, a suburb of Chicago. At the time it left the Sears Tower, the company received incentives from the state to remain in Illinois, and built a sprawling office complex that was, in suburban fashion, as the iconic tower it abandoned in 1993. Now Sears is playing the "move" game again, seeking generous payouts from states to relocate its operations.

    It is hard not to look at this and be a little cynical. In 1993 Sears was fading but still relevant to the retail world. The chain was once the nation's top-ranked retailer at a time when Kmart was the top-ranked discount retailer. In 2011 these combined companies rank number ten. Sales have declined for 19 straight quarters and stock prices have declined despite desperate buy-backs meant to inflate value. Sears is not wanting to relocate, it is looking for cash in order to survive.

    So as a state or city, is it worth bidding on this dying dinosaur? Some states think so. Ohio, for one, has offered $400 million. On the other hand, Illinois has chosen not to get into the game by offering any incentive to stay. This might have been Sears' ultimate hope - a package of concessions without the cost of relocation.

    I wonder what the real benefit might be to any place that lands a relocated Sears. How many employees will transfer with the company? For many, this may be an opportunity to jump ship. If the best executives, middle management, and technical people refuse to depart with the company, how much sooner will Sears enter the ranks of the departed? Can a company with no clear, effective direction absorb the turmoil of a move and restaffing without taking a hit, which in this case might easily be a death blow?

    Is there merit to playing the incentive game, or is Sears just waiting to expire?
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    Cyburbian Brocktoon's avatar
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    Sears possible relocation makes sense if you look at it through the lense of a mass layoff and corporate relialignment than it does as a tax strategy...but I don't think Sears is looking at it that way. According to Sears annual report and c-suite reorganization they want to become a much larger player in the online world. If they moved to Columbus, OH or Austin, TX the move would allow them to better align their workforce for their new strategy. Austin makes sense from this prospective since they have a high number of underemployed tech workers in the area. From what they are saying its purely a tax play which is short sighted because they have the ability to restructure for the better much the Boeing did when they left Seattle for Chicago.

    Why is Ohio offering a $400M package to the 10th largest retailer that is on the decline....6,000 jobs, 1 million square feet of office space and an average salary of $90K...that is a sizable net impact to any state...probably over 20 years the direct and indirect of a declining Sears is north of $400M.
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    Cyburbian DetroitPlanner's avatar
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    This was big talk in these parts about a year ago. Kmart's HQ is still empty from when they moved after the takeover. I see this as a crapshoot, but the govt is playing it with the public tax dollars. What do they have to lose? No skin in the game. Incentives are going to be the death of us all. We should not be doing so much to compete. The only winners are the corporations, and they are still likely to ship as many jobs overseas as they can get away with.
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    Unfrozen Caveman Planner mendelman's avatar
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    Quote Originally posted by Brocktoon View post
    Why is Ohio offering a $400M package to the 10th largest retailer that is on the decline....6,000 jobs, 1 million square feet of office space and an average salary of $90K...that is a sizable net impact to any state...probably over 20 years the direct and indirect of a declining Sears is north of $400M.
    And being in OH myself, if the State gets Sears and it goes into an incorporated City, that 90K avg and numberof jobs you show would be a boon to the City, due to most Cities in OH having a local income tax. I know the City I work for would bend over backwards for it and give free land and property tax abatements just to get that kind of income tax revenue.
    I'm sorry. Is my bias showing?

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    OH....IO Hink's avatar
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    Quote Originally posted by mendelman View post
    And being in OH myself, if the State gets Sears and it goes into an incorporated City, that 90K avg and numberof jobs you show would be a boon to the City, due to most Cities in OH having a local income tax. I know the City I work for would bend over backwards for it and give free land and property tax abatements just to get that kind of income tax revenue.
    At 2.25% of 90K for 6k jobs you are looking at $1.2million a year in income tax. I would imagine that they are also assuming indirect impacts and related creation of jobs. What I don't understand is why they would go after Sears. All that would be fine if it was assumed that Sears would be around for 20 years... I am not so sure about that.

    I mostly think this is a game being played by Sears to get some more tax breaks from the State of Illinois.
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    moderator in moderation Suburb Repairman's avatar
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    Quote Originally posted by Hink View post
    I mostly think this is a game being played by Sears to get some more tax breaks from the State of Illinois.
    I think that is probably the case as well. Texas should make it interesting in trying to lure them to Austin--Texas and Austin both are pretty renowned for their incentive packages, which are often a bit over the top.

    If they are to relocate, I think Austin may be the more likely destination, reflecting the general move toward the sunbelt. Also, Austin makes a lot of sense if Sears is trying to increase its Internet presence (a guess they're getting into that game about a decade late).

