Incentives: Are they Necessary or Essential?

In an effort to boost economic growth and create jobs, the Cuomo administration in 2012 launched “New York State Open for Business, ” a $140 million advertising campaign featuring a voiceover by Robert De Niro set to rapper Jay Z’s “Empire State of Mind.”

While Alabama’s Bentley administration has yet to take such an unconventional approach — imagine an ad with Taylor Hicks singing Lynyrd Skynyrd’s “Sweet Home Alabama” — recruiting business to the state is a high priority accomplished, in large part, through economic development incentives.

Are incentives a valuable and even essential tool for attracting new businesses? Or in the long run not worth their high price tag? The debate over awarding incentives to companies to sway their business location decisions is heating up as states and municipalities offer ever more bountiful packages to potential investors.

According to Dan Gorin, supervisory policy analyst for the Federal Reserve Board’s Division of Consumer and Community Affairs, incentives intensified in the 1980s and 1990s as a result of public bidding wars among states and localities to draw businesses to their communities. Most significantly, incentives offered to automobile manufacturers escalated during this period.

In 1992, BMW’s package to locate to South Carolina was reportedly $150 million. Just a year later, Alabama brought considerably more to the table, beating out other states with $253 million in incentives to bring a Mercedes-Benz assembly plant to Vance. Since then, Alabama has successfully used incentives to attract major companies, including Honda, Hyundai, Toyota, Airbus and Australian-based shipbuilder Austal.

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Incentives are a fact of life, says Alabama Secretary of Commerce Greg Canfield, necessary to attract economic investments that in turn bring jobs. And all the state’s rivals offer incentives when a major project is in play. An effective incentives package can give Alabama a seat at the negotiating table where its business climate, logistical advantages, job training programs and workforce can be presented.

“One of our basic measures on each incentivized project is a return on investment analysis, ” Canfield explains. “The metrics used for this ROI analysis include the capital investment of the company, risk characteristics, payroll generated, property tax generated for education, income taxes, payroll taxes and other factors.”

Canfield says the state has been repaid many times over for its support of Project Rosewood (the campaign to recruit Mercedes-Benz to Alabama), which began in 1993 as a $300 million plant with 1, 500 employees. After four expansions, the investment now totals $4 billion in the plant and equipment, and the workforce is at nearly 5, 000 employees.

“On another level, Mercedes has improved Alabama’s image and opened doors for us around the world, ” says Canfield. “The same is true for Honda, Hyundai, Toyota and other international companies operating in the state. I expect Airbus to have a similar effect.”

Calculating the return on investment is done “very carefully, ” Canfield points out. “We evaluate the financial metrics of all projects using a number of factors and ROI is a common calculation among several others we use.”

Canfield says performance-based measures are often introduced to tie incentives to job creation or investment, so that payments are structured only at certain intervals. Clawback clauses ensure that companies live up to their end of the bargain or they must make reimbursements. For big projects, the Department of Commerce consults an independent source, typically an economist, who provides a detailed assessment of costs and benefits.

“We have seen other states create more incentives that rely less on debt and more on tying the source of incentives to tax streams that benefit from economic activity, ” Canfield adds. “Alabama, to remain competitive and keep our incentive base sustainable, must look at funding incentives in similar fashion. We’re working on a new incentives approach for this legislative session.”

“We are currently evaluating plans to introduce a new incentive approach this legislative session that we are calling the Made In Alabama Act. This new plan will reduce Alabama’s dependency on debt to encourage growth and will give us the ability to incentivize companies not just around capital investment but also around job creation. The act will include additional incentives to companies interested in creating jobs in counties that are suffering from high unemployment, ” Canfield says. “This new act is a win-win solution in that it provides attractive incentives to companies and it provides the state a guaranteed return on investment.”

Not all incentive projects proceed without a hitch. German-based ThyssenKrupp has put its first U.S. steelmaking plant on the market — a facility in Mobile that topped more than $1 billion in incentives for land, job training and tax breaks. The $5 billion plant in Mobile and Washington counties is still operating and is among the area’s largest employers.

Alabama’s incentive investment in ThyssenKrupp’s Mobile facility, Canfield says, was covered when total employment at both its carbon and stainless plants hit 2, 000 jobs. “Not only that, but we are very encouraged by the possibility of the purchase of ThyssenKrupp by the joint venture between ArcelorMittal and Nippon Steel.”

Near Muscle Shoals, Canadian-based National Steel Car built a railroad car plant using a total of $625 million loaned by Alabama’s pension fund, but the railcar industry went bust during the height of the recession. As its new owner, the Retirement Systems of Alabama is now trying to sell it, and National Steel Car’s chairman and CEO was accused of defrauding the RSA by not disclosing the actual cost of the project and will be tried in Colbert County.

Canfield says the National Steel Car project incentives were performance based and the state made an initial incentive payment of approximately $13 million. Since that time, he adds, the state has renegotiated a new project with Navistar and Freightcar America, and the plant is in active production.

David Bronner, CEO of Retirement Systems of Alabama, believes incentives are crucial to leveling the playing field by making Alabama more attractive to outsiders. “A state like Alabama, where the quality of life isn’t as good as it is in some other states, can’t compete without incentives. It’s just that simple.”

Back in Gov. George Wallace’s day, Alabama could only attract dirty industries like chemicals and oil, Bronner recalls. “And you had to put up a lot of money for a few jobs. Now, for example, the state has the automotive industry, which I call a ‘mother bee.’ A whole lot of other jobs have to supply that mother bee — all kinds of tier 1 and 2 suppliers.”

