Prosperity or Promiscuity?
Are corporate tax incentives rescuing or ruining South Carolina?
Boeing opened its 787 Dreamliner Final Assembly building in North Charleston in June 2011.
Photo Courtesy of Boeing
Admittedly, tax incentive packages — those benefits the state offers to draw large corporations with their plethora of jobs — are not the sexiest topic in the world. But they affect every South Carolinian in ways they hardly imagine. In the past couple of years, the state has landed some major companies — Amazon, Boeing, Bridgestone/Firestone, Continental Tire, TD Bank, GKN Aerospace, among others — and with them thousands of good paying jobs, badly needed in a state with double-digit unemployment. To do that, however, state officials had to offer some large monetary enticements in the form of tax breaks.
To many economic developers, the inducements make perfect sense. Every other state offers them, so South Carolina has to in order to compete. Some policymakers, on the other hand believe the state is giving away too much and wonder why the state has to raise its skirt and wink like a cheap date to attract the guy with all the jobs?
Because most people’s eyes glaze over at the mention of the word “taxes,” the debate has remained largely below the public radar. But among those people whose jobs are to make South Carolina prosper, the battle rages with all the passion and fury of an underground fight club.
The Case for Tax Incentives
Ask any economic developer and they can rattle off a list of reasons why South Carolina is good for business. South Carolina is a right-to-work state, and it has a skilled labor force and a strong technical college system willing to adapt to the training needs of almost any industry. The state has a port, an extensive rail system and four interstate highways passing through it. The cost of living is relatively low and the quality of life comparatively high. To top it all off, there are the mountains, the ocean, golf and year-round good weather.
Sumter Mayor Joe McElveen served in the state legislature from 1986 to 1996. He supported and voted for legislation that enabled the state to offer tax incentives, and he helped amend bills that approved the practice. He wrote opinion pieces for various newspapers to help gain public support for the measures.
“You have to do it or you won’t get jobs, and jobs are very important to the people of South Carolina,” he says. Boeing, for example, when fully operational in the Lowcountry, will offer 4,000 direct jobs and an estimated 8,000 jobs in spin-off industries that will not only benefit South Carolina but also spill over into Georgia. In addition, the company is required by its incentive agreement to provide $750 million in direct investment into the state.
McElveen points out that for a period of five or six years in the 1990s, North Carolina was prohibited from offering public dollars as corporate incentives. As a result, the state lost out on some major relocations. McElveen says prior to the South Carolina’s statewide legislation, any breaks a company got were from local governments.
The mayor believes tax incentives have been good for Sumter. “Industry jobs are different than commercial/retail. Most industry jobs bring in increased wealth.
Continental Tire will be a game changer for us. It will increase our per capita income,” he says.
South Carolina has been good with tax incentives, according to the mayor. “Still, we’ve lost some deals at the table because we didn’t bring enough.”
Amy Love, spokesperson for the S.C. Department of Commerce, referred Columbia Metropolitan to the department’s website for a list of tax incentives available to any large company looking to relocate or expand in the state. They include:
- A 5 percent corporate income tax rate
- No state property tax
- No local income tax
- No inventory tax
- No sales tax on manufacturing equipment, industrial power or materials for finished products
- No wholesale tax
- No unitary tax on worldwide profits
South Carolina also provides a variety of customized incentive programs, including:
- Corporate income tax credits – job tax, corporate headquarters relocation, research and development,investment, biomass resources and ethanol or biodiesel
- Discretionary income, license or withholding tax incentives – job development, job retraining, corporate
- income tax moratorium, international trade incentive and port volume increase
- Discretionary property tax incentives – negotiated fee in lieu of property tax
Love also provided documents outlining several tax incentive packages. Among them are the Economic Development Set-Aside Fund that helps local governments develop infrastructure needed to recruit industry; the Governor’s Closing Fund, money from the general fund that provides the additional dollars needed to recruit a “high impact” industry; job development credits that give a quarterly cash refund only to new or expanding companies; and retraining reimbursements. The department also provides assistance and support to small businesses, from the award-winning South Carolina Business Resource Guide to lender matchmaking events.
In years past, when economic development deals were handled on a more local or county level, incentives typically expired after a certain number of years. State economic incentives do not have such “sunset” clauses, according to Love. “The grant programs are funded on an annual basis,” she says.
