City Hall for sale

Almost every city in America is feeling pressure to get in the economic incentives “game,” seduced by arguments that spreading around a little cash, or slashing taxes for select companies, will “create” jobs and keep the local economy “competitive” with other towns that might offer companies more. So cutthroat and pervasive have these shakedowns become, in fact, that one Florida City – I’m not kidding here -- actually threw in its City Hall as a way to sweeten the deal with one company it was courting. Now the company, Palm Coast Data, is preparing to make the former Palm Coast City Hall its corporate headquarters.

What more fitting symbol could there be of the soul-selling some cities are engaging in, beguiled by the idea that paying tribute to companies is the only way to buoy the local economy, and an acceptable way of doing business.

That’s where Colorado Springs finds itself today, with some in City Hall and in the business community arguing that they need the taxpayers to “partner” in their sometimes-risky economic development ventures, in order to “create” or “save” local jobs. And on Tuesday these people might take a major step closer to getting their hands on that long-sought “incentives” money, when City Council decides whether to extend a soon-to-sunset property tax for 16 years, and put the $3.2 million it generates annually into an economic development slush fund, to be used at the discretion of a handful of suddenly-very-powerful insiders.

Yesterday I began to make the case for why City Council should be wary of taking Colorado Springs in this direction. Today I lift the lid a little wider on the Pandora’s Box that beckons. The arguments in favor of getting into the economic incentives “game” – though it might also be called a “racket” -- are seductive, especially in a time of economic turmoil, because they give desperate and na�ve people a false sense of control and economic self-determination. But like all manner of seductions, there’s a darker side that isn’t at first obvious.

Here are even more reasons why Colorado Springs should chart a different course toward improving its business climate (a topic I’ll take up in more detail in this space Tuesday):

1.) It’s gotten out of hand

If you do enough research and get the 40,000 ft. view of what might broadly be called the corporate welfare racket, from Washington’s too-big-to-fail bailouts to the generous “incentives” that many state and local politicians are throwing at corporate America, you see a scandal of monumental proportions, which disproportionately benefits opportunists in corporate America at the expense of largely clueless taxpayers.

Author Greg LeRoy has called it The Great American Jobs Scam, and not without reason. LeRoy’s smart growth agenda isn't to my liking, but many of his critiques of how politicos and businesspeople are conspiring to take taxpayers for a ride are spot on target. What’s occurring in Washington is only the most obvious manifestation of a trend toward a corporatist government and economic system. Some describe this as “municipal socialism” when it trickles down to the local level. Ike’s famous warning against the perils of the “military-industrial complex” obviously was directed at defense contractors. But at a time when almost every business sector is either on the take, or trying to get on the take, such warnings apply across the board.

2.) Many beneficiaries don’t need the money

Not just tens of millions, but hundreds of millions of dollars are being handed to companies by state and local governments, based on the promise of generating economic activity. And some very profitable companies are soaking up some of that gravy.

Google has a $260 million “deal” to open data centers in North Carolina. E-Bay just got $27 million from Utah for opening a facility there. Volkswagen received an estimated $400 million in incentives to locate a plant in Chattanooga. Wal-Mart collects incentive payments from the state of Arkansas. Hemlock Semiconductor not long ago was promised a total of $200 million in state and local "incentives" to relocate to the town of Clarksville, North Carolina. And the list of windfalls for successful companies could go on and on.

Millionaire sports team owners have the taxpayers bankrolling their stadiums -- article and article – and even Hollywood has found a way to reach into the taxpayers pockets -- blog post -- by spinning Tinseltown pipe dreams for average Americans and playing one state off against another.

It’s gotten completely out of hand, in short, and it will only get worse, and more cutthroat, unless taxpayers wake-up to the scams and enough cities and states go on a corporate welfare strike. We should lead the way in Colorado Springs. I think many towns and cities, which are feeling similar pressures but want to resist the shakedowns, will be delighted to follow our lead.

