The Folly of Southern Hospitality

Dixie leads the way in lavish corporate subsidies. As other parts of the country follow suit, it's time to ask whether such incentives work.

John F. Sugg from the May 2007 issue

In 2006 the Korean car maker Kia decided to build a $1.2 billion plant in West Point, Georgia. To land the project, the state offered a $420 million incentive package that included free land (bought from the previous owners at about 2.5 times the market value), tax-funded employee training, and a new $30 million Interstate interchange. Altogether, the subsidies amounted to roughly $168,000 for each of the 2,500 jobs at the plant.

Gov. Sonny Perdue, a Republican, says it was the incentives that brought those Kia jobs to town. Harvey Newman, an economist at Georgia State University’s Andrew Young School of Public Policy, isn’t convinced. “It was clear they would pick a Southern state because of labor costs,” he notes. “Alabama had a trained force of autoworkers, so Kia located on the Georgia-Alabama border.” In other words, Georgia taxpayers are paying Kia hundreds of millions of dollars to hire Alabama workers.

The story might sound outrageous. Actually, it’s typical of Southern corporate hospitality:

* After Hurricane Katrina destroyed CSX train tracks along the Mississippi coast, the state’s U.S. senators, Republicans Trent Lott and Thad Cochran, arranged the allocation of $200 million in federal money to rebuild the railway. Then CSX asked for another $750 million to move the tracks less than 10 miles north. Lott and Cochran attached that money to an emergency spending bill for military operations in Iraq and Afghanistan.

The justification for the gifts to CSX was “economic development,” plus the weak argument that moving the tracks a few miles would protect them from another hurricane. Critics, such as Sen. Tom Coburn (R-Okla.), charge that Cochran and Lott were carrying water for the developers and casino operators who now can build along the coastal land where the tracks originally ran.

*In 2005 the multibillionaire France family, which owns NASCAR, decided its sport needed a hall of fame museum. So it went through the motions of pitting Atlanta against Charlotte for the privilege of hosting the attraction. NASCAR probably had already decided on Charlotte; the city lives and breathes stock car racing, and most of the drivers are based in North Carolina. But the bidding war drove up the public subsidies. Atlanta offered about $102 million; Charlotte anted up $123 million.
The museum will provide only about 100 jobs, most of them low paying. Business development officials in both cities claimed that the prestige of gaining the NASCAR museum, plus the promise of expanded tourism, were worth forcing taxpayers to foot the bill.

*Also in 2005, Dell opened a new computer plant in North Carolina after getting $267 million in subsidies from the state. The company pitted three counties against each other for the right to host the facility, pocketing another $37 million in the process. The total subsidies are three times what the company will spend to build its plant.

Jurisdictions across the nation offer such inducements, which include tax abatement, land acquisition, construction subsidies, training subsidies, and outright cash grants. Nationally, relocation incentives total about $50 billion a year, according to the WHR Group, SIRVA, and other relo­cation consultants. (Such consultants often collect as much as 30 percent of the grants they negotiate for the businesses.)

But there’s one part of the country that’s especially quick to throw taxpayers’ money at businesses in the hope of creating jobs and raising tax revenue. For the last 70 years, the idea that businesses need special inducements to locate themselves in the South has become ingrained in the region’s public policy. The general theme in Southern politics is to be “pro-business,” which politicians interpret to mean pro-subsidy. Taxpayers are increasingly left out of the calculations as many states move to shield economic development decisions from the public. Atlanta, for example, went to extraordinary lengths in its NASCAR initiative, essentially making private entities the custodians of public documents that detailed the public largesse being offered. Officials cite the competitiveness of luring businesses as the justification for secrecy.

The inducements used to be relatively minor and often invisible, such as forgiving corporate income and property taxes. Now they can total hundreds of millions of dollars. “Each new deal sets a new standard,” says J. Mac Holladay, an economic development consultant in Atlanta. “If Alabama has given a car maker $200 million, the next car maker will want $400 million, and will get it.”

It’s hard to get a precise total of the dollars involved, but almost every major business relocation in the South is accompanied by a cornucopia of publicly funded grants, despite ample evidence that the subsidies have little impact on corporate site selection. Other regions of the nation, especially ones experiencing protracted economic downturns, are increasingly emulating the South. The politicians involved rarely consider broader tax and regulatory changes that would make their states more attractive to all businesses, outside and homegrown.

“Historically, the South has always led in offering incentives,” Holladay says. “Other regions—particularly the Midwest, which is suffering through recession—are becoming more aggressive. I’m talking about Michigan, Ohio, and Pennsylvania. But the most aggressive states are still in the South, along with border states such as Kentucky.” The South also offers the most inventive subsidies, he adds. “In Alabama, South Carolina, and Kentucky,” he says, “officials are now calculating what a new business would pay in unemployment taxes and giving that to companies as a cash bonus. That shifts the burden to other employers in the state.”

Look Away, Dixieland
The National Association of Economic Development Agencies compiles and analyzes information on relocation incentives. Its president, Miles Friedman, says it’s difficult to make broad state-to-state comparisons due to the variety of incentives and the different types of organizations involved. Nonetheless, he says, “it’s accurate to conclude that the South has the widest array of incentives and Southern states are the most experienced and aggressive in offering them. In dollar terms, the South leads.”

Public bankrolling of private companies has been an American staple for more than 200 years. In 1791, Wayne State University political scientist Peter Eisinger notes in his 1988 book The Rise of the Entrepreneurial State, New Jersey granted tax exemptions, the power to condemn property, and control over water resources to a private business founded by future president, James Madison. The clout of the company’s founder set a powerful precedent for political intervention in the market.

Efforts to lure Northern factories southward began in the aftermath of the Civil War. Henry Grady, editor of The Atlanta Constitution in the 1880s, championed a scheme known as the New South. The general idea was to industrialize and diversify the former Confederacy’s economy; in practice, this meant offering Northern-owned companies cheap Southern labor in exchange
for tolerating Dixie’s white supremacist policies.

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