State economic development initiatives.

• Author: Kahan, Paul R.

Geographic competition across the nation has fostered the creation of a wide variety of incentives to improve and promote "friendly" local business climates. Their announced objective is to increase the number of jobs in the private sector by encouraging business to locate, expand, or sometimes just to make it possible for a troubled firm to continue to operate within a jurisdiction. Despite arguments by political opponents, economists, and others that they are corporate welfare, inefficient, costly, and ineffective, their availability continues to mushroom. [1]

Consistent with expanded opportunities, an increasing facet of the Corporate State & Local Tax function is to identify and capture the benefit of those incentives. Because they are so widespread, evaluating their effect should become an integral part of the financial study performed by companies planning capital investment or increased employment levels or investigating plant, warehouse, or office sites. Looking at the picture from another direction, a Tax Department would be derelict if it failed to aggressively pursue incentive takedowns.

Government incentives traditionally occupy a secondary role among the factors leading to a decision whether to proceed with a project. One reason is that the aggregate state tax burden constitutes less than one-half of one percent of the cost of doing business. [2] Nevertheless, upfront cost reductions together with their political and psychological appeal may significantly alter perceived investment strategies, especially for larger projects. Therefore, they may become a key factor leading to the choice of one location over another.

Two models exist--the first is the selective package targeted at a single project. The second is the generic intended to engineer specific economical or social behavior that rewards all businesses performing the favored activity.

Most incentives operate as tax reductions that are offset against payments that otherwise would be owed and their realization is contingent upon first incurring the tax liability. Targeted sponsorship also includes grants, real estate transfers and infrastructure improvements, direct expense reimbursement, and the funding of services, the most frequent of which are education and training. Incentives may be earmarked to build a manufacturing base, assist businesses experiencing difficulties, spur employment, or stimulate growth. They serve to reduce initial taxpayer outlays and continue for a fixed period of years. Thereafter they are phased out or end when the term expires and then the recipient is treated the same as all other taxpayers in the community.

Governments provide inducements today because to do so is politically correct: cash outlays are the exception and the real cost consists of short term revenue losses that are minor when weighed against the long term policy to boost economic activity. Development agencies aggressively scour the country and even overseas to pursue firms that may be considering relocation or establishing new facilities. More than 30 States have adopted Enterprise or Development Zone initiatives, approximately 35 offer hiring, job-creation, and investment credits and at ]east 25 provide research and development credits. [3] Many serve to stimulate socially responsible actions--environmental remediation and improvement, energy conservation, charitable giving, training, and child care--to name a few.

During the past two decades, the media have scrutinized the near cutthroat competition between States and localities that have vied for large facilities. The outcomes of many of these have been severely criticized as lush giveaways. For example, the package given by Alabama to attract Mercedes Benz has been estimated to cost taxpayers $165,000 per new job. A Congressional Research Service report published May 29, 1996, concluded that sports stadiums financed by tax-exempt bonds rarely generate enough economic benefits to justify the subsidies they receive from federal, state, and local governments. [4]

The following illustrate some 'trophy' contests:

* One of the earliest to receive notoriety was the bidding war during the mid 1970s for Volkswagen, which constructed its American plant in New Scranton, Pennsylvania. The tax abatement was $70 million for a plant originally projected to employ 6,000; the actual head count stopped at 1,500 and the plant closed a few years after opening. General Motors chose Springhill, Tennessee, as the site for its Saturn plant. Mercedes Benz opened a $300 million facility near Tuscaloosa, Alabama, which may employ 6,000. BMW built a 1.9 million square foot complex in South Carolina which was estimated to cost $400 million. Honda moved to Marysville, Ohio, and Toyota chose Elizabethtown, Kentucky. Large new auto...