Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, September 27, 1994 TAG: 9409270085
SECTION: EDITORIAL PAGE: A-5 EDITION: METRO
SOURCE: By JOHN ACCORDINO
DATELINE: LENGTH: Long
Virginia has long offered in-kind incentives, such as work-force training and shell buildings. But the $163 million package recently offered to Disney, and the state's unsuccessful $232 million effort to woo United Airlines in 1990, have expanded the magnitude and nature of incentives.
In theory, a state can develop its economy by offering modest incentives, if the companies that receive them hire unemployed residents at good wages and stimulate the creation of additional jobs in supplier firms and services. In practice, however, incentives have shortcomings.
As states compete for companies, incentives dramatically increase the cost to the taxpayer. Alabama recently paid $340 million to lure a Mercedes-Benz plant, a cost of more than $200,000 per job. Even when one counts the additional jobs expected as supplier companies and retailers spring up to serve the plant and workers, the cost will be at least $30,000 per job.
Unless recruitment efforts are very carefully targeted, most of the jobs created by the new company and the businesses that arise to serve it will be filled by newcomers to the community, not unemployed residents. Thus, to the costs of the incentives must be added the expense of new schools, police and fire protection, roads and other services.
The benefits of new-business recruitment are not necessarily shared equally. Existing businesses, whose taxes pay for the location incentives but who receive no incentives themselves, may experience none of the benefits associated with the new company.
Taxpayer dollars used for business incentives cannot be spent on other projects. For example, the Disney project is expected to create 2,700 direct jobs, and possibly 12,000 additional jobs in related activities (e.g., hotels). Could the state have created or retained more or better jobs by spending the same $163 million helping Virginia's apparel, textile and furniture manufacturers modernize, or by improving primary education?
Without a thorough analysis, that question cannot be answered.
Companies that receive location incentives often fail to uphold their end of the bargain. Many do not create the number of jobs they promise, and some leave town before the community has recovered its costs, as illustrated by a recent case in Pennsylvania.
In 1976, that state offered Volkswagen a package worth $70 million, including forgiveness of state income taxes and local property taxes through 1998. But the company left Pennsylvania in 1988, after creating only 3,000 of the 5,000 jobs it had promised.
What should Virginia do?
Craft a strategy for economic development that includes criteria for incentives.
The commonwealth should focus on the creation and retention of good jobs, social equity and environmental stewardship. In the absence of such a strategy, the controversy that has surrounded the Disney deal will be repeated each time a major subsidy is considered.
Those guidelines should emphasize subsidies to firms that provide jobs with career ladders to unemployed residents, whereas firms that locate in areas with little unemployment and provide dead-end jobs might get no subsidies.
Generally avoid cash grants and tax abatements as incentives.
These leave nothing of value in place if the company moves to another location, and are unfair to businesses that pay their taxes. Other incentives - such as work-force training, buildings and equipment, and infrastructure - stay even if the company goes.
Treat incentives as business transactions, not as sacrifices to a fickle god.
No subsidy should be awarded until officials have demonstrated, through cost-benefit analyses, that taxpayers will receive the best possible return on their investment. This is easier said than done: Few politicians can avoid the temptation to build overly optimistic assumptions into such studies.
If cost-benefit analyses are to protect taxpayers, they must be reviewed by a competent, impartial entity. Virginia's Joint Legislative Audit and Review Commission (JLARC) might play this role.
Also, Virginia should require repayment if the actual number of jobs created falls short of company projections, or if unemployed Virginians do not get the jobs. JLARC should monitor this for the General Assembly.
Remember that most new jobs come from the expansion of existing businesses, not from the recruitment of new ones.
Business recruitment is a necessary economic-development tool. But it is no substitute for the more cost-effective strategies of addressing the needs of existing businesses, and maintaining a healthy business climate for all.
John Accordino is an associate professor in the Department of Urban Studies and Planning at Virginia Commonwealth University in Richmond.
Virginia Forum
by CNB