Maryland looks to boost business incentives

State spending on business incentives — through loans, grants and tax credits — is growing again.

The Hogan administration is asking the General Assembly for more power to attract companies to Maryland — and to keep those that are here from leaving.

The push follows the revival of the state's largely dormant "Sunny Day" program to negotiate record-breaking packages for Northrop Grumman and Marriott. It comes as the administration steers more funding to its reorganized economic development arm, the rebranded Commerce Department.

State spending on business incentives — through loans, grants and tax credits — is growing again.

Some of that increase is a natural result of an improving economy, as property values rise and businesses invest — and then take advantage of tax credit programs. The state waived more than $106 million in sales tax in fiscal 2016, for example, linked solely to purchases of machinery used for production.

Changes proposed by the administration would accelerate those trends, and give the administration more leeway to determine worthy projects.

Administration officials want lawmakers to increase the amount of money they can grant a single company under a key incentive program. They also want to deepen tax credits for firms that add jobs, and make it easier for businesses to claim those benefits.

The use of grants and tax breaks to lure businesses has drawn criticism from the left and right, and evidence of its effectiveness is mixed. But as cities, counties and states compete for economic development, spending on such programs nationwide has climbed into the billions of dollars, even in an era of fiscal austerity.

"In a perfect world, states wouldn't be using incentives like this to get businesses," said Doug Mayer, a spokesman for Gov. Larry Hogan. "But they are. That's the world we live in. So the governor is going to do anything and everything possible to win."

Maryland is not an outsized spender on business incentives, compared to other states. But it does have more programs than any other state: more than 70, according to the Center for Regional Competitiveness, which evaluated the offerings at the request of the state Commerce Department. Many offer credits aimed at reducing taxes.

The volume of programs has led to a system that is overlapping, confusing and often less effective than it could be, those who have studied it say.

Amid Maryland's slow growth — job creation has lagged behind national averages in recent years — the programs have drawn concern from across the political spectrum. The state added about 30,000 jobs in 2016, for a growth rate of roughly 1 percent, according to the federal Bureau of Labor Statistics. The national rate was 1.5 percent.

Galen Clagett, a Democratic former state delegate from Frederick County, sponsored legislation in 2013 that required the state to provide more detail on its programs.

Clagett, who saw two major firms — Bechtel and Alcoa — leave his district, said he hoped the measure would promote accountability, and push the state to make better deals.

"You get what you pay for," he said. "I'm willing to pay for it. I just wanted to make sure we get results, and I wasn't convinced that we were."

Legislative analysts, for example, found little evidence to tie Enterprise Zones, which offer generous tax benefits, to increased business activity. In a 2014 report, they determined that those that were most active appeared to benefit areas or businesses, such as Amazon, that were already successful.

The Augustine Commission, a group of lawmakers and business leaders convened by the General Assembly in 2016 said the state's tax credit programs needed better data. But even without it, members wrote, it was apparent that "many clearly yield little return."

Even the Commerce Department's own reviews show wide variation in effectiveness. Department officials told the legislature last year that more than a dozen programs, for example, made back just 55 cents of every dollar spent on economic development.

Commerce Secretary Mike Gill said some of the changes the agency is seeking this year are a response to the problems those reports highlighted.

The efforts grow out of promises Hogan made during his 2014 campaign to bolster the state's economic development.

"With the right set of tools, we can compete against anybody," Gill told the House Ways and Means Committee last week.

Under Gill, a former investment banker who started his career in sales at IBM, Maryland has rebranded the Maryland Department of Business and Economic Development as the Commerce Department, added business representatives, worked to raise the state's profile internationally and refocused attention on Western Maryland and the Eastern Shore.

The state has also expanded Enterprise Zones and announced packages to keep high-profile firms in Maryland. Spice maker McCormick & Co. received $4 million in state and county incentives for retaining its headquarters and 800 workers in Baltimore County.

