Eye on Subsidies
 

January 9, 2007

by Philip Mattera

  • Google searches for subsidies in the Carolinas
  • Other Southern states ante up for German steel mill
  • Closing of subsidized vacuum cleaner plant angers Mississippi community
  • TIF remains controversial throughout the U.S.: a roundup of recent developments
  • Pennsylvania goes all out for Westinghouse Electric
  • Michigan city backs off threat to rescind tax breaks for Ford-Mazda alliance
  • Wisconsin tax-credit package for Harley upped after workers reject concessions
  • "Looking Behind the Curtain" at tax expenditures in Iowa


Google searches for subsidies in the Carolinas

 

Google Inc. has a market capitalization of about $150 billion and a profit margin above 25 percent, but public officials in the Carolinas are hoping that a few million dollars in financial incentives will sway the company's decision on where to locate a new server farm. Such facilities use large quantities of electricity to run and cool computers handling Google's vast web traffic.

 

A few months ago, Berkeley County, South Carolina approved tax incentives for a $750 million development designated as Project X. Later, the company involved was said to be Pyrite LLC, which was apparently a code name for Google. The search engine company reportedly bought 520 acres of land located about 20 miles north of Charleston under the name Maguro Enterprises.

 

Despite the cloak and dagger moves, South Carolina has found itself in a bidding war. North Carolina recently offered Google a grant worth up to $4.7 million to locate the facility at a site in Caldwell County. This was on top of the move by the state legislature last summer to cut sales tax on electricity and the kind of equipment Google would use at the server farm. Google may be waiting for the bidding to rise. The company told the Raleigh News & Observer recently that it was still considering both the North Carolina and South Carolina sites.

 

 

Other Southern states ante up for German steel mill

 

Another investment competition among Southern states is taking place over the siting of a $3 billion steel mill by the German company ThyssenKrupp AG. Louisiana, Alabama and Arkansas appear to be the main contenders. While Alabama and Arkansas have done their wooing behind the scenes, Louisiana Gov. Kathleen Blanco launched a high-profile effort to get the state legislature to set aside $300 million to fund subsidies for the massive project, which is projected to create 3,000 permanent jobs. 

 

After some initial resistance, Blanco got what she wanted. Yet there were reports that the other two states were preparing generous packages of their own. Alabama was said to be considering an offer of tax-exempt financing under the Gulf Opportunity Zone program created to aid in the recovery from Hurricane Katrina. ThyssenKrupp is expected to announced its decision later this month.

 

 

Closing of subsidized vacuum cleaner plant angers Mississippi community

 

Oreck Corp.'s announcement last month that it would close its vacuum cleaner plant in Mississippi and move production to Tennessee has been met with public expressions of anger and disappointment in the affected community. Harrison County Development Commission Director Larry Barnett told the Biloxi Sun Herald: "I am trying to remain optimistic, but I am extremely disappointed to see that the company did not stick with their employees who helped them get through the storm." Barnett was referring to the intense efforts of the 450-person workforce to get the plant back in operation only ten days after it was damaged by Hurricane Katrina. The rising cost of insurance was one of the reasons given by the company for the relocation.

 

Making the shutdown more bitter for the workers and other residents of the town of Long Beach was the fact that Oreck had received considerable financial assistance from taxpayers. The aid included free land, a $3 million low-interest loan, infrastructure improvements and an exemption from all county property taxes except for the portion going to the school district.

 

It appears there are no clawback safeguards in effect, but county officials may be more vigilant on future deals. According to the Sun Herald, County Supervisor Marlin Leader "said he's tired of the county's traditional way of attracting companies: 'You get a deal and we get the shaft. That's ridiculous.'"

 

 

TIF remains controversial throughout the U.S.: a roundup of recent developments

 

Kansas: Aggressive use of TIF has observers here asking "how much is too much?" That question was posed recently by the Kansas City Star in the wake of a decision by Wyandotte County, KS to provide $28 million in TIF funding for a $150 million big-box development anchored by a Wal-Mart Supercenter and a Sam's Club. The Star subsequently published an editorial stating: "The giveaway, among other things, will benefit Wal-Mart, which hardly needs a handout to open a store in a rapidly growing area that draws thousands of tourists each month." That area is the vicinity of the Kansas Speedway, which itself was the recipient of TIF financing.

 

Missouri: TIF is pervasive throughout the Kansas City area. In November, the Kansas City Business Journal completed a six-month investigation of TIF on the Missouri side of the border during which the publication found it difficult to obtain the information needed to evaluate the program. The Journal wrote: "records of TIF projects are so riddled with missing and incomplete figures that it is impossible to determine the city's return on its investment with any degree of accuracy." The city recently approved a commercial project involving "super TIF financing." An office building and hotel complex being planned by Briarcliff Development Co. will receive 100 percent of the sales and property taxes generated by the development.

