Monday, April 23, 2007

Corporate Freebies - A Southern Folly

"In 2006 the Korean car maker Kia decided to build a $1.2 billion plant in West Point, Georgia. To land the project, the state offered a $420 million incentive package that included free land (bought from the previous owners at about 2.5 times the market value), tax-funded employee training, and a new $30 million Interstate interchange. Altogether, the subsidies amounted to roughly $168,000 for each of the 2,500 jobs at the plant.

Gov. Sonny Perdue, a Republican, says it was the incentives that brought those Kia jobs to town. Harvey Newman, an economist at Georgia State University’s Andrew Young School of Public Policy, isn’t convinced. “It was clear they would pick a Southern state because of labor costs,” he notes. “Alabama had a trained force of autoworkers, so Kia located on the Georgia-Alabama border.” In other words, Georgia taxpayers are paying Kia hundreds of millions of dollars to hire Alabama workers."

That's just one comment from an eye-opening assessment in Reason Magazine that tax breaks and other types of corporate welfare seldom provide many promised results.

While it may make some sense to offer assistance to use tax money to accelerate development of roads, water or energy lines, and other similar projects, the unspoken freebies to woo wealthy companies usually include free land and years of no taxation. That's usually called "abatement", which is easier on the ears of taxpayers than the word's real meaning - free ride on taxes.

As the story notes, the real decisive factor for the majority of businesses has little to do with these massive payouts - they are concerned with other issues, like work force training, access to suppliers, and prevailing wages.

The South is leading the way for tax-funded subsidies, and companies are paying attention to the trend. It allows them to go to other states (perhaps the ones they prefer from the beginning) and see what kind of bidding war can ensue.

Newman has more on the topic, too -

There’s almost never any evidence that [taxpayer-funded incentives] work” at producing benefits for the general public, says Newman, the Georgia State economist. “We know that incentives aren’t usually the deciding factor. So the jobs would be created in any event. And incentives are basically unfair, favoring some companies over others."

I've mentioned this topic before, Tax Increment Financing (TIF), noting the true cost to communities which tend to offer any and every tax deal imaginable. The real costs are soon dropped on residents in the form of higher taxation:

But what is missing here is that the cost of developing private business has some public costs. Road and sewers and schools are public costs that come from growth.” Unless spending is cut —and if a TIF really does generate economic growth, spending is likely to rise, as the local population grows —the burden of paying for these services will be shifted to other taxpayers. Adding insult to injury, those taxpayers may include small businesses facing competition from well-connected chains that enjoy TIF-related tax breaks. In effect, a TIF subsidizes big businesses at the expense of less politically influential competitors and ordinary citizens."

What are the real costs of Southern 'hospitality'?


  1. OXYMORON12:26 PM

    This is the "conservatives" version of Adam Smith's "invisible hand" at work.
    Never mind that this kind of incentives is a throwaway, it undermines allready estabished facilities of companies who pay their employees long term health and pension costs.
    Government underwritten corporatism: what's 'at called agin?

  2. Oxy -- your comments give much food for thought.

    interesting point about Smith. however, I have to wonder if Smith's philosophy ever considered the realities of the world we inhabit today.
    for instance, Smith noted an individual promoting his own good tends to promote the good of the community.
    yet, what if that individual promoting his own good were one of those elected officials in TN cited in the TN Waltz scheme, who looked to their own good ... i suppose the good of the community was served when they were caught. but how often do those who serve themselves first and last in violations of law are the subjects of a criminal investigation?

    i suppose it could be said that no matter the action taken by an individual, some good comes from it. is that optimism? philosophy? a rose-colored illusion?

    in Smith's day, immense numbers of the population were daily involved in the economic life of a community, whether local or foreign, and in affecting growth within a community, and not just thru the paying of taxes on goods and services. today such workers/creators are far removed from the forces, invisible or otherwise, which shape the world at large.

    most interesting topic, Oxy.

  3. My friend just opened a restaurant there, which was a smart move, given his fare and pricepoint. I don't think that area will reap any benefits from KIA for a very long time, and I too am concerned about the incentive package. I lived there for many years, and yes, most of the mills are gone, but unemployment isn't rampant. I wonder what the average salary will be at that plant?