Defense contractor Northrop Grumman received a package worth $57.5 million, including a $20 million forgivable loan. The proposed $62 million deal for hotel giant Marriott also includes $22 million in forgivable state loans.

One of Hogan's signature bills this year would boost tax credits for manufacturers. Legislative analysts say the measure would reduce state revenues by more than $15 million in future years.

The Commerce Department is also asking for the authority to increase the amount of money it can offer without other approval to individual businesses through the Maryland Economic Development Assistance Authority and Fund, from $2.5 million to $4 million. Officials also want to expand the permissible uses of the money — now, it may be used for investments; they want to offer it for operations as well.

The MEDAAF would be rebranded Advantage Maryland.

Officials also want to overhaul a tax credit for creating new jobs, reducing the number of hires needed to qualify and changing the reporting required, with the goal of making it accessible to smaller firms.

They want to cut the lifetime of Enterprise Zones in half, from 10 to five years, while targeting the incentives on a tiered system. The change would offer businesses greater benefits in counties outside the I-95 corridor and in Baltimore City to give those places an advantage in attracting businesses.

Analysts for the General Assembly say the legislation could cost the state more than $28 million in 2022.

Jim Brady had Gill's role in the 1990s, when many of these programs started. He was appointed by Hogan to chair the University System of Maryland Board of Regents.

"The governor's campaign was all based on economic development, business and jobs," Brady said. "It was relentless and it was very clear, and I think what has happened with the administration is that that has been carried forward into action."

Officials point to 2U, an online education provider that helps run online graduate programs for schools that include Georgetown, American University and Yale, to illustrate how these strategies work.

Company officials started looking for a new headquarters about three years ago, as employment at the Lanham-based firm swelled.

Since 2010, the firm has grown from 98 people to more than 1,200, including more than 700 in Maryland. Revenue nearly doubled in two years to more than $205 million in 2016, according to filings with the Securities and Exchange Commission. (It closed 2016 with a loss of about $20.7 million.)

CEO and co-founder Christopher "Chip" Paucek said they considered Washington and Northern Virginia as a base for the firm, but were persuaded to stay after the state and Prince George's County reached out to discuss incentives.

The package announced last year included a $2 million forgivable loan from the state and a $1.5 million forgivable loan from the county.

The firm, which has 87 positions open in Maryland today and expects to add hundreds over the next five years, moved into its roughly 300,000-square-foot headquarters in Lanham near the New Carrollton Metro station last month.

"When the state came to bat the way they did, from an economic standpoint it became very compelling to stay where we were and build long-term in Prince George's County," Paucek said.

But the administration's approach has drawn critics from across the political spectrum.

Del. Jay Walker, a Democrat from Prince George's County, said he is worried that a tiered system would increase competition between counties. He also questioned how the tiers were determined — he asked why some counties with greater incomes and lower poverty rates than Prince George's were deemed to be in greater need.

Del. Warren E. Miller, a Republican who represents Carroll and Howard counties, questioned the boost to the state's grant and loan program. He said government should not be in the business of picking winners and losers, and called benefits granted to individual companies a "slippery slope."

"It's great for Marriott or it's great for McCormick," he said. "But what about all those other companies that pay their taxes and don't ask for anything?"

Del. C. William Frick, a Democrat who represents Montgomery County, said he wants to see more aggressive reform of tax credits.

He pointed to the biotechnology investment incentive tax credit — which analysts say costs more than $300,000 per job and has historically gone to investors in well capitalized, mid-stage companies not the start-ups it's supposed to help — as a program in need of change. The administration has proposed modeling tax credits for cybersecurity firms along similar lines.

"There's a disjunct between the professional analysis and the political process there," Frick said. "An administration that campaigned on reforming state government ... has missed an opportunity when it failed to reform some of the incentive programs."

Others want the state to target programs more effectively, given budget shortfalls for items such as education.

Hogan's budget request would increase Commerce Department spending to more than $153 million, up more than 25 percent since fiscal 2016.

