One Trophy Virginia Doesn’t Need: King of the Incentive Packages

Incentives — a trophy we don’t need.

Kudos to the McDonnell administration: Virginia was not one of the big spenders on economic incentives in December 2012. A report on economic incentives published by the Site Selection Group covered 224 global projects exceeding a total of $2.4 billion. A list of the 83 largest in the United States included only one — $1.3 million to grease the relocation of Intelsat headquarters from Washington, D.C., to Fairfax County — that had been proffered by Virginia. That project ranked a measley No. 72 on the list.

Florida blew out the competition with a $2 billion incentive package for Sasol, a manufacturing deal, while Florida followed with $27 million for FlightStar Aircraft Services and New Jersey with $26.9 million for Deep Foods.

It’s getting harder to resist the siren call of incentives because businesses are increasingly seeking them. “There’s been a shift in mentality in the C-suite over recent years: Everyone wants incentives. It’s part of a changing economy,” said King White, founder and president of Dallas-based Site Selection Group which helps companies with relocation and economic incentives.

As communities compete for business, they are getting more aggressive in handing out incentives — even smaller projects. White attributes Texas’ strong economic growth in part to its strong packages of state and local incentives. “Texas is just playing far more organized and strategic.”

Virginia plays the incentives game, but the tax breaks and subsidies are minor in scope and tied tightly to economic performance. So far, Governor Bob McDonnell has been fairly restrained in asking for more incentive money, preferring instead to invest in knowledge creation and infrastructure. While I have major reservations about projects like the $1.4 billion U.S. 460 Connector — essentially, it’s a big gamble that major industrial development will ensue — at least it is an investment in productivity that benefits Virginia broadly rather than a bribe to an individual corporation for locating here. It is a tangible asset that will stay in Virginia long after specific manufacturing companies have come and gone.

Virginia’s conservatism in this regard is a good thing. While the benefits of incentives are highly concentrated and highly visible, the downside is diffused, hence invisible. But the drawbacks are no less real. In the aggregate, incentives result in a hollowing out of the tax base. A narrower tax base means higher taxes for those who don’t have the leverage to bargain for incentives. Conversely, keeping incentives under control means a broader tax base and lower overall taxes… which benefits business generally.

Virginia’s General Assembly remains bedeviled by senators and delegates who hand out tax breaks as indiscriminately as trophies for a junior league baseball team. Here’s a winning platform for our gubernatorial candidates this year: No more corporate welfare. Everybody competes on a level playing field. Fewer tax breaks for the few and lower rates for everyone.


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3 responses to “One Trophy Virginia Doesn’t Need: King of the Incentive Packages

  1. You have a bug on this. In general I don’t disagree with your general attitude but it is clearly an competitive environment in attracting businesses that provide jobs, right?

    In a better world, perhaps we would not be competing against other states more than willing to pay incentives but the reality is that we do compete…

    I’m not quite clear why you think this is such a bad thing.. because the bucks involved seem minimal compared to other expenditures.

    re: US 460 – devils advocate question.

    If you believe in the context of Smart Growth that building a subway (or a road) will tend to focus development why not US 460 doing that also?

    Would you not consider US 460 an “incentive”?

  2. Jim:

    Two things:

    1. States MUST attract surplus taxpayers. In a world where almost half of wage earners pay no federal income tax it is more and more important to get people into your state who not only pay taxes but pay more than they cost. Right now, Texas is just cleaning up on surplus taxpayers while California is hemorrhaging these people. And the easiest way to get surplus taxpayers is to get the companies that employ them to move to your state. It’s not the only way but it’s the easiest way.

    2. The problem with tax incentives is that they tend to last forever. There is no reason for this. In an effort to combat “corporate welfare for life” Chap Petersen has sponsored legislation that would sunset all incentives after 5 years. The General assembly could renew the incentives but it would take an overt act. And well all know how good the General Assembly is with proactive measures. Right now, the cumulative effect of the many tax incentives handed out over the past few decades is $12.5B per year in lost revenue for the state. A stunning number.

    Summarizing, I think Virginia should use incentives to attract businesses since it is competing against states that use incentives. However, the incentives shouldn’t go on forever.

  3. Chap’s idea definitely would be an improvement.

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