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Wednesday, July 26, 2017    Login


The economic development incentives debate: Part . . . whatever

By Mike Randle

Some deals in economic development don't work out, but the percentage is tiny. That doesn't mean states lose significant amounts of money on projects that struggle or fail. For example, Dell closed its plant in Winston-Salem, N.C., after a few short years and that government got back its investment through clawbacks. Regardless, workers in Winston-Salem received the wages paid by Dell for the time it was up and running. Pictured is former Tennessee Gov. Phil Bredesen and his economic development chief Matt Kisber. The two paved the way for Hemlock Semiconductor and Wacker Chemie to build massive solar energy-related plants in Tennessee. Wacker has delayed its $1.5 billion polysilicon plant in Charleston, Tenn., and Hemlock laid off 75 percent of its workforce prior to the expected opening of its billion-dollar-plus facility in Clarksville, Tenn., this quarter. It remains to be seen whether or not those two projects pan out. Interestingly enough, Bredesen and Kisber formed their own solar-related company after leaving office in 2010. In the more than 20 years this magazine has been in print, we have responded to numerous articles surrounding the incentives debate. In fact, we have written about the "debate" so many times that we started to add to the titles, such as "Incentives Debate: Part I, II, III, IV," etc.

Well, I hope this is the final "incentives debate" article I write because the last one in the Summer of 2007 was titled, "The Incentives Debate, Part IV: STOP IT, STOP IT, STOP IT! There is no debate!" Either I had a stroke while writing or what someone else had written that quarter hit my last nerve. Speaking of:

The New York Times came out with a widely read story about corporate and industrial incentives in the fall quarter titled, "As Companies Seek Tax Deals, Governments Pay High Price." The piece, in short, was condescending -- specifically to the South -- pompous, deprecating, certain, yet so misinformed.

I love The New York Times. It is my favorite newspaper, and to produce our Southern news aggregator, our editors read over 150 newspaper web sites daily, so we certainly have something to compare it to. The Times seems to be an expert on everything; everything except economic development. In that arena, The Times has never written a single article that I have read that even remotely displayed any actual knowledge of the practice of economic development, especially here in the South.

Like all anti-incentive stories, this one focused on one thing: the front end of a deal. If there is one aspect of economic development the South's practitioners and politicos have done poorly over the decades, it is educating their fellow citizens about the return on investment these projects give back to states and communities. You never read about ROI do you, or the back end of a deal? Why? I don't know, but all of these articles focus on one thing: the front end of a deal.

Why don't politicos and economic developers encourage automakers for example -- but it can be any business -- to put out a press release after they pay their $1-billionth wage (or even $1-millionth) instead of the 500,000th car they produce? That would solve the incentive debate on the spot. Just an idea.

You want a shining example of return on investment by state and local governments in an economic development project? South Carolina and its citizens have earned more than 20-fold on its investments in BMW, maybe more. The New York Times article cited GM as a poor investment by states and governments. GM and every automaker – foreign and domestic – in the Southern Automotive Corridor are cash cows for state and local governments. It should be noted that not a single foreign-owned automotive plant in the South has closed. Pictured are workers at BMW's plant in Greer, S.C., doing final checks on an X3 model. Here is a quick ROI example: BMW has been in South Carolina for 20 years. That state has given out about $1 billion in incentives to the German automaker during that time. The company pays today about $1 billion annually in wages just at the plant. So, in just one year, South Carolina gets its money back in wages at the plant alone.

Oh, but there's more. Statewide, wages supporting the plant through suppliers and such are estimated by SB&D to be around $1.8 billion annually, or almost double in one year what South Carolina has "paid" mostly in tax credits to BMW over 20 years.

And taxes paid by BMW to the city of Greer, Spartanburg County or the state of South Carolina? If it's a dollar, S.C. is still way ahead. By the way, BMW has invested $6 billion in its facility in the Palmetto State since 1993. How many construction workers purchased houses from the money they earned building that plant that seems to expand every year?

The Times article also portrays incentives as cash to a company. Smart governments that propose incentives for job generating companies center most of the package on tax credits. The idea is, if the company chooses your state or community, any taxes it pays are more than what the state or community is receiving now, since the company isn't there yet. Notice the word "Pay" in the headline of the story. The Times article reads as if incentives are cash on the barrel deals and added, they "divert money from public education."

Nothing could be further from the truth. Bobby Hitt, South Carolina's Secretary of Commerce and a former employee of BMW, was quoted in the article saying, "I don't see it as giving up anything." The Times article didn't let Secretary Hitt explain further. It simply wrote after his quote, "Mr. Hitt, like most political officials, has a short-term mandate."