 

Minnesota: Developers working in the Twin Cities suburb of Rogers are waiting to see what happens to TIF now that the new mayor, Paul Przybilla, who campaigned against the overuse of subsidies, has taken office. Voters also elected two other critics of TIF to the city council, giving them and Przybilla a majority on the body. Rogers provided a controversial subsidy package for a Cabela's store in 2005 and has long topped the list of cities in the state in terms of the portion of tax capacity diverted into TIFs.

 

Michigan: On December 17 the Lansing State Journal published the results of an investigation of local TIF use that raised issues of accountability. The paper found that "lax state oversight leaves local [development] authorities largely unregulated," and it described the authorities that handle TIF projects as "slot machines that never pay out. Despite contributing hundreds of thousands each year to the development authorities, taxing bodies [and taxpayers] don't reap the full financial benefit of increased tax revenue until the authorities are dissolved."

 

Kentucky: State legislators are reported to be working on bills that would expand the use of TIF. Under existing state law, the financing mechanism can only be used on publicly owned land; some legislators want to make it available to projects using private land.

 

 

Pennsylvania goes all out for Westinghouse Electric

 

Westinghouse Electric Corp. agreed to locate a planned nuclear engineering facility in Pennsylvania after the state legislature created an entirely new subsidy program for its benefit, but now the company has generated a tug-of-war between two Keystone State communities. After many years of stagnation in its nuclear power business, Westinghouse--now owned by the Japanese company Toshiba--is benefiting from a new interest in nukes.

 

Westinghouse announced last month that it would build the facility, which is projected to create 1,000 to 2,000 jobs, somewhere in western Pennsylvania. This came in the wake of the passage of a bill that created up to four Strategic Development Areas around the state that will provide 15-year abatements on state and local taxes for companies locating in the zones. Firms must commit to creating or maintaining at least 500 jobs and make $45 million or more in capital investments within three years.

 

The only question now seems to be whether Westinghouse will choose Cranberry or Monroeville--the two Strategic Development Areas in the western part of the state. Monroeville is where the company has its main offices and existing operations. It is unclear what the two towns can offer in the way of additional incentives, however, since the state program has, in essence, already given away the whole store.

 

 

Michigan city backs off threat to rescind tax breaks for Ford-Mazda alliance

 

Officials in Flat Rock, Michigan, home to AutoAlliance International, a joint venture of Ford Motor and Mazda Motor, have decided not to carry through with a threat to rescind $6 million in tax abatements granted to the carmaking operation. In October, the city council approved a 50-percent abatement of property taxes on a $93 million expansion of the AutoAlliance plant, but later there was some confusion about the exact terms. Mayor Richard Jones recently asked the council to cancel the abatement unless the company paid an additional $200,000 a year in building permits, but the council turned down his request.

 

The confusion caused concern in some quarters about the state's reputation, with the Detroit News editorializing: "Communities must be careful when crafting tax deals. Backing out of them after the fact is unfair and gives the whole state a bad name."

 

 

Wisconsin tax-credit package for Harley upped after workers reject concessions

 

State officials in Wisconsin acknowledged recently that they sweetened a financial assistance package for Harley-Davidson after union workers rejected concessions that the motorcycle maker said it needed to expand in the state. The company was given an extra $1 million, raising the value of its tax credit deal to $4.5 million. In exchange, Harley is expected to invest $300 million and create an additional 200 jobs in the Milwaukee area. "We wanted to make sure that Wisconsin remains the center of Harley-Davidson's production, not just its corporate offices," Gov. Jim Doyle told the Milwaukee Business Journal.

 

After the expansion of the tax credits, Harley workers in Wisconsin, members of Local 2-209 of the United Steelworkers, agreed to more limited concessions. The credits are being made available as part of the state's Enterprise Development Zone program.

 

 

"Looking Behind the Curtain" at tax expenditures in Iowa

 

Iowa is providing business with about $155 million a year in tax benefits to stimulate economic development, but the state imposes little in the way of accountability, according to a new report by the Iowa Fiscal Partnership, a joint initiative of the Iowa Policy Project and the Child & Family Policy Center (CFPC). Titled Looking Behind the Curtain, the report notes that there is no disclosure about which companies are receiving state tax breaks and almost no reporting requirements about the effectiveness of the subsidies. "Once these breaks are on the books," said CFPC Executive Director Charles Bruner, "they are rarely reviewed. There should be an annual review--just as there is for spending done by appropriations." 

 

In most states, corporate tax credits are much more hidden than other forms of subsidies, given that the only source of information about them are (non-public) corporate tax returns.