Ike McLeese, president and CEO of the Greater Columbia Chamber of Commerce, supports incentives, but he says the state has to examine each project specifically to determine what the appropriate inducements are. “Amazon, for example, was a much different scenario than Bridgestone/Firestone or Continental Tire. If Amazon had been forced to leave the state, they still wouldn’t be paying sales taxes. The only difference is that 2,300-plus people would be out of jobs.”
McLeese says economic developers and officials have to look at whether the incentives offered are offset by a rise in the per capita income in the county where the businesses are looking to relocate or expand. If not, he says, “It would make no sense.” Bridgestone/Firestone got incentives common to all large businesses in the state. “If I were a small business owner, I’d look at how many people would be able to buy my products because they now have jobs.”
College of Charleston economist Frank Hefner says the question of whether the state is getting a good return for the incentives it offers is the central question. But the answer depends on what one compares it to. “There is no accepted standard for what is a good return,” he says. “Economists tend not to look at it in terms of jobs created, but rather for every dollar spent, how much do we get back. The simplest way to look at it is if we spend a dollar and get more than a dollar back, that makes a good return.”
Then there is the question of who gets the money. “If we’re going to give money from the general fund, then we should measure how much the state gets back in taxes.” Hefner points out that most incentives in South Carolina are tax abatements. “It’s not money spent, but money we decided not to collect.”
The money the state does get back, though, comes in the form of income taxes generated by the new jobs. Hefner says he has performed a host of economic impact studies and that there are a number of measures he uses, from spin off jobs to supply chain networks created. None of those calculate in real terms the money the state receives, but taxes collected on income answer that question and, theoretically, at least, the state does eventually recover its investment. “Generally speaking, over time the taxes generated from an economic development project should exceed the incentives,” says Samantha Cheek, public information director for the South Carolina Department of Revenue.
Hefner also points out that some developers simply apply the “zero versus the 100 percent rule,” a perspective that says, “We’re not losing anything by offering the incentives because if the industry doesn’t come, we will still be without the jobs it would bring.”
“That does tip the scale in terms of industry recruitment,” he says.
The Case Against
As with anything dealing with legislators, lobbyists and lawyers, one has to be careful about the terminology one uses — as in “small” business versus “local” business. One complaint about tax incentives is that the state always seems to offer them to large out-of-state firms and that homegrown companies do not get the same consideration. Not so, says Mayor McElveen, and, technically speaking, he is correct.
Businesses born and bred in South Carolina can qualify for the same incentives, but only if they have sufficient underlying capital investment and can create similar numbers of industrial level jobs brought by companies like Boeing or Amazon, both offering thousands of positions. That’s a hard feat for small businesses that, according to Small Business Chamber President and CEO Frank Knapp, Jr., are responsible for 97 percent of all jobs in the state and account for $322.5 million in state taxes collected each year.
“For the most part, small businesses do not have the access to tax and other incentives available to big business. The only state incentive for a small business is job tax credits, but these depend on the county and pay of new employees. Local units of government also can do some non-tax things to help a small business, but these would be only in very special cases,” he says.
According to Knapp, small business usually likes to have a big business move in. However, small businesses often do feel neglected and unappreciated when the full recruitment incentive packages are revealed. There are some economists who will argue that the taxpayer money spent on big business incentives would be better spent helping locally-owned small businesses to grow. This would be a more economically sustainable approach since, for the most part, small businesses do not often move to another state or country. “We have for years asked the Department of Commerce to just use a small part of their budget to work with local governments to help them become more small business friendly and grow their own economies. This is especially important in much of South Carolina that is unlikely to see a big manufacturer locate in their area,” he says.
For small businesses especially, property taxes have a huge impact. The state has increased that burden with past laws that cap property taxes for schools on owner-occupied homes, thus shifting that tax burden to the commercial sector. “The state needs to develop a better and more equitable funding mechanism for schools,” Knapp says.
Even proponents of the incentive packages admit the system has its drawbacks. Hefner says that if the state can afford to lower property taxes to draw a company here, does that mean the taxes are too high to begin with? “When fee-in-lieu was created, it was aimed at big businesses,” he says. “Yes you’re creating more jobs, but you also are placing more demands on public services.” The question then becomes: With reduced taxes, added infrastructure and increased demand on public services, is the state getting any return at all on the investment of public dollars?
