You Gotta Have Somethin’: In Defense of Incentives

There are certain hot-button issues — God, politics, and possibly football – that are so dear to some people that they are incapable of changing their minds once they have formed an opinion.

We are all guilty of this to some degree. We espouse the notion of being objective, unbiased, logical and sensible, but research shows that we consistently fall short.

Confirmation bias causes us to pay closer attention to evidence and arguments that support our own firmly held conclusions and to discount contradictory evidence. We are resolute and the facts be damned.

Once we decide, we don’t like to re-decide. That’s too much work. It’s because of our neurological laziness that we sometimes fall prey to beliefs, impressions, and reports that are just plain wrong.

One of those beliefs, which many economic developers know all too well, is that all financial incentives provided to companies to expand in a given place amounts to “corporate welfare.” Try changing someone’s mind on that one.

Three Mega Projects

This argument goes back for decades, and periodically pops up, usually because of headlines. There are three mega projects in the news right now, and all center around incentives to some degree.

I am referring to FoxConn, which has announced that it will build a plant in Wisconsin, Toyota-Mazda, which publicly announced it will build plant somewhere, and Amazon, which also publicly announced that it will locate a second headquarters somewhere.

The size and scope of these projects, coming literally back to back, have economic developers, a group that is always watched, scrutinized, and second guessed, in a tizzy.

Get Things Right

Wisconsin’s efforts to bring a $10 billion Foxconn Technology Group plant to the state may have hit a snag. The board of the Wisconsin Economic Development Corp. delayed a vote to give final approval to a contract that would provide the Taiwanese firm with $3 billion in economic incentives.

Final action on the contract will not happen before the board’s next scheduled meeting on Nov. 8 at the earliest. Apparently, board members are wanting more safeguards in place.

“We’re going to take whatever time is required to get things right,” WEDC Chief Executive Officer Mark Hogan told the Milwaukee Journal Sentinel. 

The contract being considered would pay up to $2.85 billion in cash to the company over 15 years to offset 17% of its qualifying payroll costs as well as 15% of the capital costs of constructing an up to $10 billion factory that could employ as many as 13,000 people.

Unconventional and Big

The Amazon project has captured the imagination of the nation, partly because the Request for Proposal (RFP) was unconventionally published in a very public manner and the sheer size of it. This project defines big on so many different levels.

If you are reading this on Oct. 19, today is the deadline for the responses from cities that choose to compete. At stake is what Amazon is calling “HQ2,” a second headquarters that will create 50,000 direct jobs averaging $100,000 and approximately the same number of indirect jobs. The capital investment for 8 million square feet of office is estimated to be about $5 billion.

Amazon currently employs about 40,000 people in Seattle, where since 2010 it has paid nearly $26 billion in wages and spent $3.7 billion on buildings and infrastructure. The company estimates it has had an indirect economic impact of $38 billion on Seattle.

Pay to Play

Based on the numbers, I believe the city that wins HQ2 will be offering an incentive package in the billions. The Baltimore Sun has reported that Maryland’s incentive package reaches that mark. And in In New Jersey, outgoing Gov. Chris Christie (R) and bipartisan leadership of the state Legislature have pledged a $5 billion package.

It should be noted that New Jersey ranked 50th and Maryland ranked 43rd in the newly published 2018 State Tax Business Climate Index by the non-partisan Tax Foundation.

That is not to say that Amazon will go to the highest bidder. I don’t think it necessarily will. Tech talent and the culture of the place will go a long way in determining what city will become the next company town. But incentives will play a role, because they have to. It is now the nature of the game. It is what is expected.

The smallest of the three mega-projects is that of Toyota-Mazda. Together the Japanese companies will invest about $1.6 billion in the new plant. By all accounts, that is still a very large project, which is why the automakers are pressing for an incentive package of at least $1 billion, according to a recent Bloomberg report.

About 4,000 direct jobs will be created. Figure another 12,000 to 15,000 indirect jobs will be created.

Will they get it? Probably so based on history. Should they get it? Well, that depends on who you ask.

A Commonplace Tool

It is not just the national headline projects in which economic development incentives are employed. Just do a Google search and you will see that in Bexar County, where San Antonio is the county seat, local economic developers are pushing for a 10-year property tax abatement, worth nearly $3 million, for a credit union that will create about 50 new jobs.

Just last week, officials in San Antonio and Bexar County opted not to bid on the Amazon project, saying the city wouldn’t have been “competitive” on incentives.

