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.

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.

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.

“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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