Mayor McElveen has concerns that houses are being assessed at the same rate as industrial businesses. He does not believe that is sustainable. “The cost of running government is being passed down to you and me. The challenge of incentives is not to pass the point of diminishing returns. Even though some will always say that the state is justified in giving up taxes for jobs, there probably is a point where the growth will put a heavy demand on infrastructure and the tax code will not deliver enough revenue to expand and maintain that infrastructure without significantly increasing taxes on other taxpayers.”
Another huge complaint about the incentive deals is the perceived lack of transparency. “Just look at the Boeing announcement,” says Ashley Landess, president of the South Carolina Policy Council. “That came from out of nowhere. Until the announcement, no one knew about it and even most legislators seemed to be caught off guard.”
“Let’s say your investment broker pulls you into a room with some other clients and tells you he wants you to invest in a company but he can’t tell you the name and that maybe only two out of the five of you in the room may benefit,” Landess says. “You’d think that was crazy, but this is exactly the type of lawyer/legislator/lobbyist deals that go on behind closed doors. What I want is for our legislators to defend them openly in public.”
“We have to look at what the politicians promise in return for this use of public tax dollars,” she says. “They always promise two things: jobs, jobs, jobs and higher income levels. Look over the past 30 years. South Carolina has some of the highest unemployment in the nation, some of the lowest per capita income, and state government costs more each year. It’s a failing strategy.”
“Even if it were in line with the founding principles of this country,” she continues, “who can defend this strategy of corporate welfare?”
Landess asserts that it is unfair for a handful of politicians to give away taxpayer money and not publicly disclose the details. “And then the companies that get our money won’t open up and tell us how many jobs they create.”
But, she says, politicians jealously guard the secrecy of the process and are reluctant to even openly debate the merits or drawbacks of the system. “It’s almost heresy to speak ill of the incentives. It’s like you’re insulting the company.”
She believes the state should level the playing field beginning by lowering what she calls the highest manufacturing property taxes in the United States. That, combined with offering a competitive environment and encouraging small businesses to start up and expand within the state, would serve a better purpose than selectively relieving certain companies of their tax burdens.
Even Hefner agrees. “I have a problem with selectivity. It creates the perception that new companies coming in have an advantage over companies already here,” he says.
South Carolina companies have proven they can create jobs in big numbers. According to the Department of Employment and Workforce, nearly 15,000 more jobs existed in October 2011 compared to October 2010. Nearly 75 percent or 10,800 of those jobs were in the manufacturing sector. Education and health services were up more than 4,000 jobs over the same time period, and professional and business services saw a rise as well.
These numbers do not reflect job announcements from some of the companies enticed to the state with tax incentive packages.
Mayor McElveen says the selectivity had a noble purpose in the beginning. “It came about in order to help under-developed industry in South Carolina. But now we’re offering the same deals to everybody. In the 50s and 60s, tax incentives were a really good deal. You gave an employer some land or prepared it for them and then forgave their property taxes, but not their school taxes, for five years,” McElveen says. “But we’re far from that now.”
Landess says the middle-income, taxpaying public is tired of the sweetheart corporate deals. “And if the folks at the statehouse don’t realize that, they have a big surprise coming.”
To Give or Not to Give: That Is the Question
The state, it seems, can’t afford not to offer incentives just because it never used to. The “that’s the way we’ve always done things” mindset has sunk more than one company and make no mistake it could sink an entire state. Adding excessive burdens to infrastructure and public services and then excusing the very companies that caused it from paying their fair share is not an effective solution either.
And then there’s transparency, the buzzword for the state in 2011. Taxpayers have to accept that when potentially billions of dollars are at stake for a company, its negotiations are more closely guarded than military secrets. Legislators have to understand negotiations with public money come with a degree of accountability, and when you’re talking about the financial viability of millions of citizens, you don’t get credit for simply trying. You had better succeed.
Hanging in the balance is the brass ring everyone is reaching for: economic prosperity for all of South Carolina.
In the competitive world of attracting large corporations to the state, South Carolina has no choice but to offer incentives or lose business to other more competitive states. The type of incentive offered, the transparency of that offer and a comprehensive cost/benefit analysis in regards to the state economy are key to creating a winning formula for all South Carolinians. Big business creates thousands of jobs, numerous satellite businesses and per capita income growth. Small business, in the aggregate, does the same thing and on an even larger scale. It is the job of the state legislature to promote both in an equitable manner so that the people of South Carolina are the winners.