    If Sears as a brand still exists in 10 years, I'll be shocked. About the only thing that people seek Sears out for with any kind of loyalty is Craftsman tools, DieHard batteries and home appliances (although Lowes & HD have made major inroads on both tools & appliances). I know I pretty much swear by Craftsman tools. I could see someone purchasing the Craftsman brand easier than I can see Sears surviving.

    "Oh, that is all well and good, but, voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same way in any country."

    - Herman Göring at the Nuremburg trials (thoughts on democracy)

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    Cyburbian ColoGI's avatar
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    Quote Originally posted by Hink View post

    I mostly think this is a game being played by Sears to get some more tax breaks from the State of Illinois.
    Happens all too often. And far, far too often pols fall for it.
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    Cyburbian Brocktoon's avatar
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    Quote Originally posted by ColoGI View post
    Happens all too often. And far, far too often pols fall for it.
    And far too often a company moves because the pols did not do enough to keep them.
    "If you don't like change, you're going to like irrelevance even less" General Eric Shinseki

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    Cyburbian ColoGI's avatar
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    Quote Originally posted by Brocktoon View post
    And far too often a company moves because the pols did not do enough to keep them.
    Exactly, like join the race to the bottom to see how low you can go to get to the pandering level. AFAIC all this tax break fairy dust subsidizing can stop any time.
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    Cyburbian Brocktoon's avatar
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    Quote Originally posted by ColoGI View post
    Exactly, like join the race to the bottom to see how low you can go to get to the pandering level. AFAIC all this tax break fairy dust subsidizing can stop any time.
    No one likes incentives but as long as two or more people want something they will engage in an arms race to win.
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    Cyburbia Administrator Dan's avatar
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    At the risk of a "me too!" post, I had the same reaction as Cardinal when I first heard the news of Sears' possible relocation from Illinois. Who would want to fight over a company that's been on the decline for decades?

    With many retail chains, their home base is very much a part of their identity, and indirectly, their branding. Wal-Mart? Arkansas and the South. Target? Scandinavian-flavored Minneapolis. Macy's New York City. Neiman Marcus? Dallas. The location of Sears in Chicago links it with Middle America and the American everyman. Are you going to find cheap tools at a store based in the City of Broad Shoulders? Of course not.

    For the past 20 years, in the changing face of retail, Sears has searched for an identity; where they fit in among the consolidating local and regional department store chains, discount department store chains, and big box retailers. During the economic boom of the 1990s and early/mid 2000s, they weren't content to be the same dowdy, reliable middle-end chain that they were for decades prior. It made attempts to go upscale. It dropped its catalog. It tried, and largely failed, to enter the big box realm. Now, it's considering an exit from Chicagoland. Severing the last connection to its roots, a connection to a place that defines Sears as much as brands like Craftsman, Kenmore and Diehard, will be a fatal blow for the chain. The "winner" of Sears will be a loser in the long run.

    Meanwhile, when I first heard the report on NPR about Sears and their move out of Illinois, I wondered if it would be unconstitutional for states to enter an anti-cannibalism compact, where they would not offer incentives to entice companies to relocate from other states in the compact. For example, if Ohio and Illinois are signatories to an anti-cannibalism compact, Ohio would not offer incentives to Sears for their relocation out of Illinois, nor could Illinois offer incentives for ... oh, let's say Progressive Insurance, to relocate out of Ohio. Would an anti-cannibalism compact be seen as an impediment to interstate commerce?
    Growth for growth's sake is the ideology of the cancer cell. -- Edward Abbey

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    OH....IO Hink's avatar
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    Quote Originally posted by Brocktoon View post
    No one likes incentives but as long as two or more people want something they will engage in an arms race to win.
    And this is where the argument about Government slowing business or government getting too big, etc. is really hypocritical. So you can't keep your business functioning in Illinois, so you are going to go somewhere where a government will give you something to either continue growth, or in Sears case, stave off bankruptcy.

    Private sector businesses are subsidized by government. And when they aren't, they go somewhere else that will subsidize them. Texas is growing because of low taxes, and huge subsidies. It will be interesting to see if these tactics will keep businesses in the future with smaller budgets, and "economic development" being less important. Business retention is big now. What will you give me, is a pretty common discussion with business now.

