Adding it all up, are incentives worth it?

by

Published: March 7,2005

In 1936, in an effort to quell the lingering effects of the Great Depression, Mississippi lawmakers took a bold step as the nation’s first state to sponsor an economic development plan by enacting Balance Agriculture With Industry (BAWI) legislation.

Today, every state operates its own economic development program to recruit business and industry, in addition to local and regional groups within the states, but some industry experts say buying jobs with taxpayer dollars is no longer a sound strategy.

In 1994, two professors at the University of North Carolina in Charlotte discovered in a market study that government-subsidized incentives ranked 22nd among site selection factors, with local public schools, local work attitudes and labor availability among the top three factors in choosing a location. The same manner of site selection decision-making remains today, said Buzz Canup, a nationally-recognized site selection consultant who helped shepherd the Nissan project to Canton.

“Big corporations have long eliminated most bidders well before incentives come into the picture,” he said. “Competitive incentives are at the bottom of the list.”

Arthur E. Foulkes, an economist with the American Institute for Economic Research, has said the most glaring flaw in economic development programs is that they increase a behavior known to economists as “rent seeking,” a euphemism for business efforts to secure government favors.

“Businesses pay lobbyists, lawyers and consultants large sums of money to help them obtain economic development funds,” he said. “Unfortunately, this makes less money available for higher priorities, such as capital investment.”

Royce Hignight, a Biloxi resident who investigated white-collar crime for the FBI before retiring, said that it also causes a strong imbalance of power in the political process, in favor of such businesses over ordinary citizens.

“This imbalance of power is, in effect, paid for with the public’s very own funds,” he said.

Pete Walley, director of long-range economic planning for the Institutions of Higher Learning (IHL), said the “free market hand” of economics causes a business to make the correct location decisions based on factors that will make that business competitive and profitable.

“The problem for a geographical boundary, like Mississippi, is that the free market hand could not care less about that boundary,” he said. “The business is simply responding to the factors that will allow it to make the best return on its investments. If Mississippi is not competitive in a factor, like workforce capability or efficient supply chains, or quality of life, or any number of factors, then the public sector acting for the ‘state’ offers an incentive to pervert or corrupt the free market hand in favor of the state. Over the long term, if the state does not undertake to improve the factors that affect business decisions, then the state must offer increasing incentives to continue to encourage businesses to locate within the state boundary.”

Going to court

Some citizens have taken the matter to court. More than a decade ago in North Carolina, Winston-Salem attorney William Maready filed suit as a taxpayer charging that the city’s and county’s use of economic incentives violated the equal protection and public purpose clauses of the state constitution. Superior Court Judge Julius Rousseau agreed and ruled in Maready’s favor.

Last fall, a three-judge panel for the 6th Circuit Court of Appeals in Cincinnati ruled that tax incentives given by Ohio to DaimlerChrysler Inc. to build a Jeep plant in Toledo were unconstitutional because they interfered with interstate commerce. After requests by the state and various entities to rehear the case were denied by the entire 22-judge Court of Appeals, Ohio now has the option of appealing the ruling to the U.S. Supreme Court. If it is upheld, the Ohio ruling could have far-reaching effects on similar tax incentive programs.

Taxpayers are also calling for stricter controls on incentive packages. In Washington, House members passed a bill last month establishing reporting requirements to monitor the effectiveness of the state’s roughly 500 tax incentives for businesses.

“We have fallen, I think, in the eyes of the public in terms of their view and their confidence in the state tax system,” bill sponsor Rep. Jim McIntire (D-Seattle) told The Daily News in Longview, Wash. “This is just a modest step toward restoring their confidence.”

When it doesn’t work out

In Mississippi, finger pointing has been rampant over which elected officials deserve the blame for the failed beef processing plant.

“The controls put over such public investments are only as good as the people and institutions who oversee them and those people and institutions have failed miserably,” said Hignight.

Some taxpayers have criticized state lawmakers’ approval during a special session last November of $130 million for Northrop Grumman to create 2,000 jobs in Mississippi. Even more disconcerting, they say, is the recent news that military budget cuts will total $60 billion over the next six years, with the brunt of the cuts coming from the Navy and specifically affecting plans to cut the orders of the new LPD-17 San Antonio-class amphibious landing docks made by Northrop Grumman, which would affect as many as 2,000 jobs in Mississippi and Louisiana. A September 7, 2004, Washington Post article titled, “Navy Plans to Buy Fewer Ships,” foreshadowed the military budget cuts.

“I guess we all get what we deserve when we hire a former defense industry lobbyist to be our governor,” Paul Stewart of Bay St. Louis wrote to The Sun-Herald.

In a perfect world…

John Arledge, deputy chief of staff for the governor’s office, said, “In a perfect world, no state would offer incentives, but in the real world, competition is fierce for major projects, and Mississippians need and deserve more and better jobs, and incentives help us create those. SteelCorr is a good example. Without the state’s involvement, the project could be in Arkansas. I think everyone would agree that 500 jobs averaging $70,000 a year in a high unemployment area of our state is good news for everyone.”

In addition to the $100-million incentive package for SteelCorr, moving through the Mississippi Legislature are other bills that would expand lawmakers’ incentive giving authority.

In January, business and education leaders in Mississippi presented Gov. Haley Barbour and legislators with a plan to overhaul the state’s incentives system, which calls for providing existing companies with the same breaks now enjoyed by new companies. The plan would encourage high-growth, high-value companies, particularly high-tech companies, to remain in Mississippi and/or expand their business in the state.

“We still have to do the right things to provide the right climate to grow this economy,” said Anthony Topazi, CEO of Mississippi Power Company, who chairs Momentum Mississippi.

Compelled to play the game

Senate Insurance Committee chairman Dean Kirby (R-Pearl) introduced a bill that would provide tax credits to insurance companies for the location or expansion of operations centers or claims centers in Mississippi. At press time, the Senate had approved the bill and sent it to the House.

“We’re offering tax incentives and bond issues for beef plants and steel mills and shipyards,” said state insurance commissioner George Dale. “Let’s do the same thing for high-tech industries like insurance.”

Walley said he doesn’t believe Mississippi can cease to offer incentives.

“The underlying problems of Mississippi’s economy are so large and will take more than a generation to improve that the state is compelled to offer incentives,” he said. “However, the state must shift from offering incentives to any and all business to becoming more strategic in those offers. In particular, we must develop a transparent process whereby incentives are offered to those businesses that give us the best return on investment of public resources. We have to decide what kinds of business offer the state the best opportunity to contribute to our quality of life. We must acknowledge that the public funds will be selective and specific. We do not have the public sector resources to offer all incentives to any business that requests them.”

Contact MBJ contributing writer Lynne W. Jeter at lwjeter@yahoo.com.

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