No end in sight for incentives-As states engage in competition, only businesses win, expert says

Indiana is caught up in a war between the states that shows no signs of abating as business incentives nationwide are bid to ever-higher levels.

By:
Ted Evanoff, and Michele McNeil Solida
Indianapolis Star News

Two decades ago, cities usually limited generous incentives to hometown companies. Today, rich deals are frequently viewed as entitlements by prosperous corporations.

This shift has had huge repercussions in Indiana, host to one of the largest economic deals ever created for a company in the country — the $300 million package for United Airline’s huge jet maintenance hub.

But with United now in bankruptcy and its promise to create good jobs in Indianapolis broken, a question arises:

Why is any company worth $300 million of public economic development incentives?
In recent interviews with economists, lawmakers and economic developers throughout the nation on the rise of economic incentives in the country, one idea cropped up repeatedly:

Incentives are escalating as states fight each other to win big plants. And unless Washington acts, governors, economic developers and corporations are reluctant to stop the deals.

"We’d be at a disadvantage if we didn’t have them," said Tom McKenna, chief of staff for Indiana Lt. Gov. Joe Kernan. "It would be like unilateral disarmament. Everyone is doing it. Everyone is in the incentive business."
While the incentives are intended to create good jobs and improve the standard of living, they have had uneven results throughout the country, including Indiana.

In the past two decades, Indiana and its communities have handed out more than $1 billion worth of economic incentives. In some cases, such as Eli Lilly and Co.’s ambitious growth plan that has been aided by more than $200 million in incentives, the resulting investment and job growth are easy to see.

But the household income for the typical Indiana family today is about $41,600, barely higher than the buying power a generation ago when adjusted for inflation.

"The winners aren’t cities and states. It’s the company and the entrepreneur who wins. This is just a corporate subsidy," contended economist Arthur Rolnick of the Federal Reserve Bank of Minneapolis.

Indiana economic development officials are quick to defend the United deal. If Indianapolis hadn’t landed United, some other city would have reeled in the maintenance hub, which still employs about 1,500 workers.

As it was, Indianapolis pulled off what was widely regarded as an economic development coup in 1991 when it landed United and the promise of 7,500 jobs. But with air travel down, the company filed for bankruptcy this month and has handed layoff notices to 1,000 Indianapolis workers in the past 16 months, raising worries that the hub eventually will be phased out.

"Are incentives worth it? Yes. Do they sometimes fail? Yes. But they’re part of the overall puzzle," McKenna said.
Indianapolis officials said they took steps to protect the city’s investment in the United deal, requiring the repayment provisions in case the airline ever backed out from its commitment.

As a result, United already has paid the city, state and Hendricks County $34 million in penalties for failing to meet investment goals laid out in the deal. The airline also is on the hook for an additional $146 million because its job-creation pledge has been broken, though United’s bankruptcy makes it unclear whether the city stands to collect the money.

Deal-making abounds
At least half the states offer economic incentives. This hands corporations an advantage because they can quietly prod cities into bidding contests that inflate the value of the packages.

Incentives are becoming more common even for smaller companies. While deals for the likes of Lilly and United draw a lot of attention, governments also are working with small firms such as Indianapolis Shredding Co., which received a tax abatement from the city to help offset the cost of a $90,000 capital investment that the company says keeps 30 people in their jobs.

"There’s a huge pressure to show results, even if it’s only the appearance of results," said Meriwether Jones, a pro-development analyst at the Aspen Institute, a Colorado think tank.
Politicians haven’t backed away. They’ve scrambled to win big industrial complexes, knowing the payoff can be immense.

"If there’s nobody working, there’s nobody paying taxes," said state Rep. Winfield Moses, D-Fort Wayne.
Critics, however, point to the vast differences in incentives on similar projects.

For example, Moses was Fort Wayne’s mayor when he helped organize an incentive package for a General Motors Corp. pickup assembly plant. GM’s $26.4 million incentive package translated into $8,800 in incentives for each job created in the northeast Indiana plant.

In contrast, one of the most heralded deals in Indiana was organized in 1995 for Toyota Motor Co.’s. pickup plant near Princeton. With several states clamoring for the plant, Toyota chose southwest Indiana. The $75 million incentive package translated into $57,000 in incentives for each Toyota job.

The GM and Toyota plants are roughly the same size. But was a Princeton job really worth $48,200 more in public incentives than a Fort Wayne job?

For that matter, was a Toyota job worth more than a United Airlines job, which worked out to $40,000 in incentives per worker?

There’s no clear way to tell. Incentives aren’t based on any analysis by communities wondering whether to invest in, say, homegrown entrepreneurs or industrial jobs.

Cities usually look at what other communities have offered companies and then try to sweeten the pot, said economist Sean McAlinden of the Center for Automotive Research in Ann Arbor, Mich.

The going rate on incentives is set in an environment heated by the economic wars with no regard for whether the incentives are scaled to some appropriate benchmark.

"Economic development incentives are a blunt tool," said Jon Bond, business manager at the Indiana Economic Development Council, a research agency. "But you have to have them," Bond said. "Every other state is using them."

Growth of incentives
Although many states long have favored homegrown industries with special tax considerations, the notion of government routinely chipping in to bring new business to an area is fairly modern.
In 1904, New Castle raised the equivalent of $5 million in today’s money, luring a Maxwell-Briscoe car assembly plant to the east-central Indiana city. The deal was notable for the source of the money. Wealthy New Castle residents rather than public treasuries contributed the cash.
By the time Moses was Fort Wayne’s mayor in the 1980s, the notion had taken hold that local government ought to spend on economic development.
As large as the Fort Wayne incentive package for GM was, it would be dwarfed by what was to come. Back then, incentives were widely regarded as a lifeline to struggling corporations. In fact, GM and Fort Wayne had been devastated by the 1980-81 recession.

