Northrop Grummanannounced Jan. 4 that it would be relocating its corporate headquarters from Los Angeles to somewhere near the United States' Capitol by 2011. The defense giant follows in the footsteps of Hilton Hotels and fellow defense contractor Science Applications International Corporation, which transferred their headquarters from the Golden State to the D.C. area in 2009.
Wes Bush, Northrop's chief executive and president, said the company is looking at tax incentive packages in the region to determine its relocation destination. Such packages have spurred a number of companies nationwide (perhaps most famously Boeing) to relocate their headquarters.
Tax incentives and other subsidies to attract corporate headquarters have long been justified by claims of their positive impact on local nonprofits. Researchers David Card, Kevin F. Hallock and Enrico Moretti set out to find out if this claim is empirically true. Their research, to be published in the forthcoming issue of the Journal of Public Economics, indicates that the answer is yes, but not primarily due to corporate largesse.
Using a newly assembled database that includes the headquarters location of all publicly traded corporations in the country from 1989 to 2002 as well as contributions received by public charities in 147 cities, they determined that corporate headquarters did have an effect on local donations, to the tune of $3 million to $10 million per corporation. However, the biggest impact wasn't direct donations from the corporations, but from the well-off individuals they employ (and pay generously).
"To justify subsidies, municipalities often argue that by bringing managerial jobs to a city, corporate headquarters lead to an increase in the number of highly paid individuals," the trio writes. It appears to be true: They found that the addition of a new top headquarters in a city was associated with an approximately 275-person increase in the number of people with an annual income of $100,000 or more. (And the benefit isn't spread out evenly: "Cities like Houston, San Jose and San Francisco have gained a significant number of corporate headquarters, while cities like New York, Chicago and Los Angeles have lost," the researchers observe.)
Although none of the cities in the study appear to have lost charitable contributions over the 13-year span in an absolute sense, they certainly stopped gaining. And factoring in inflation and the rising number of nonprofits competing for corporate donations in a given city, no gain can mean a lot of pain.
Each person making more than $100,000 per year was responsible for a roughly $30,000 increase in charitable donations. However, according to the IRS, the average person at this income donates $8,700 on average to charity, indicating that the fundraising efforts of high-income people account for a large proportion of their impact.
The economists also discovered that as corporate values go up, so do donations. Each $1,000 increase in the market value (also known as capitalization) of the firms headquartered in a city yields between $0.60 and $1.60 to local nonprofits, suggesting that it pays — literally — to have successful corporations headquartered next door.
The private sector donations did not have a crowding-out effect on government grants; they didn't appear to have any impact on government grants at all. This means that the increase in donations is all gravy for nonprofits.
They point out that nonprofits provide vital infrastructure in American cities: more than one-half of all hospitals, one-third of colleges and the majority of cultural institutions fall into the tax-exempt, nonprofit category. In many cases, the nonprofits in a city are what make it a desirable place to live.
It appears that a battle is already under way for Northrop's headquarters, with cities in Virginia, Maryland and D.C. contending. Whichever city ultimately wins the prize, it seems that the real winners will actually be the nonprofit organizations within its borders.
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