Costs, impacts of incentive deals

“Gov. Haley Barbour has asked the Legislature to approve $175 million in incentives for California-based Calisolar and start-up HCL CleanTech to open facilities in Mississippi — projects expected to create direct jobs for 1,800 people.” Clarion-Ledger, Sept. 1, 2011

When this writer read that sentence he immediately got out a calculator and did the math. The incentives came out to $97,222 per job.

Economic development incentives are controversial to some, and answers to prayers for others. But they are nothing new. A June 28, 2004, Associated Press article listed the following incentives for auto manufacturers who built plants in the South:

>> $130 million – BMW – South Carolina

>> $133 million – Toyota –Texas

>> $158 million – Honda – Alabama

>> $252 million – Hyundai – Alabama

>> $253 million – Mercedes-Benz – Alabama

>> $295 million – Nissan – Mississippi

More recently, Toyota was provided incentives of $296 million to create 2,000 jobs ($148,000 per job) in Mississippi, according to an article in the March 5, 2007, edition of USA Today. The same article updated the Nissan Mississippi incentives to $363 million. Note that all of the above auto manufacturers are still in business and have invested billions of dollars and created thousands of jobs. Most have even expanded since first opening.

At this point, it should be pointed out that the incentives mentioned above are not cash incentives, although one state has offered direct cash incentives in the past. Also, some states offer cash rebates to companies meeting certain criteria. So are incentives a good thing or a bad thing? As always, it depends on one’s perspective.

Incentive is defined as, “a thing that motivates or encourages one to do something.” The creativity of incentives is limited only by the imagination. Examples of incentives include tax credits for each new job created, rebates on sales taxes paid for equipment, funding for infrastructure improvements, rebates for payroll taxes, enterprise zone incentives, tax credits for individual investors who invest in certain types of start-up businesses, loan forgiveness, etc. Some units of government have even gone in as equity partners with developers. A search of state and local economic development organizations reveals that all tout their incentive packages for certain types of industries and job-creating companies.

Incentives make sense when there is a good probability that the objectives of the one offering the incentives will be achieved. Usually these objectives are measured in economic terms using the concept of return on investment. Sometimes the objective is something other than economic. For example, when Alabama provided incentives to Mercedes of over $66,000 per job it was understood that there would not be a financial recovery of that investment. Yet Alabama made that investment because it had a goal of recruiting a world-class manufacturer to the state. The result was that Alabama’s image in the international business world was enhanced. From that standpoint, Alabama economic development and business leaders would say that the investment objective had been met.

Return on economic investment is another matter. Calculating such a return is based on assumptions made by the investor, i.e. the government organization. Change those assumptions and deals can look shaky indeed. For example, management at a certain conference and convention center that had been publicly funded announced that it had exceeded expected revenues and was operating in the black. The financial statement omitted the fact that debt service was not included. In another case, a hotel and conference center that had been heavily subsidized with tax credits, no-interest loans and other incentives could not show that it would be profitable when the incentives expired unless its room rates were dramatically increased. The lesson here is that projects should probably not receive incentives if the market would not support the project alone without the incentives.

In today’s environment there is a push at every level to create jobs. Indeed, job creation is a worthy goal and is vitally important to a nation’s economy and to its psyche. It is a world where a person seems to be defined more by his or her job than just about anything else. So incentives to create jobs will not go away regardless of the controversy over them. The goal then is to use incentives wisely so as not to be set up for failure. So-called clawback provisions, performance guarantees and other measures are available to governments in case of default by the companies receiving the incentives.

Nevertheless, there comes a point when the cost of an incentive for a job is clearly beyond the realm of reason and feasibility. When the President recently put before Congress a plan called the American Jobs Act, with an estimated cost of $440 billion, this writer went in search of the calculator once more. Several economists estimated that the number of jobs created would be 1.9 million. The calculation was made. That would be a cost of $231,579 per job.

Phil Hardwick is coordinator of capacity development at the John C. Stennis Institute of Government. Contact Hardwick at phil@philhardwick.com.

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One Response to “Costs, impacts of incentive deals”

  1. The Nissan Trap: For better or worse, Mississippi’s investment created a dilemma | Says:

    […] incentive package was the largest in history. (It has since been surpassed by Mississippi’s $296 million deal with Toyota in […]

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