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

(Page 3 of 3)

“It never happens,” says Phil Porter, an economist at the University of South Florida. Porter has looked at several cities where the multiplier effect was promised and checked to see if it worked as predicted. His method is to take the current economy and work backward—in the case of our hypothetical city, subtracting both the $10 million spent by the enterprise and the $30 million allegedly generated by the multiplier effect. If the effect worked as promised, he’d arrive at $100 million. Instead, he invariably gets less.

For example, local boosters in Tampa, Florida, claimed the 2001 Super Bowl brought $300 million in economic impact to the area. But according to sales tax receipts, sales in Hillsborough County (where Tampa is located) for January 2001 were about $1.44 billion, compared to $1.4 billion for a year earlier. There was growth, sure, but no more than is seen in many year-to-year comparisons when the Super Bowl wasn’t a factor; in fact, it was less than the average growth, and far less than what was predicted.

Corrupting Effects
There’s one more reason to be wary of corporate subsidies: Doling out all that money has a corrupting effect. In April 2006, just weeks after announcing the new Kia plant in Georgia, the chairman of Kia’s parent, Hyundai, was jailed in his home country for operating a $109 million slush fund used to influence Korean officials.

The corruption isn’t limited to Korea. In a 2005 federal sting operation, undercover FBI agents claiming to be from a company called E-Cycle Management offered bribes to Tennessee officials in return for state-funded economic development incentives. The result: Nine public officials, including five current or former state legislators, were indicted for bribery.

The corruption of public officials who tap into the flow of public subsidies generates headlines. The corruption of the marketplace is less noted, but it’s even more corrosive. The losers aren’t just the taxpayers but all the businesses that must succeed or fail on a playing field warped by subsidies.
It’s unfair to give carpetbagging companies tax cuts while denying them to businesses that have invested in a community for generations—and are more likely to stay there as well. Many companies that seek subsidies pack up and leave once the public giveaways disappear. A Sony Music factory in Carrollton, Georgia, for example, closed in 2001, laying off 1,500 employees, after its tax benefits and other subsidies came to an end. Sony sought out other markets that would again allow it to avoid paying property and other taxes. In cases like that, when other communities offer similar conditions such as a low-paid work force and cheap land, the benefits do make a difference.

But there are better, neutral, market-friendly ways to attract investment in states or cities. These are rarely discussed in state capitals and city halls. In general, LaFaive notes, officials “don’t look at what such things as a tax cut across the board would do. An incentives package admits that it’s too expensive to do business. So lower the costs across the board.” The result, he says, would be “a fair field with no favors.”

“If governors and legislators would just put away the states’ wallets, if all of them in every state would do that, you’d see little change in economic development,” Holladay predicts. “In fact, if every business got a fairer shake, you’d witness faster economic growth.”

John F. Sugg is group senior editor of CL Newspapers, which publishes alternative newsweeklies in Atlanta, Charlotte, Tampa, and Sarasota. He is the 2005 recipient of the Society of Professional Journalists’ Green Eyeshade Award for serious commentary.

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