We’re told by advocates of localized corporate welfare that we have to play “the game” because many others communities are doing it. But not every community is doing it. And the fact that some are doing it suggests that we face an ever-escalating bidding war, in which cities with fewer qualms about picking citizens’ pockets will always have an advantage. Once we give in to these arguments, and begin to play the “game,” we’re on a slippery slope that only gets steeper. Polls indicate that most Americans are wary of a federal bailout of the Big 3 automakers, and the bailout of big financial institutions, yet these same Americans seem sanguine about the corporate welfare giveaways taking place right under their noses. We'll have to overcome this case of cognitive dissonance if we're going to get the "panhandlers in pinstripes," of all stripes, out of our pockets.

3.) It creates a mercenary corporate culture, in which community loyalty is lacking

By surrendering to the seductions of corporate welfare, we are enabling a mercenary mindset in corporate boardrooms that will come back to haunt us in the long-run, even if we manage to use incentives for short-term advantage. A company that relocates to your town because of subsidies and handouts will likely pull up stakes and go elsewhere when the next good “deal” comes along. We may “win” those jobs in the short-term, but they’re always up for auction to the highest bidder, creating a vicious circle that benefits a few companies at the expense of the taxpayers.

We should put our energy instead into nurturing a home-grown economy, which is more deeply rooted in the community. Of course, when a locally-spawned business grows large enough, the business-poachers may come courting, and some of those companies may succumb to such temptations. But if we’ve created the optimal business climate in Colorado Springs in which entrepreneurship, opportunity and creativity can flourish, we can always count on another crop of businesses to sprout here, many of which will have stronger bond with the city that helped them succeed. We need to concentrate on growing our own, since small businesses can grow up to be big businesses – and stop trying to steal from other people’s gardens.

4.) The economy is too dynamic to be corralled or controlled

Business development gurus make their living convincing people that they can “create” jobs, “save” jobs and “attract” jobs, but the American economy is too dynamic for anyone to control. Forces beyond the control of the EDC or the local “Economic Development Authority” will dictate what companies survive and what companies fail, what jobs are “created” and which jobs are destroyed, and it’s silly to believe incentives will keep a company in business that isn’t otherwise viable. No American company is going to keep a semi-conductor plant open in Colorado as a result of incentives, if that plant no longer makes sense and can’t turn a profit. We have to accept that the economy is in a constant state of flux, which is largely beyond our control, and focus on the things we can control – like keeping the tax and regulatory climate business-friendly, and the cost of living and doing business affordable, and keep the schools turning out an educated workforce, and reducing the hassle factor for business start-ups. That isn’t as easy or glamorous as cutting business “deals” with other people’s money, or wining and dining out-of-town CEOs. But it’s the surest way to ensure that our economy – that part of it that’s within our control – continues to thrive.

5.) It empowers insiders at the expense of the taxpayers

Hard evidence that the incentives game actually “creates” new jobs – as opposed to simply moving them around the map, in a shell-game, or getting money for jobs that would have been created anyway – is sparse, as I explained yesterday. The greatest number of actual jobs “created” by “the game” is inside economic development offices and among the consulting firms who make a living helping companies shake-down communities for incentives. Here’s a link to one of their favorite publications. Look through it sometime, if you want to get a big picture perspective on the one industry the incentives game actually spawned. I’m not sure you’ll like what you see.

Politicians like the game, too, because it enhances their power, and egos, by casting them in the role of “deal-makers” and “job creators.” That’s why there is so much resistance to a proposal by South Carolina Gov. Mark Sanford to end the state’s crazy-quilt of incentive programs and instead improve the state’s business climate by slashing business taxes across the board. Reports The Greenville (S.C.) News:

“The South Carolina Economic Developers’ Association balked Tuesday at a plan put forward by Gov. Mark Sanford to eliminate a passel of tax breaks used to lure business investment in order to pay for elimination of the corporate income tax over a decade.

The governor’s plan would "completely eliminate the very economic development tools that help make South Carolina competitive" for new jobs in a time of rising unemployment, said John Lummus, vice president of economic development at Tri-County Technical College in Pendleton and the current SCEDA president.