That's not a ton of money, relatively speaking — lawmakers agreed to set aside more than $160 million for the department in former Gov. Martin O'Malley's final year. But the growth, especially in general funds, would far outpace the general budget, which has increased 10 percent since fiscal 2016.

"It's something that I'm looking at very closely," said Sen. Bill Ferguson, a Baltimore Democrat. "We have to have the right balance."

Economists said incentive packages aren't the most effective way to improve a state's economic outcomes.

Businesses respond more to services, such as tailored job training programs, than to cash, said Timothy Bartik, a senior economist at the W.E. Upjohn Institute. Since most companies that relocate attract a high share of new workers, adding people, they're rarely fiscally advantageous.

Once officials start offering deals to retain businesses, he said, it can be hard to stop. And the process gets caught up in politics.

"There's an old joke in economic development circles ... when it comes to economic development incentives, you can't give out just one," he said. "Eventually, at some point, you're giving away your entire tax base."

Anirban Basu, the chairman of the Maryland Economic Development Commission, said he would like to see officials push harder to reduce taxes and regulations.

"If you have an advantageous economic development climate, you don't have to make as many deals," he said.

The Commerce Department is aware of the criticisms.

"The bottom line is we do need incentives to be able to compete," spokeswoman Karen Glenn Hood said.

Even some beneficiaries of the state's programs say they wish there were another way.

Darin Holderness is the chief financial officer of Woodgrain Millwork, an Idaho firm that won a contract with Home Depot in 2015 and opened a warehouse in Baltimore.

The firm received a $250,000 forgivable loan from the state and another $250,000 loan from the Baltimore Development Corp — incentives that Holderness said were critical to the company's decision to open in Baltimore and take on some of its predecessor's workers.

The firm, which employs about 2,500 people around the United States and about 35 in Baltimore, expects to expand in the city, he said.

"Without having spent this money you wouldn't have got us here," Holderness said.

But as someone who often identifies with the political right, he said, he's sympathetic to the view that "this is a waste of taxpayer dollars."

"It's a tough decision," he said. But "you've got to compete."

nsherman@baltsun.com

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Companies involved in recent announcements include:

Oct. 2016: Marriott said it would build a new headquarters in Bethesda and retain 3,500 employees. The incentive package is worth an estimated $62 million package, including $22 million in forgivable state loans and $22 million in conditional grants from Prince George's County. The project is also eligible for tax credits.

Feb. 2016: Northrop Grumman said it would purchase a divisional headquarters in Linthicum and maintain 10,000 jobs in Maryland. The package is worth an estimated $57.5 million, including a forgivable $20 million Sunny Day loan. The General Assembly also approved a special $37.5 million tax credit.

Nov. 2016: Morgan Stanley said it would hire 800 people and open a second office in Baltimore. The $5 million package included a $4.5 million conditional grant from the state and a $500,000 forgivable loan from Baltimore. The company is also expected to be eligible for tax credits.

Feb. 2016: 2U said it would move to a new headquarters in Lanham and hire 900 people over five years. The $3.5 million package includes a $2 million forgivable state loan and $1.5 million in forgivable loan from Prince George's County.

April 2015: McCormick said it would consolidate more than 800 workers at a new headquarters in Hunt Valley. It received $4 million, including a $2 million state grant and $1.8 million in infrastructure assistance from Baltimore County.

Sept. 2016: WeddingWire Inc. said it would add 200 people at its Chevy Chase offices. The firm is slated to receive $1.5 million, including a $1 million forgivable state loan and $500,000 conditional grant from Montgomery County. The company is also eligible for state and local tax credits.

May 2016: Frito-Lay was announced as recipient of a $1 million conditional state grant, matched by a $100,000 training grant from Harford County. The award followed the firm's construction of a new automated distribution center in 2014 and construction of two new Cheetos manufacturing lines. Together those projects represent an estimated $122 million investment and an additional 140 jobs.

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