    I look forward to seeing studies about moves like this in the future. Around these parts a large company called NCR (National Cash Register) move to Georgia for a lot of incentives. Killed the area where it used to be. Huge loss for the community. We will see if they build good will and a more successful business where the incentives are sweeter. Personally, I doubt it. Same can be said for Sears. They aren't going anywhere. They just want Illinois to understand how much they would miss them if they were gone, and make sure they get their "fair" due.
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    Cyburbian ColoGI's avatar
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    Quote Originally posted by Hink View post
    And this is where the argument about Government slowing business or government getting too big, etc. is really hypocritical. ...Private sector businesses are subsidized by government.
    Just so. And IMHO corporations and government working together often makes things worse. This is the perfect example of the vacuousness of any argument that includes 'free market'.
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    Cyburbian
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    There are really no winners when jurisdictions keep sniping businesses from each other. This is especially true with this Sears situation. I mean there are zero jobs being created, it's just one city taking jobs from another. Then Sears being in the financial shape it is, it will just be spreading the pain around to another city when it eventually goes under.

    I have a big problem with a lot of the incentives that I see being offered to companies around here. Like Amazon would build a large distribution facility in the state only if they were exempt from sales tax. The state denied that exemption and Amazon promptly stopped work on the facility. Of course like a week or so later, the lawmakers reneged and passed the exemption. Now Amazon is the only business in the state with that type of exemption which is completely unfair to all the other businesses. Now with this exemption, Amazon is putting more facilities in the state which are all exempt from collecting sales tax. I really have to wonder if the few hundred new jobs is really enough to offset the loss in sales tax revenue.

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    Cyburbian Brocktoon's avatar
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    Quote Originally posted by Dan View post
    Meanwhile, when I first heard the report on NPR about Sears and their move out of Illinois, I wondered if it would be unconstitutional for states to enter an anti-cannibalism compact, where they would not offer incentives to entice companies to relocate from other states in the compact. For example, if Ohio and Illinois are signatories to an anti-cannibalism compact, Ohio would not offer incentives to Sears for their relocation out of Illinois, nor could Illinois offer incentives for ... oh, let's say Progressive Insurance, to relocate out of Ohio. Would an anti-cannibalism compact be seen as an impediment to interstate commerce?
    So if IL and OH passed this what is to stop Indiana or Wisconsin from upping their efforts? A great example of cannibalism and lack of cooperation is the Kansas City region. AMC is moving to the Kansas side with a large incentive package. Gov Brownback of KS has said openly that he welcomes and will induce all new investment regardless of where it came from. When this type of relocation occurs it is a zero sum game for the nation but a huge game for the community that gets the new company.

    We also need to realize that it is not just the US that is incentivizing corporate location but many countries around the world. The fact of the matter is incentives are not going away, they are being expanded to cover more items but with smaller government budgets the amounts will be small but the deal structure will be much more complicated. I was speaking with a site search consultant that specializes in incentive structures and she told me that the incentive offers are much smaller, that transactions are being more complex, cash upfront is being as common as tax abatements and the deal structures are paying more attention to the tax treatment of incentives.
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    Cyburbian mgk920's avatar
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    Quote Originally posted by Hink View post
    At 2.25% of 90K for 6k jobs you are looking at $1.2million a year in income tax. I would imagine that they are also assuming indirect impacts and related creation of jobs. What I don't understand is why they would go after Sears. All that would be fine if it was assumed that Sears would be around for 20 years... I am not so sure about that.

    I mostly think this is a game being played by Sears to get some more tax breaks from the State of Illinois.
    Governor Quinn and the Illinois legislature have been HAMMERING the state's private sector in recent years with heavy increases in taxation and Sears is not the only iconic private employer who is seriously threatening to leave the state. The Chicago Mercantile Exchange and Caterpillar are among other major corporations who are also actively seeking out other places for their board rooms.

    And now with the selective incentive-offering from Quinn and Co., the words 'Crony Capitalism' are a very correct way of describing it.

    BTW, IMHO, Sears really lost it when they left the Sears Tower - many members of their front-office brain trust were unable to follow them to Hoffman Estates when they moved a generation ago.

    Mike

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    Cyburbian rcgplanner's avatar
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    The incentive game is so maddening to me. Regardless of the level of government, more and more places are giving away the farm to large corporations. A perfect example is a new Bass Pro Shop that opened. This company with nearly $2 billion dollars in revenue comes into to this community. The city bends over and builds the company a new $3,000,000 store, roads and abates their property taxes. The city in return gets sales tax and low paying retail jobs. If Bass Pro Shops is interested in the area, they have already done the research and believe the store will be profitable.

    Why do so many who rail against government spending seem to look the other way when it comes to giving away the farm to bring a company in, it seems like an endless race to the bottom.

