Firms’ Decisions Show Incentives Not Necessary

June 4, 2010

Investigative Reports

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The NerveThree recent case studies in state economic development incentives show that the General Assembly’s practice of serving up such corporate welfare makes for anything but an exact science and a sure bet.

Two of the examples indicate that the same can be said of incentive freebies on behalf of counties and other local governments, too.

Grinding it out in a hard, unsympathetic economy, South Carolinians might not give a whole lot of thought to incentives, what with challenges like raising kids and paying a mortgage facing them.

But if people look up from the demands of their daily lives and look around the state at economic development projects, they would be hard pressed to find one that didn’t come packaged with subsidies of one kind or another.

Yet, are the giveaways really necessary? And are they really a good deal for taxpayers?

After all, it’s safe to say that companies make decisions about locating in a new market or expanding a plant and what have you based on their strategic, long-term interests, not whether they receive incentives to do so.

Consider Southwest Airlines.

The industry leader in low-cost airfare, Southwest announced a few weeks ago that it will begin providing service in the Greenville-Spartanburg and Charleston areas next year.

Unlike a number of low-cost carriers that have flopped in South Carolina, Southwest holds promise for the state.

“If they make a move into a market, they put a lot of time and thought and effort into that market,” says Richard Cobb, an expert on the aviation industry and chairman of the management and marketing department at Jacksonville State University in Alabama. “You can almost bet if they add a city, that market’s going to work.”

Southwest made its announcement right as the Legislature was on the verge of passing a bill, H. 4343, to provide state incentives geared toward boosting low-cost air travel in South Carolina.

And right as Charleston County Council was moving to approve a 5 percent tax on rental car receipts in the county to raise money for improvements at Charleston International Airport.

The proposed state airline incentives could be legislatively appropriated general fund dollars or up to $15 million in loans from the Insurance Reserve Fund, which provides property and liability coverage to more than 1,000 state and local agencies in South Carolina.

However, Southwest said its service in the Palmetto State “will not be dependent on pending legislation to provide air service subsides.”

On Second Thought

Well, guess what has since transpired with the would-be state and county freebies for the airline industry?

Both have been stopped cold – and indefinitely.

The bill passed the House and was just one vote away from clearing the Senate. But it was stuck on that chamber’s contested calendar for the better part of a month and remained there – for all practical purposes dead – when the legislative session ended Thursday.

As for the Charleston County tax, it was set for the crucial second of three required votes on May 20. But the County Council delayed it, and as of May 25 had not rescheduled the matter, according to county spokeswoman Jennie Davis Flinn.

Meanwhile there is the opposite extreme of Southwest Airlines – the company that states unequivocally it will not undertake a project unless it receives handouts from taxpayers.

That’s what the Florida-based Sembler Co. told South Carolina with regard to proposed state sales tax rebates to help pay for an upscale shopping mall the retail developer wants to build in the Lowcountry.

It would seem to be an easy call: If a business venture cannot stand on its own merits, is it really something taxpayers ought to be compelled to help underwrite?

Forget it, right?

Wrong.

For, in the halls of power in the State House, where the wheels are greased with lawyers, lobbyists and consultants for hire, the public interest sometimes takes a back seat to special interests.

Working that playbook, Sembler, after failing to wrangle the state tax breaks out of the Legislature this session, managed to get a bill, S. 1054, through the House and Senate to allow for a local option sales tax to subsidize the company’s mall project.

The chambers passed two variations of the legislation and must work out a compromise version for it to become law. That could happen June 15-17, when the General Assembly is scheduled to reconvene to tie up loose ends from the session.

Demonstrating how transparently Sembler’s plans have hinged on that happening, the company has allowed its option to buy the project site to lapse and apparently won’t be able to pull off the deal after all, according to the Hilton Head Island Packet.

“Sembler president Jeff Fuqua said the company plans to continue developing about 40 acres it already owns but has put on hold its plans to build a 280-acre shopping center and luxury outlet mall while it awaits lawmakers’ decision about incentives,” the newspaper reported on May 22.

Now, the owner of the site, Horne Properties of Tennessee, is proceeding to develop the land itself, the report said.

Gotta love those economic development decisions based on market forces and the merits of the project.

The third incentives case study is the big enchilada – a 787 Dreamliner assembly plant under construction in North Charleston.

Courtesy of legislators on behalf of South Carolinians, the factory will provide nearly a half-billion dollars or more in tax breaks and other giveaways to the manufacturer of the next-generation airliner, multinational defense and aerospace industry giant Boeing.

Many leading government and business leaders in the state have defended the 787 incentives package as a pittance compared to what the facility will produce in long-term economic impact for South Carolina.

Behooving Boeing

But be that as it may, a strong argument can be made that Boeing would have built the plant in the state regardless of the incentives.

The company has faced excruciating labor difficulties in its native Washington state.

By contrast, South Carolina has a well-known company-friendly labor climate. Ripped from the proverbial headlines: “Boeing chief tells why S.C. chosen,” reads the banner of a March 3 dispatch in The State newspaper. The subhead: “He says strike, rising wages kept Everett, Wash., from getting new assembly line.”

Moreover, Boeing already had a presence in the Charleston area after buying a 787 fuselage plant there from Vought Aircraft Industries last summer and acquiring a 50 percent ownership interest in an adjacent 787 facility from Vought in 2008.

In any case, Boeing’s package, which the Legislature rushed through a special legislative session last fall, is but the main dish in a smorgasbord of state and local incentives.

At the state level, some are statutory and others are discretionary, controlled by the S.C. Department of Commerce.

Then there’s whatever lawmakers dish out via legislation.

They must be in love with the idea, as legislators are close to passing a raft of new incentive measures in an encyclopedic bill, H. 4478, called the South Carolina Economic Development Competitiveness Act.

It’s the brainchild of House Speaker Bobby Harrell, R-Charleston.

Like the Sembler bill, it also could be approved when lawmakers go back into session later this month for their wrap-up work.

On the local front, meanwhile, the preferred incentive is known as a fee-in-lieu-of-taxes agreement. All or nearly all 46 counties in South Carolina have active FILOTs.

A number helps put the matter in perspective: From fiscal years 1994-95 through 2006-07, state incentives spending totaled more than $1.35 billion, according to College of Charleston economics professors Pete Calcagno and Frank Hefner, who source the total to S.C. Board of Economic Advisors data.

The figure is in the ballpark of how much the state general fund budget has been cut since 2008-09 because of revenue shortfalls.

Examples of the consequences of those cuts: hundreds of lost teacher jobs; funding for prescription drugs on the chopping block; disability programs threatened.

But incentives bring companies to the state, right? They produce jobs – jobs! jobs! jobs! – and raise per capita income, don’t they?

Well, the record isn’t so convincing, at least when talking income.

While state spending on incentives steadily mounted from the mid-‘90s through a few years ago, South Carolina’s per capita income ranking among the states fell from 38th in 1997 to a dismal 45th in 2008, according to the book Unleashing Capitalism: A Prescription for Economic Prosperity in South Carolina.

So, if that’s the case, what’s the rationale – the real payoff – for incentives?

Political, good people, political.

Professors Calcagno and Hefner explain how that works in chapter seven of Unleashing Capitalism. The Nerve’s parent organization, the nonprofit South Carolina Policy Council, published the book in November.

“Whether or not tax revenues increase,” the economists write, “providing selective incentives gives the appearance that legislators and policy makers are doing something concrete to generate economic development and solve the problems of the state.”

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