The association has more than 650 members, many of whom work in local economic development departments around the state and frequently use some of the 14 tax incentive laws that Sanford wants to eliminate. One of those laws -- a credit against the withholding tax for job creation -- is a "key tool" in the hunt for corporate investment, said Lummus, the former economic development director for Anderson County.

Sanford, however, argued that the tax breaks for economic development favor new and big businesses over longtime and small ones.

"What if you just treated every business the same?" the governor asked during a press conference where he unveiled his tax reform plan.”

"What if you just treated every business the same?" It's a question we might want to ponder in Colorado as well.

Sanford’s approach makes sense. But the economic development people and corporate interests that benefit from the incentives game, and the politicians who use it to curry favor with constituents, don’t want to give it up. The wheelers and dealers like playing with other people’s money. It means political power and job security for a small army of consultants and economic development gurus.

6.) There’s a point of diminishing returns

These handouts are frequently sold as “investment,” since politicos have adopted the language of capitalists, even while pursuing policies that smack of corporatism rather than real capitalism. But not every “investment” is a sound investment, as I pointed out yesterday, using the Frontier Airlines hanger “deal” as a case in point. And politicians have an absolutely horrendous track record when it comes to picking winners and losers, and “investing” other people’s money. It’s a simplistic clich� to argue that “it takes money to make money.” But we’ve all also seen cases where investors pour money into a black hole. That’s okay when it’s private money, invested for personal gain. But the risk increases when the process get de-personalized, and the “investing” is done with other people’s money.

It’s possible that giving one company a few million dollars to tip a relocation decision in this city’s favor will win the day, and generate more in tax revenue and economic activity than what was “invested.” But does the balance sheet work in our favor if similar incentives are offered to 5 or 10 or 20 companies? At some point, you are putting out more than you’re taking in, and the costs are eclipsing the benefits. It’s called the point of diminishing returns. Where that boundary lies is hard to tell. But few serious studies are conducted on the subject before most state or local governments take this plunge. Colorado Springs needs to look before it leaps. The few serious studies done on the subject -- including one in Kansas I wrote about yesterday -- show that the trumpeted economic benefits are meager, illusive or non-existent.

7.) Other factors still matter more

Companies are more than willing to take incentives thrown their way, and to play one community off against another in an effort to up the bidding, but incentives still rank relatively low on the list of factors that make or break a major business decision. A survey of CEOs done in 2007 found that “state and local incentives” and “tax exemptions” were near the bottom of the top 10 factors that businesses consider. Incentives matter. But of equal or greater importance are: highway accessibility, labor costs, energy availability and costs, availability of skilled labor, occupancy and construction costs, available land, corporate tax rates and environmental regulations.

Our city and county leaders should focus on improving these other factors, most of which are within their control, if we really want to create an optimal business climate, and steer clear of panaceas like “incentives.” The Pike’s Peak region still has a lot of work to do on getting these business climate fundamentals right, before we even begin talking about paying cash on the barrel-head. Colorado Springs is a desirable-enough place to live that we don’t have to resort to subsidies if we focus instead on getting all these other things right. But that takes hard work and focus. The easier and more glamorous route is to put a bunch of money in a pot and dangle it in front if corporate mercenaries, which is why “incentives” are the lazy city’s way to improve the economy.

8.) Such activities can breed corruption

Any time politics and business mix, there’s the potential for ethical lapses, bed-feathering, conflicts of interest and outright corruption. And the economic development racket creates the ideal conditions for such situations to occur. In Baltimore it's led to corruption and scandal; in San Diego, to self-dealing and mismanagement of taxpayer money (article, article, and article); and in Florida, to at least one recent case of self-dealing.

Would creating an economic development slush fund at City Hall’s disposal lead to similar ethical lapses in Colorado Springs? Not necessarily. But the surest way to avoid such situations is to turn our backs on the temptations. And the surest way to do that is to avoid getting into the “incentives game” to begin with.