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    Cyburbian DetroitPlanner's avatar
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    Quote Originally posted by rcgplanner View post
    Why do so many who rail against government spending seem to look the other way when it comes to giving away the farm to bring a company in, it seems like an endless race to the bottom.
    Beacause they don't know any better. Good paying jobs are the enemy to these people. What surprises me are the number of lower working class folks they can convince that these policies are a good idea. Folks shop at Walmart because they can't afford not to, but they don't see how much of the money leaves thier local or national economy. All they know is Speed stick deodarant is five cents cheaper. They also can't see how driving the extra 10 miles to the Walmart is increasing thier transport costs over shopping at a more more local store. These corporations have this figured out and are playing the politicans and the people like fiddles. Why should they pay for these when they don't have to?
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    OH....IO Hink's avatar
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    Surprise, surprise...

    Sears will stay in Hoffman Estates if Quinn signs tax breaks
    http://www.dailyherald.com/article/2...ews/712139766/

    What Sears would get under the deal: An extension of its 20-year-old local property tax deal worth $125 million, as well as $150 million in state income tax breaks over 10 years.
    No that isn't blackmail.... Let the market dictate if Sears can be profitable, not government. We get in the way...
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    Cyburbian
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    Quote Originally posted by rcgplanner View post
    The incentive game is so maddening to me. Regardless of the level of government, more and more places are giving away the farm to large corporations. A perfect example is a new Bass Pro Shop that opened. This company with nearly $2 billion dollars in revenue comes into to this community. The city bends over and builds the company a new $3,000,000 store, roads and abates their property taxes. The city in return gets sales tax and low paying retail jobs. If Bass Pro Shops is interested in the area, they have already done the research and believe the store will be profitable.
    They had something similar happen with a Cabellas in Colorado except Cabellas pulled out of the deal in the end. This was after the city, county, and state had already spent tens of millions of dollars making to improvements to the site. This was all due to a sudden change in site preference on the part of Cabellas. They still wanted to enter the Denver market but now wanted a smaller store which that particular site wasn't suitable for.

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    Cyburbian Cardinal's avatar
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    Quote Originally posted by mgk920 View post
    Governor Quinn and the Illinois legislature have been HAMMERING the state's private sector in recent years with heavy increases in taxation and Sears is not the only iconic private employer who is seriously threatening to leave the state. The Chicago Mercantile Exchange and Caterpillar are among other major corporations who are also actively seeking out other places for their board rooms.

    And now with the selective incentive-offering from Quinn and Co., the words 'Crony Capitalism' are a very correct way of describing it....
    This is more than a little biased. Companies are threatening to leave Wisconsin too, and this week saw several closures in the central part of the state. Should we blame the misguided policies of Governor Walker? Did these companies not receive incentive deals because they did not support him in the recent election or upcoming recall?

    The incentive game is selective - and that is one of my strongest objections to it. Why should one company receive prefernetial treatment when their competitor, or even just the company downt the street has to shoulder the burden themselves? More often than not, the incentives go to a handful of large companies, while the locally-owned small businesses receive no benefit at all from the incentive. In fact, it could be argued that many of them suffer as a result of subsidized competition and having to pay for the incentivized company's benefits. We would all be much better off if local and state governments did not, or were prohibited from offering direct incentives to individual companies, and instead invested in creating a better business environment for the industries they desire.
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    Cyburbian ColoGI's avatar
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    Quote Originally posted by Cardinal View post

    The incentive game is selective - and that is one of my strongest objections to it.
    Aside from the Cabela's debacle, we also like to TIF around here which is another selective giveaway.
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    Cyburbian
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    TIF is just another irritating variation of the "incentives" game. The winner is a business that should be able to afford the investment--or why would you want them in your community?

    The exception is those service retail businesses that truly won't come to a low-income community unless they feel that the government helps them reduce risk. A better investment of government funds in that case would be to show business decision makers why it makes sense to come to communities where density may compensate for lower median income per household.

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    Someone needs to be revenue positive.

    We all know that new residential developments cost more in services (police, fire, school, roads, etc.) than they produce in revenue (local tax, notably property tax).

    A city or town can't survive if the businesses also cost more in services (police, fire, roads, etc.) than they produce in revenue. Something has to produce more tax revenue to make up for the entities that don't produce enough tax revenue.

    So a city that tries to woo Sears with a huge tax break is committing economic suicide.

  25. #25
    Cyburbian Cardinal's avatar
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    Illinois buckled and provided a $15 million per year state tax break, while extending a property tax break they already received as a bribe for building years ago. Other large companies will soon be lining up for similar payouts in what really amounts to something like a"protection" racket. Of course these free market practices to unbalance competition in favor of large corporations have a bright side. They can be paid for by raising taxes on homeowners, the middle class and small businesses, by reducing government worker wages, and by cutting unnecessary services like medicare, education, public safety, transportation....
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