Friday, December 21, 2012

The Push Back Continues

By Jim Vaughan, Senior Fellow.

Perhaps it is because of the national debate about taxes—who pays how much and what is fair. 

Or maybe it's the scale of the study and the amounts of money involved. 

Whatever the reason, the New York Times series on corporate incentives (see Dec. 6 post by Alex Pearlstein) has editors and columnists across the nation raising more questions about the cost and benefits to states and cities of the subsidies being paid to businesses

The push back we’re seeing should cause leaders of chambers of commerce and economic development organizations to be particularly concerned since most of us have relied on incentives as one tool in our business recruitment and retention toolbox. 

The Waco Tribune-Herald has been a supporter of local incentives for new businesses and the local chamber’s work in economic development. I would not have expected its reaction to the Times series: “Corporate welfare, tax breaks and subsidies out of control in Texas.” 

The Waco paper’s editorial continued, “Our state has far too many tax loopholes and bonanza savings offered to lure businesses here, often at the expense of taxpayers and communities.” That’s strong. 

Writing in the Atlantic Cities, Richard Florida argues against incentives, calling the practice a “long-standing waste of state and local resources.” 

“Incentives do not actually cause companies to choose certain locations over others,” Florida writes. “Rather, companies typically select locations based on factors such as workforce, proximity to markets, and access to qualified suppliers, and then pit jurisdictions against one another to extract tax benefits and other incentives.” 

I have known and respected nationally syndicated columnist Neal Pierce for many years. He also challenges the value of the incentives. 

“No new net wealth is created,” Pierce writes in his most recent column. “One city or state’s gain is another’s loss.” 

I am inclined to make the case that most new projects are expansions or new operations and that we’re not playing a zero-sum game. But that’s certainly not always the case. There are many examples of communities competing to attract companies who will close plants and eliminate jobs in their former location with no net gain in employment or taxes paid. 

A classic example of this zero-sum benefit is seen in what has been called the “border war” in the Greater Kansas City region where Missouri and Kansas often compete for each other’s companies and jobs. The governors of the two states ignored a 2011 letter signed by 17 top metro area executives calling for a ceasefire. 

An insurance marketing company received $5 million from the state of Kansas to close the company’s existing location in Missouri and move to a new site one mile away in Kansas. 

The Kansas City Star says the Kansas-Missouri border war bleeds taxpayers for no good purpose

“Millions upon millions of tax dollars are being wasted this way, and for what? The back-and-fourth activity has created almost no new net job growth for the area.” 

During my tenure at the Greater Waco Chamber, we helped secure cash incentives and tax abatement for new and expanding companies in amounts from $24,000 to $2.8 million based on jobs created and capital investment. 

Compared to the awards described in the Times series, our program was quite modest and our contracts included “claw-backs” to require companies receiving grants to pay them back if the number of jobs created and retained were less than agreed upon. 

As the push back to incentives continues, a lesson learned is that the holistic approach to economic and community development advocated by Market Street has the best chance of winning broad-based support from public and private sector leaders and from the news media. 

Economic and community development is about creating great places with talented people where the businesses of the future will grow and prosper. A case can be made to offer incentives to businesses who invest in that new future. But the agreements need to be transparent and there is a need to make certain the agreement is a good deal for the local community, the state, and the company.