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

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Meanwhile, the government artificially lowered labor costs by offering convicts as workers: Blacks would be incarcerated on minor offenses, then leased to corporations such as U.S. Steel. A 2001 report by The Wall Street Journal concluded that around 100,000 blacks were forced into convict labor during a 60-year period ending in 1928. There are no estimates on how much money companies saved by leasing convicts from the state, but Alabama alone received payments from companies leasing convicts totaling $285 million (in current dollars) during the first two decades of the 20th century.

As the convict lease system was gradually abolished, other forms of public largesse came to the fore. In 1936, for example, Mississippi passed the nation’s first incentive legislation, the Industrial Act, to “balance agriculture with industry.” Under that law, a state panel selected companies for various come-ons, including cash grants, favorable tax treatment, and industrial revenue bonds—bonds paid off using tax revenue and other income derived from the projects they are sold to induce.

One business that benefited from such subsidies was the Real Silk Hosiery factory, which opened in Durant, Mississippi, in the late 1930s. Real Silk rented its factory from a state agency for $5 a year, enjoyed tax incentives, and had public agencies train its employees and even build their homes. The Durant plant was shuttered in the mid-’50s. Like many other Southern industrial facilities abandoned by owners seeking better deals elsewhere, it closed before the industrial revenue bonds were paid off. Writing in Time in 1998, reporters Donald Bartlett and James Steele noted that Mississippi “was the poorest state in the nation when its corporate-welfare program began in 1936.…62 years and hundreds upon hundreds of millions of dollars in economic incentives later, it remains dead last in per capita income.”

Keeping Up With Alabama
The subsidies continued long after that period of Southern history was over. Consider three deals finalized in 1995, all of them in North Carolina. This End Up, a furniture manufacturer, accepted $230,000 and other incentives from the state for a new plant near Fayetteville that would employ 200 people; then it closed a Raleigh plant that employed 150. Quaker Oats received $98,000 for a new 98-worker plant near Asheville; then it closed another North Carolina operation where 70 people worked. Seffi Industries took $300,000 and promised to create 300 new jobs. It not only failed to open a new plant or hire a single new person but a few months later went out of business altogether.
Trendy businesses—particularly technology firms—have the greatest leverage in demanding government subsidies. In February, for example, biofuel manufacturer Range Fuels, based on lit­tle more than its word that it could deliver a economically competitive product, was offered $6 million in state cash, a 97-acre tract in central Georgia, and a set of tax abatements. At best, the company will employ 70 people.

Other beneficiaries of business welfare in­­clude low-tech factories in the mid-South; call centers in the Tampa Bay area; auto manufacturers in Alabama, Tennessee, South Carolina, and Georgia; and biotech firms in Florida and North Carolina. Publicly financed sports stadiums are common across the nation, and the South is no exception. Tampa built Raymond James Stadium for the Buccaneers a decade ago as part of a deal that will divert $1 billion in taxpayer money to team owner Malcolm Glazer over 30 years. Glazer, in a style common to team owners, threatened to move the football team if he didn’t get a new stadium. To win voter approval for a bond issue to finance the project, city officials attached it to a referendum providing money to alleviate crowding in the city’s schools. The stadium was built long before most of the new schools.

This flood of public incentives is decried by development experts, who point out that such subsidies are seldom a good investment. “There’s almost never any evidence that [taxpayer-funded incentives] work” at producing benefits for the general public, says Newman, the Georgia State economist. “We know that incentives aren’t usually the deciding factor. So the jobs would be created in any event. And incentives are basically unfair, favoring some companies over others.”
“Incentives are expected by companies in today’s business climate,” says Jim Clinton, executive director of the Southern Growth Policy Board, a think tank in North Carolina. “But are incentives the reason a company will pick one state or city over another? Usually not, although they can be a factor in breaking a tie.”

A recent decision by the Swiss pharmaceutical company Novartis illustrates the point. In 2006, when Novartis announced plans to build a $600 million flu vaccine plant in the South, Georgia was quick to offer a package that included $61 million in benefits. But Novartis picked an area in North Carolina’s Research Triangle, even though that state offered only $44 million. “North Carolina has a technically experienced work force,” says Mike Cassidy, executive director of the Georgia Research Alliance at
Georgia Tech. “We don’t have that here, and that’s a sad fact.”

Decades ago, North Carolina began investing in edu­cation to train high-tech and biotech workers. That, along with an economic environment favorable to start-ups—ample venture capital and the expertise of several other technology companies—lured companies such as Glaxo­SmithKline, plus a host of entrepreneurial start-ups. Ultimately, financial incentives proved far less important than the state’s general milieu of expertise.

“Companies don’t rank incentives very high,” says Mike LaFaive of the Mackinac Center for Public Policy, a pro-market think tank in Michigan. “But they’re definitely willing to accept the gifts states give.” Based on information from relocation consultants and company officials, the Mackinac Center concludes that most businesses pick a locale based on such factors as access to suppliers, transportation facilities, work force training, prevailing wages, and the availability and price of office or industrial space.

For further evidence, consider a deal announced on February 27. The state of Mississippi agreed to pony up $296 million in incentives so Toyota would locate a new factory near Tupelo. The largesse had grown as Arkansas and Tennessee made rival bids.
But despite the enormous incentive package, Toyota North America President Jim Press shrugged off its importance. “It wasn’t a competition for incentive packages and the size of the packages,” he told the Associated Press. “That really wasn’t a factor in our decision.” Much more important, he said, were the work force, training, infrastructure, and transportation access.

Holladay, who has headed state economic development agencies in Georgia, Mississippi, and South Carolina, remembers a conversation with Zell Miller, then governor of Georgia, at a National Governors Conference in the ’90s. “The topic of subsidies came up,” he recalls. “Zell asked me, ‘Is there any way to end this foolishness?’ I answered, ‘The only way I know is to not elect any more governors.’ ”

Learning to Multiply
Holladay’s point is that politics, not economics, drives these subsidies. He’s not alone in that assessment. “These programs give the appearance of creating jobs,” says LaFaive. “But that’s never been proven. The only real difference is that without the subsidies, governors and mayors wouldn’t have ribbon-cutting ceremonies to attend.”

The Mackinac Center’s research finds little or no connection between subsidies and job creation. In a study it conducted from 1998 to 2002, seven companies that received a total of $120 million in grants from the Michigan Economic Development Commission promised to create 775 jobs, a goal that was later reduced to 458. When the job creation project was complete, the companies claimed they had exceeded the revised goal by 177 jobs. But when the Michigan auditor general’s office examined the companies’ actual reports, it turned out the enterprises had actually lost 222 local jobs.

Of course, proponents of public incentives don’t just point to the workers the businesses they attract will have to hire. They argue that there is an economic “multiplier” effect, by which spending at a factory or entertainment venue indirectly generates spending on other goods and services.

Imagine a local economy of $100 million in 2000. A new business relocates to the area that year and directly spends $10 million. Economic development boosters claim that for every dollar spent another three are generated indirectly, as the relocation draws more businesses. (Manufacturers of automotive parts, for example, will establish plants or distribution facilities near a new car assembly plant.) So in 2001, the economy should be pumping along at $140 million—the original $100 million plus $10 million in direct spending plus $30 million from the multiplier effect.