2013-05-02 13:46:02
The downturn has forced states to be savvier and more careful about providing
tax incentives to business
Apr 27th 2013 | ATLANTA |From the print edition
ON NOVEMBER 14th 2012, before an audience of elected officials and assorted
local dignitaries, voestalpine Metal Forming, a division of an Austrian steel
company, broke ground on a manufacturing facility in Bartow County, around 50
miles (80km) north-west of Atlanta. Voestalpine supplies parts to European
carmakers, and hopes to expand further. Mercedes-Benz has its only American
plant near Tuscaloosa, Alabama, while Volkswagen has one in Chattanooga,
Tennessee, just over the Georgia border. Car-manufacturing factories dot the
south-east, a region of low-tax states without strong unions and offering
relatively cheap land. Voestalpine looked at many sites across the region, and
finally narrowed the contenders down to three states.
Georgia boasts the world s busiest airport, America s fourth-busiest container
port, several interstate highways and a well-respected workforce-training
programme. To sweeten the deal, however, the state s economic development team
gave voestalpine an array of tax credits and incentives: $3.3m in job-creation
credits and $1.4m in port-tax credits over five years, $4m in sales-tax
exemptions on machinery and equipment, $3m in local-tax abatements and a grant
of $275,000 towards site developments in all, over $14m in credits and cost
exemptions.
If that seems steep, consider that Voestalpine will invest $62m in the
facility, which is scheduled to open later this year. Not including the jobs
and the economic activity generated during its construction, it will eventually
employ 220 people directly and could generate hundreds more jobs for its
suppliers and vendors. Those 220 jobs will pay employees an average annual
salary between $30,000 and $40,000 right around the Bartow County average of
$37,000 a year, and particularly welcome these days, when the county s
unemployment rate stands at 9%, well above the national average of 7.6%. Much
of that money will find its way back into the community as employees buy
houses, food, cars and so forth and as they spend they will pay sales and
property taxes, which means more government revenue and so more money for
social services.
If voestalpine fails to meet 80% or better of its promised investment and
job-creation targets in five years, Georgia can claw back whatever portion of
the $14m in credits and grants has not been claimed or spent. Chris Cummiskey,
who heads Georgia s Department of Economic Development, says that companies
such as voestalpine are putting far more into the community than they are
taking out .
Not everyone agrees. Opposition to incentives is a rare issue that can unite
progressives and tea-party types. Greg LeRoy, who heads an
economic-development watchdog group called Good Jobs First, suggests that
states would be better off making investments that benefit everyone, rather
than showering big companies with dollars. He calls subsidies aimed at luring
or, worse, retaining companies that say they are thinking of moving (see chart)
a race to the bottom that wastes a lot of money on a microscopic fraction of
employees . Instead he suggests that governments should fund training
programmes, cluster training, investments in infrastructure or fibre-optic
networks or [school] education. These are much safer investments benefiting
lots of different employers. Mr Cummiskey believes that given Georgia s
infrastructure, even with no incentives, We d pick up most of the business in
the south-east.
That is easy to say from a comfortable perch in a big, rich city such as
Atlanta. But incentives can give scrappier, hungrier places a way to compete
for business. They keep dominant cities from getting too comfortable. They help
businesses keep costs down and hedge their expansion risks. The cash crunch
that followed the downturn led some states to spend more on economic
development in order to lure businesses. It has led others to save precious
funds by tightening economic-development budgets. Putting even a rough dollar
figure on the number of incentives offered is difficult, but all states and
many cities and counties have them, and they have become an accepted and
largely beneficial aspect of competition.
They take a variety of forms: credits for creating jobs, taxpayer-funded
workforce training, property-tax abatements, assistance with land acquisition
(land is often just given away) and site development, credits against expenses
for research and development, sales-tax refunds on machinery or energy used in
manufacturing, credits for redeveloping brownfields or opening a business in a
poor district.
Some are statutory; they are available to any company that meets a
predetermined requirement. The $3.3m in job-creation credits that voestalpine
will receive, for instance, comes from a credit available to any company in
Georgia that creates jobs in one of seven sectors, including manufacturing. A
company gets $3,000 per job per year for five years as a credit against its
total tax liability. Voestalpine s port-tax credits are also available to any
company in Georgia that increases imports or exports through Georgia s ports by
at least 10% over the previous year. Around half of all American states have
some sort of job-creation tax credits. Some target wages, as Georgia s does;
others target types of businesses: in 2010 California and Connecticut both
enacted credits for small businesses that hire full-time workers.
Others, such as the relatively small $275,000 that went toward voestalpine s
site development, are discretionary, meaning they go to specific companies for
specific purposes most often to large companies relocating or expanding in a
state. The largest source of discretionary funds is probably the Texas
Enterprise Fund (TEF), which Rick Perry, the governor, created in 2003. Texas
calls this a deal-closing fund, critics a slush fund for the well-connected;
either way, it provides grants that have ranged between $194,000 and $50m to
companies choosing between a site in Texas and one in another state. Companies
must promise to hire a lot of people (at least 75 in cities and 25 in rural
areas) at wages above the county average. Since 2004 the TEF has dispersed
$487.4m. Texas also offers grants to technology companies through its Texas
Emerging Technology Fund, which has given nearly $195m to 137 businesses since
2005.
Texas s free hand has inspired copycats: all its neighbours now have
discretionary deal-closing funds, as do several other states. They have come
into vogue even as cash grants have generally grown scarcer. Companies may
prefer cash grants to help them hedge risks and defray costs during a major
expansion or those tenuous first few years, but in recent times states have
tended to prefer credits and abatements, which have little or no upfront cost
and have impacts that can be spread over several years.
The downturn has also led to demands for greater accountability for recipients
of incentives and greater scrutiny from state legislatures. Many states now
have clawback provisions written into their incentives. A 2012 study by the Pew
Centre on the States found that (only) four states rigorously assessed their
economic-development incentives, and used the results of those assessments to
inform policy decisions. Without such measures costs can balloon. Louisiana,
for instance, brought in an extraction-tax exemption for horizontal drilling in
1994, when that was a newish technology. In 2007 it cost the state $285,000. By
2010 horizontal drilling had become a common method of getting natural-gas
deposits from the Haynesville Shale in northern Louisiana, and the exemption
cost the state $239m. Such scrutiny may have helped inspire the welcome trend
away from film-tax credits, which have limited lasting effect; the number of
states offering them fell from 40 in 2010 to 34 in 2012, though that is still a
lot more than four in 2001.
Even supporters admit that there is no simple way to determine how effective
incentives are. Take Texas. According to the Federal Reserve Bank of Dallas,
between June 2009 and June 2011 the state was responsible for nearly half of
all jobs created in America. How much of that is due to the generous incentives
it offers, and how much to other factors? Texas, after all, is a state where
union closed-shops are banned, and with a lot of cheap land; a company could
relocate there from Chicago, Boston or New York and come out ahead on land and
labour costs alone.
A study by Angelou Economics, a consultancy headed by Angelos Angelou, a former
vice-president of economic development for the Greater Austin Chamber of
Commerce, in April 2012 found job growth correlated less with the amount of
incentives states offer than with rates of entrepreneurship, retention of young
professionals and overall business climate. States with an ageing population
and high corporate taxes, such as Maine, may need to be more generous with
incentives than young, low-tax states such as Georgia or Texas. Some may not
like it, but brisk interstate competition is far better than none.
Correction: According to the original version of this story a study by the Pew
Centre on the States found that 13 states assessed all of their
economic-development incentives and used the results to inform their policy
choices. In fact, only four do. This was corrected on April 30th 2013.
From the print edition: United States