BEA Chief: Sembler Likely to Shift, Not Boost, Sales

February 5, 2010

Investigative Reports

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The NerveThe state’s chief economist says a megamall the Florida-based Sembler Co. aims to build in the Lowcountry is unlikely to increase overall sales, but instead would probably shift retail patterns in the area.

The assessment by chief economist William Gillespie, staff director of the S.C. Board of Economic Advisors, underscores one of the main concerns expressed by opponents of millions of dollars in proposed state subsidies for the project.

The multimillion-dollar tax break is in a bill pending in the General Assembly.

The legislation recently cleared a key hurdle but faces a daunting road to passage.

“This bill does not help to create productive capacity that sells product outside the state,” Gillespie writes in an estimate of the fiscal impact of the legislation.

“Because the facility adds to an already well established retail sector,” he continues, “it is difficult to expect that the facility will create new sales, but rather will shift sales from existing retailers and not add to sales that would otherwise occur in the absence of the (subsidies) provision.”

In his projection, Gillespie says the bill is expected to reduce sales tax revenue in the state general fund by an estimated $4.5 million per year for five years, from FY10-2011 through FY14-2015.

That would be a total of $22.5 million if the estimate proved accurate.

Gillespie’s estimate lends credence to assertions Sen. Greg Ryberg, R-Aiken, Sen. Tom Davis, R-Beaufort, and other critics of the subsidies have made about the bill.

The tax break would be provided to Sembler, to offset the company’s infrastructure costs for the project, in the form of rebates from sales tax revenue generated at the mall, named Okatie Crossings.

Here’s how the deal would likely work: Tenants of Okatie Crossings would pay rent to Sembler, money that could offset the company’s building expenses.

Shoppers at the mall would pay sales tax, and a portion of that money would get refunded to the out-of-state company, passing through a county government.

The subsidies would come from the state’s general fund, which is used to pay for core government functions such as education and law enforcement.

Estimates of the total amount of subsidies vary from $40 million to some $130 million.

Okatie Crossings would be located off Interstate 95 at U.S. 278 and S.C. 170, near the towns of Hardeeville and Bluffton. Most of the mall would sit in Jasper County; part of it would be in Beaufort County.

The project site is not far from a Tanger Factory Outlet Centers mall and other retail locations.

Supporters of Okatie Crossings and the bill say the mall would be an upscale destination shopping experience housing high-end retailers, such as Ferragamo, that do not presently operate in South Carolina.

Ryberg disagrees.

“The simple fact is that Sembler plans to attract tenants from across town by using low-cost infrastructure, paid for by taxpayers, to undercut the other mall,” Ryberg wrote in an op-ed published in mid-December in the Aiken Standard. “There will not be new jobs here, just the transfer of jobs from one location to another nearby. This is taxpayer-subsidized piracy.”

The chief sponsor of the bill, Democratic Sen. Clementa Pinckney of Jasper County, fired back in a guest column published a few days later in The State newspaper. “Critics who say this will be just another outlet mall simply don’t know what they’re talking about,” he wrote. “There are only a handful of malls on this scale anywhere in the country.”

Pinckney described Okatie Crossings as “our area’s Boeing and BMW.” And he said it would “improve the quality of life in an area with sky-high unemployment, an area where one in five persons is below the poverty level.”

On Tuesday, the Senate Finance Committee approved the bill by a large margin and sent it to full Senate.

However, Ryberg attached a “minority report” to the legislation. That caused it to be placed on the Senate’s contested calendar and significantly raised procedural bars it must clear to pass the chamber.

The opponents of the subsidies say they are all for jobs and economic development. They just don’t want taxpayers to be forced to help foot the bill for the project.

The supporters counter that the subsidies would not kick in until and unless the Sembler mall met certain thresholds: capital investment of $200 million; job creation of 1,250; and sales tax revenue of $6 million. They also contend that the subsidies would come from new revenue the state currently is not receiving.

The bill says the sales tax revenue “may be based on an annualized number using the two most recent quarters.”

Similarly, the bill appears to allow some wiggle room for the developer as to what exactly could be classified as capital investment. The legislation says it would include “all its components, regardless of how those components are owned or controlled.”

Could that mean such soft costs as architectural fees and an environmental impact survey? Would any local government infrastructure costs count?

Those are just two of many questions the proposed Sembler subsidies raise.

Perhaps the biggest one is why the state continues to dish out corporate welfare to some companies and not to others, instead of abandoning the practice and thereby helping to level the playing field for all South Carolina businesses.

Reach Ward at (803) 779-5022, ext. 117, or eric@scpolicycouncil.com.