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The Dubious Payoff for State Subsidies of Business


Phoenix -- This sun-soaked community is embroiled in a heated controversy over a proposed downtown baseball stadium.

The basic issue is who pays -- private investors led by Phoenix Suns president Jerry Colangelo, or the taxpayers?

Mr. Colangelo's group and several county supervisors think it would be fine to raise the required $240 million capital through a quarter-cent boost in the local sales tax.

Lots of taxpayers, though, believe they'd be taken to the cleaners through a rental agreement that would provide a slim 1.5 percent return on the county's investment. County officials are feeling the heat and show signs of backing off the deal.

By contrast, officials in most states have only to whisper "jobs" for the public to acquiesce in transferring huge sums to subsidy-hungry firms -- and not just sports owners, but big industries.

Last year Mercedes-Benz got a stunning $253 million offer to put its new U.S. plant in Alabama. Kentucky, to snare a 400-worker Dosasco Steel plant, gave up $140 million in incentives -- translating to $350,000 per job.

Are states giving up "the seed corn of their tax base?" That's the danger, veteran economic development expert George Autry said in a Raleigh (N.C.) News & Observer interview. They're obligating funds they'll need to provide the "necessary infrastructure to keep their states progressing -- the roads, the schools, the security, the water and sewer."

Maybe it's time to ask: Are there incentives to business that represent a good investment for the taxpayer?

A very qualified "yes" to that question emerges from a dispassionate study of business incentives by Mary Jo Waits of Arizona State University's Morrison Institute for Public Policy. The study was prepared for the Arizona Department of Commerce and the Greater Phoenix and Tucson Economic Councils.

More important to businesses than incentives, notes Ms. Waits, are a quality work force, good access to markets and reasonable operating costs.

But if subsidies are to be considered, she says, they should be based on clear goals -- quality jobs, plant modernization, upgrading technology and worker skills -- "and not just to win competitive bidding wars for companies."

A state or locality, she suggests, should decide on explicit guidelines to judge any deal -- "rigorous cost-benefit analysis is the bottom line." Yet only two states -- Illinois and Indiana -- have formalized cost-benefit analysis.

Once a firm is given a subsidy, Ms. Waits suggests, it needs to be held accountable.

A state or locality should be prepared to press for "clawbacks" -- reducing, canceling or recovering public subsidies if a company doesn't provide as many jobs as it promised, or tries to skip town after accepting public aid.

As an example, a court has blocked General Motors from closing its Willow Run plant in Ypsilanti, Michigan, because GM had accepted years of tax abatements offered by Ypsilanti to keep the plant in place.

The Arizona study stops just short of what may be most needed on the subsidy front -- a strong dose of democracy and sunshine, ways to let the public in on what the deals are, and their pros and cons, before state or local officials sign off on them.

Who's to say, for example, that the public subsidy greasing the way for a new plant announcement is the best way to spend taxpayer dollars? Ms. Waits reports that if Arizona were to invest in job training to upgrade skills, so that current Arizona workers earned an average of $100 more a year, the state's economy would benefit as much as if 6,000 new jobs were brought in. And the state wouldn't suffer the burden on its roads, schools and other public services caused by burgeoning population.

Behind that lies a simple but basic point: In economic development, the premium ought to be the improvement of existing residents' livelihood and quality of life, and not just growth for growth's -- or some big company's -- sake.

The ideal is a government that bargains sensitively and smartly for citizens' interest -- unswayed by flashy headlines and simplistic appeals of numbers of jobs over quality of jobs.

Admittedly, there are intangibles -- is it worth subsidizing a sports stadium in hopes of drawing some major-league team that may raise a city's prestige? But realistic cost-benefit analysis can illuminate most of the arguments over subsidies. And if government itself is often too politicized, under too much pressure to evaluate each proposal coolly and effectively, why not think of a partnership between universities and newspapers?

Jointly, the academicians and a state or city's media could produce some realistic sets of guidelines to judge deals. They could analyze alternative investments to the ones politicians come up with, or give in to.

They could, in short, do the public's homework -- and strengthen the hand of concerned citizen groups -- in decisions rife with overclaims and confusion.

University-media collaboration wouldn't stop debate over which cost-benefit analysis is the most realistic. It wouldn't stop newspapers from reporting any and all debate on a subsidy issue.

But it would slow down the freight train of half-cooked deals and give subsidies a sanitizing dose of clear-eyed inspection.

Neal R. Peirce writes a column on state and urban affairs.

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