In Hoover, Alabama, the city council approved tax rebates of up to $4 million for a Whole Foods Market Plaza shopping center. And in Hodge, Louisiana, the WestRock paper mill, which employs 450 workers with an annual payroll of $28 million, will get a performance-based tax rebate of $1.5 million a year for five years in exchange for a $200 million expansion that will keep the plant competitive.

My point is that incentives are a commonplace tool in economic development, and are not just awarded to the FoxConns, Amazons and the Toyotas of the world.

Textbook Tax-Break Auction

But that doesn’t make it easier for the critics to accept. They contend that companies are going to locate and expand with or without incentives. From their standpoint, granting incentives is an irresponsible and wasteful act that costs taxpayers.

Greg LeRoy, executive director of Good Jobs First, an organization that promotes corporate and government accountability in economic development, has called the Amazon project a “textbook tax-break auction.”

“Taxpayers should watch their wallets as the trophy deal of the decade attracts politicians to a hyper-sophisticated tax-break auction. We fear that many states and localities will offer to grossly overspend to attract Amazon, even though the business basics–especially a metro area’s executive talent pool–will surely control the company’s decision.

“Public auctions for economic development deals, like those staged in the past by Boeing and Tesla, are the rare exception: nearly all are staged in secret. Based on what we know about Amazon, we expect this one to be a textbook show,” he wrote.

A Bad Deal Costs a Good Man

To say there is not a kernel of truth to the critics’ arguments would be a fallacy. To say that mistakes have not been made in awarding incentives would be wrong.

I recently spent time with an economic developer whom I greatly respect and who lost his job because a deal went bad. Several million taxpayer dollars were lost, which naturally caught the attention of the news media.

But that same economic developer could rightfully point to a long track record of good deals that he brokered in which hundreds of millions of dollars, perhaps billions, were invested in his state and thousands of jobs were created.

Did he err? Yes, he would say that he absolutely did. But should he have had to fall on his sword because of one bad deal after a long string of successes? I don’t think so. But that’s what happened.

I could tell that it pained him to talk about it. And yet, he needed to. I’m glad I heard his story, because it put things in context. Incentives can be costly in more ways than one.

Greasing the Skids

But I am philosophically not opposed to incentives, so long as they are judiciously applied with the proper due diligence. Part of that is because I have represented companies in a consulting capacity that have sought incentives during a site selection project.

I always advise companies that incentives should never be the driver of the project, rather that solid business reasons should prevail. But the fact remains that there are substantial costs and risks to a new capital investment and job creation for a company in a new place.

“Greasing the skids” to lessen those upfront costs and risks only make sense to communities that choose to engage in business attraction and compete in the arena for corporate investment. But with this comes great responsibility.

Economic developers and local officials must know what the impact or return on investment will be to the local economy in terms of jobs created, (both direct and indirect) annual payroll, taxes paid, and the general economic ripple effects. Only then, when armed with the numbers, should they be offering public dollars as an inducement.

By the same token, companies should know the numbers and only accept incentives if they are certain they can do what they say they will do in terms of capital investment and job creation.

I Was There

Back in 1994, when I was the business editor of The Birmingham News, I heard complaints that Alabama had “bought” the Mercedes-Benz project, a $325 million assembly plant, with a $250 million incentive package.

I didn’t take those comments too much to heart, because I had seen the numbers showing that the incentives would pay for themselves in a matter of four or five years.

The plant in Tuscaloosa went through a number of expansions. I cannot tell you how many. I can tell you that the plant, now in its 20th year of production, was in the midst of a $1.3 billion expansion, when Mercedes announced last month that it would spend an additional $1 billion to manufacture electric SUVs and create an additional 600 jobs.

The economic impact of the latest expansion is to the state is estimated to be $307.9 million annually, according to the University of Alabama Center for Business and Economic Research. That includes contributing $109.2 million to the state’s GDP and $62.4 million in earnings to Alabama households from direct and indirect jobs.

Once this latest expansion is complete, Mercedes will have invested $6.8 billion in the state, a far cry from the initial investment of $325 million. Looking back, that $250 million incentive package was well spent.

Would Alabama have gotten Mercedes, or later Honda in Lincoln, or later still Hyundai in Montgomery, or Toyota in Huntsville without offering financial incentives? No way, and that’s because other states, offering their own incentive packages, were competing hard for those projects.

When I think of economic development incentives, for some strange reason Billy Preston’s 1974 hit record “Nothing from Nothing” pops into my mind.

Nothin’ from nothin’ leaves nothin’, You gotta have somethin’ if you want to be with me.

Billy understood.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. BBA helps companies and communities. (Send us your RFPs.) Mr. Barber is available as a keynotes speaker and can be reached at dbarber@barberadvisors.com or at 972-890-3733.

Advertisement