As the 1980s rolled on, though, the economic battle between the states, simmering for decades, heated up. Rural southern states long had doled out incentives. The industrial north, rich with jobs, never seriously responded.
In the 1980s, however, the environment shifted. Inflation set off by the 1970s oil shocks had begun to rapidly escalate wages and taxes in northern cities.

Stung by the increases, and noting the steady migration of northerners to the Sun Belt, companies became more mobile, willing to uproot and relocate plants to the nonunion South and Southwest.

In defense, northern states and cities geared up entire economic development departments to retain and recruit industry. Companies small and large sought and received incentives, particularly tax abatement and low-interest industrial development bonds.

What escalated the dollar value of the packages, though, was the headline-grabbing competition among the states for the big auto plants in the 1980s.

Japanese and then German automakers built an array of assembly plants in the United States. Coming in two separate waves in the 1980s and 1990s, these transplants touched off intense competition among states trying to land the massive plants.

As the deals made headlines, companies came to expect generous incentives whenever they made plans to open their own major facilities.

"A business should want to locate in a state because it has a well-educated work force and a good tax structure, not who offers the biggest bucks," said Indiana Sen. Lindel Hume, D-Princeton. "This puts taxpayers on a treadmill — they’re buying jobs."

And buy them they did.

Only six years after the GM deal in Fort Wayne, $100 million incentive packages for major plants were the norm, opening the way for the kind of megadeal arranged for United in Indianapolis.

A sampling of incentives offered here and across the country in the 1990s:

• Indianapolis drug maker Eli Lilly and Co. pledged to invest $1 billion in its operations in Indianapolis and add 7,500 jobs over 10 years when it garnered a $214 million incentive deal in 1999.

The company announced plans in May to build a 50,000 square foot research and office building on its Kentucky Avenue campus, which would house 600 workers when it opens in 2005. With that $225 million commitment, Lilly said it had met its investment pledge and that it also would be more than halfway to the jobs goal by the end of 2002.

• Fort Worth, Texas, lavished $70 million worth of incentives on Dell Computer Corp. for 1,000 jobs.

• Pennsylvania kept Vanguard’s 6,000 mutual fund jobs with a $55 million deal at Downington.

• Kansas City handed aspirin maker Bayer AG $44 million in incentives for 140 new jobs in the Missouri city.

• Amarillo, Texas, officials mailed checks to 1,300 firms throughout the country, offering $8 million to each company that created at least 700 good jobs.

• Louisiana set up a $25 million deal-closer fund, useful for doling extra incentives to companies considering other states.

Lawmakers abstain
As the incentives poured out, Rolnick, the Federal Reserve economist, and a variety of state activists through the years urged Congress to intervene. But the deals remain part of the industrial landscape.

No state or local official wants to back out and lose the chance to snatch a high-profile plant, particularly when the deals promise to recoup the price tag on the package within a decade or two. For example, GM’s Fort Wayne plant pays $4.6 million in annual property taxes and the annual payroll exceeds $150 million.

That kind of payback can look remarkable compared to the incentives. For the GM plant, Indiana and community incentives included an $11 million freeway interchange, $7 million in side road improvements and an $8.4 million sewer extension.

Most often, the government clears land for development, widens roads to the new facility, extends sewers, trains workers, reduces income taxes or abates property taxes on land and machines.

Years ago, most big companies usually bought their land, paved their roads and trained their workers. In fact, many homegrown companies still do, without ever knocking on the statehouse door for assistance.

Dagney Faulk, an associate professor at Indiana University, studied Georgia’s widely praised economic development efforts but couldn’t find a strong connection between job creation and tax incentives.

"The firms that did take tax credits created more jobs than the firms that didn’t, but that could have been because of better management," Faulk said.

"There is possibly some effect of incentives on economic growth," Faulk added. "But I think that in many cases having tax incentives (simply) sends a signal to the business community that an area is business friendly."
And with more states competing intensely for jobs, a friendly signal has become a valuable tool.

"They are important if we want new projects here and new jobs," said Melina Kennedy, director of economic development for the city of Indianapolis.

Since Mayor Bart Peterson took office in 2000, Indianapolis has handed out 76 tax abatements to companies promising $1.2 billion worth of investment in the city. Because of these abatements, companies will shave at least $92 million off their costs.

Both city and state officials tout Klipsch Audio Technologies as a success story made possible, in part, by tax incentives. In 2000, officials held a news conference to announce the company’s expansion — a new 27,000-square-foot engineering and technology center worth $12.8 million that’s expected to create 132 new, high-paying jobs in the next three years.

To help seal the deal, the Indiana Department of Commerce and the city of Indianapolis offered a combined tax incentive package of $1.4 million, which includes tax breaks on property taxes and training costs.

"This is an excellent example of an effective partnership between local and state officials and business leaders," Lt. Gov. Kernan said at the time.

Klipsch’s revenues have increased by an average of 20 percent a year over the past five years. Today, the company employs 128 people in Indianapolis — up from 55 when it received its incentive deal — and 300 worldwide.

Sen. Hume is one lawmaker who still thinks tax breaks aren’t worth it. In 1997, he sponsored anti-poaching legislation — states that signed on wouldn’t recruit business from other states that had signed the pact.

Under the terms of the bill, which Indiana passed, three other states would have to pass similar legislation for the measure to take effect. So far, no state has signed on.

"States are competing against one another for jobs," Hume said. "In the end, no new jobs are created, they’re just moved from one location to another."