Kimble Forrister, executive director of Montgomery-based Arise Citizens’ Policy Project, a nonprofit group promoting policies to improve the lives of low-income Alabamians, says that despite a company’s creation of good jobs, “We ought to ponder what would have happened if the state used that money to hire well-paid teachers rather than improving the bottom line of billion-dollar companies that ought to be able to pay their own way.”

Sam Addy, director and research economist at the Center for Business and Economic Research at the University of Alabama, says, if implemented properly, incentives are a great tool for recruitment and retention support in economic development. “If not, then they’re just another form of corporate welfare disguised, since they then become giveaways to business instead of investments.”

A downside to using public money for incentives, Addy says, is when the return on the incentives is less than what society could have gotten by using the money to provide necessary public services. Public funds must be used to provide public services and public investment in education, infrastructure and economic development, such as incentives.

“When used for incentives, the return on investment should be better than if the funds were used in other ways for the public. This can be determined through economic impact studies of the projects for which the incentives are provided.”

Yet Addy believes incentives aren’t always the best way to attract business, noting that businesses consider many factors in where to locate. Workforce availability and skill, business environment, quality schools and amenities rank higher than incentives, he says.

“Therefore, investment in workforce development, principally education, and provision of good public services are alternatives or good complements to incentives. In addition to tax rebates, Alabama’s incentive packages have workforce development and infrastructure components and reflect a portfolio approach, which is very good.”

Addy says incentives can create winners and losers, consequently restructuring economies. For certain industries such as retail, he notes, the impact study must include substitutability factors that consider the extent to which existing and locally owned businesses are affected.

Alabama municipalities also offer incentives to attract businesses to their communities. Local incentives helped entice Wyomissing, Pa.-based Carpenter Technology, a producer and distributor of specialty alloys, to build its new superalloy powder plant directly across from its nearly completed $518 million manufacturing facility near Athens, in Limestone County.

“It’s a great 125-year-old U.S. company, ” says Tom Hill, president of the Greater Limestone County Economic Development Association. “They looked at about 125 sites worldwide and visited about 10 sites. It was very competitive.”

In Ozark, officials approved a $2.2 million agreement with Love’s Travel Stop and Country Store to allow the company to secure property to construct a travel center off U.S. Highway 231. The agreement will be funded by rebating 2 cents of the local gas and diesel tax collected in the area for a period of 15 years or until sales reach $2.2 million, with the money used for the city’s general fund.

Eric Basinger, executive director of the Ozark Dale County Economic Development Corp., says travelers seek out nationally recognized brands such as Love’s. So an increase of travelers stopping off the interstate onto U.S. 231 should overflow to neighboring food and fuel retailers.

Greg LeRoy, executive director of Washington, D.C.-based Good Jobs First, a national policy resource center promoting corporate and government accountability in economic development, says that, while he is not necessarily against incentives, too many of these programs are not sufficiently targeted to make something happen that wouldn’t have happened otherwise.

“We support incentives that actually meet the definition of the word, that address market imperfections such as food deserts, ex-offender rehiring or small business credit gap. Too many subsidy programs are the opposite. They are blanket entitlements and therefore windfalls to more than 90 percent of those companies that claim them.”

LeRoy says Good Jobs First uses the term “subsidies” instead of “incentives, ” because an incentive motivates someone to do something they would not have done otherwise. He says evidence suggests that “development subsidies” are often abused by companies that would have done exactly what they did anyway.

According to Good Jobs First research analyst Kasia Tarczynska: “Alabama ranked 31st and received a D- in our ‘Money for Something’ report, in which states were graded based on job quality standards attached to subsidy programs. Alabama also ranked 34th with a C- in our ‘Money Back Guarantees for Taxpayers’ report in which we looked at clawback and penalty provisions attached to subsidy programs. In our ‘Megadeals’ report, in which we documented and collected all subsidy packages of $75 million and more, Alabama ranked 9th and had 10 megadeals.”

Click here to see the list of Alabama’s largest incentive packages
in the last 20 years. 

She says to her knowledge Alabama is the only state that will reimburse through tax credits a company import tariff (while the company is constructing its facility in the state).

According to Tarczynska, although the practice to disclose such programs is growing across the country, disclosure in Alabama at both the state and local level is poor. She says Alabama’s transparency is behind other southern states, such as North Carolina, Tennessee and Louisiana, which disclose the details of several programs each, including tax credits.

In Good Jobs First’s December 2010 “Show Us the Subsidies” report, Alabama received a D- for its disclosure practices. (Tarczynska says the study is being updated). “The state only discloses recipients of the Alabama Industrial Development Training program. However, the data are buried among other expenditures of the program, which makes it extremely difficult to understand and analyze the data.”

Canfield says Good Jobs First has been critical of many incentive packages nationwide that have helped states recruit leading companies. “Their criticism ignores the reality that incentives are an important and essential part of business development.” Alabama, he adds, works hard to remain competitive by offering incentives needed to recruit high-paying jobs and performs comprehensive due diligence on each proposed project to ensure a positive economic outcome.

Clearly, the debate over the viability of incentive packages isn’t over.

“We talk about incentives in so many different ways, ” Gorin observes. “The composition of economic development incentives may evolve over time in response to business needs and public concerns, but incentives will undoubtedly remain a tool used by policymakers to stimulate local and state economic development.”

Jessica Armstrong is a freelance writer for Business Alabama. She lives in Auburn.

text by Jessica Armstrong • photos by Robert Fouts

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