Second of a two-part series
A little-known but very big Fortune 500 company, MeadWestvaco, two months ago snubbed Atlanta and opted to build its $100 million, 1,000-job corporate headquarters in Richmond, Va.
It wasn't that Atlanta didn't offer lucrative bribes – otherwise known in the economic-development business as "incentives." More than $20 million was put on the table, according to economic boosters in Atlanta.
But the deciding factor was traffic congestion. Atlanta and Georgia have failed for decades to address runaway growth that far exceeds infrastructure. MeadWestvaco executives, not wanting to waste much of their lives sitting in traffic jams, opted for Richmond.
If there's a moral: Put money where it helps everyone, not just a few companies that, generally, are newcomers to Georgia and have never contributed to the state.
The worst example of economic-development excess came last year, when Georgia landed a deal for the Korean carmaker Kia to build a factory in west Georgia; the Atlanta Journal-Constitution gushed: "Perdue revels in big win." The bill to Georgia taxpayers for Gov. Sonny Perdue's "win": $420 million, or almost $50 taken from every man, woman and child in the state.
In recent years, the enticements have expanded beyond relatively painless practices such as forgiving corporate income and property taxes for companies that move to the South. Now we give land, promise to pay salaries and sometimes just lard companies with cash.
"If the voters thought about it, they'd realize they were paying higher school taxes because the public treasury was being used to lure businesses," says Mac Holladay, an Atlanta economic-development consultant.
The general theme in the South is being "pro-business," which interprets as subsidizing relocations. Taxpayers are increasingly left out of the calculation as many states have moved to shield economic-development decisions from the public. Georgia went to extraordinary lengths -- essentially using private entities to be the custodians of public documents and decisions -- in bids to land the Kia factory (successful) and a NASCAR museum in Atlanta (unsuccessful).
In 1936, Mississippi passed the first incentive legislation. Under that law, the state selected companies for cash grants, favorable tax treatment, industrial revenue bonds (which are paid off using tax revenue and other income derived from the projects they are sold to induce), and other come-ons.
One business that benefited from such subsidies was the Real Silk Hosiery factory that opened in Durant, Miss., in the late 1930s. Real Silk rented its factory 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. Setting a trend that's still emulated today, Real Silk closed before government-guaranteed bonds to pay for the construction of the factory were paid off. Time magazine noted in 1998 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."
Despite many cases illustrating the folly of using public funds to create jobs, the practice is Scripture to Southern politicians.
One reason subsidies do not work as advertised is that they are rarely a decisive factor in site selection. "Are incentives the reason a company will pick one state or city over another?" says Jim Clinton, executive director of the Southern Growth Policy Board in North Carolina. "Usually not, although they can be a factor in breaking a tie."
A decision last year 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."
A recipient of taxpayer largesse made an even more scathing assessment. Toyota announced Feb. 27 that it would locate a new factory near Tupelo, Miss. Mississippi agreed to pony up $296 million in incentives. That total grew as two other states – Tennessee (in conjunction with Georgia) and Arkansas made rival bids.
However, despite the enormous incentive package, Toyota North America President Jim Press shrugged off the 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." He called critical factors "subjective" – particularly the work force, training, infrastructure and transportation access.
Moreover, many companies that seek subsidies pack up and leave once the public giveaways disappear. A Sony Music factory in Carrollton closed in 2001, laying off 1,500 employees, after its tax benefits and other subsidies came to an end.
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.
And, 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. Less noticed but equally corrosive is the corruption of the marketplace. Some businesses are favored, while others aren't. The losers aren't just the taxpayers – it's every business that must succeed or fail on a playing field warped by subsidies.
There are better, neutral, market-friendly ways to attract investment in states or cities, such as lowering taxes for all businesses across the board. But these are rarely discussed in state capitals and city halls.
"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 says. "In fact, if every business got a fairer shake, you'd witness faster economic growth."
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