Yet, the article quoted other politicians outside the South in depth – with the same short-term political mandate, we assume – who are against what they deemed, "corporate welfare." Hummmm. NOTE TO TIMES: Those are the politicians who serve in places that are losing the economic development game. 

Look folks, giving out tax credits is not "paying" for anything. It is simply getting less in taxes over a period of time – usually 10 years, depending on the size of the project – if indeed the company chooses your state or community. For many governments, getting less is better than getting nothing. Nothing is what a community or state would get without tax credits (incentives) offered to a job generator. Is that too complicated for The New York Times to understand?

It's the wages.

The Times supported its findings by claiming it "analyzed more than 150,000 awards" and created a "searchable database of incentive spending," backed up with "interviews with more than 100 officials" in government, business and consulting. Really? Only 100? SB&D talks to more than double that in a typical quarter and most of those are casual conversations – the easiest way to retrieve accurate information.

But not once in the article did The Times even attempt to do a case study on the wages paid by companies receiving the evil incentives it wrote about. It cited GM -- an easy target -- as an especially evil corporation in the Midwest. "In the end, the money that towns across America gave General Motors did not matter."

The piece failed to report that almost all of GM's buildings vacated in those towns across America were so old they were not even close to being competitive with another evil group – the foreign automotive axis that includes the Germans, Japanese and Koreans who are finding the American South and Mexico to their liking like never before.

In other words, it took bankruptcy for GM to become competitive again. General Motors stayed in those dilapidated structures and paid those legacy costs when it should have just punted on the Midwest 20 years ago. EDITOR'S NOTE: SB&D publicly supported the auto bailout and is pleased that Midwestern states are benefitting from the deal. 

But what about this: How much money did GM pay in wages over the course of over 100 years in the Midwest? Not to mention that it has kept its base in Detroit after bankruptcy, when it could have moved elsewhere, and therefore will continue paying wages there for another 100 years.

Well, if BMW has paid roughly $9 billion in wages at its plant in South Carolina in 20 years, is it even an argument to project that GM has paid close to half a trillion dollars in wages at well over 100 facilities it has operated in the Midwest, including its headquarters and R&D facilities it has kept in Detroit for over 100 years?

Now, let's get back to the incentives debate, but first, this: If GM wasn't in the Midwest at all, where would that region be? Use your imagination.

Look, incentives to job and investment generating companies are a "personal" decision. Like any investor, it's up to the locality and state to make the decision. For example, if you choose not to make an investment in a stock, how much money did you win or lose? Nada, on both ends. If you choose to invest, is there a guarantee you will make a profit? Nope.

It's the same thing with government-based incentives. Will each deal make money for that government? No, but the vast majority have, times 10. And furthermore, whether that government profits from the deal or not, for the time that company is operating – in the case of GM, for generations – that government's people will make money in wages, the most important aspect of the practice of economic development.

It's not about incentives. It's about jobs and the wages. Wages buy houses. Wages put kids through college. Wages pay for schools. Wages – no matter the sum – pay the bills and essentially run the world.

In other words, forget the government and those "evil" corporations they incentivize. Mention the wages for heaven's sake. That's what economic development is all about. It's the increased POWER OF THE PEOPLE that those incentives create.

As you can surmise, I am tired of this subject because, in my mind, there is no incentives debate. Almost all of the sources griping about incentives are located in places that don't turn job generating deals. Those where big deals are done, there is no debate. Does that tell you something?

You rarely read anti-incentive rhetoric in Tupelo or Columbus, Miss., for example, two dynamic small Southern economies that compete fiercely for projects that others whining about incentives would die for. I guess The New York Times' writer Louise Story failed to visit Tupelo or Columbus while gathering data for her report. I visit those two towns, and hundreds like them in the South, every year.

Unless it comes from far-right or far-left sources, you don't hear anti-incentive talk from officials or media in Greenville, S.C., Dallas-Fort Worth, Houston, Nashville or New Orleans. . .just a handful of Southern economies that have reinvented themselves over the years with the assistance of the proper use of incentives for locating companies.

Let's be honest and I will take this quote from "Incentives Debate: Part II" that I wrote in the 1990s. "The incentives debate is mostly about leveling the playing field between the South and other parts of the country." 

Hey, New York Times, I know it is tough to swallow. Incentives, done right, work and they have worked for over 400 years in this country. After all, you don't have to look far to see the incredible economic success of incentives to business and industry – big and small – willing to take the risk of paying wages and taxes. Just look out your office window. New York was founded through the use of incentives, paid for by European governments who put brave men on tiny, leaky boats looking for the "new world." They found New York and they were paid to find it.

 Southern Business & Development

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