Are tax breaks effective for reeling in big business?
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HARRISBURG --When Volkswagen was looking for a place to build Rabbits back in 1978, Pennsylvania won the deal with $70 million in state incentives for a Westmoreland County plant.
But 10 years later, when sales slumped, VW pulled up stakes.
Republican Gov. Dick Thornburgh declined a proposal from Democratic lawmakers to allocate $25 million for incentives in 1985 when General Motors Corp. was seeking a location for a plant, reportedly arguing that "a company as large as GM would not be swayed by $25 million." The plant went to Tennessee.
In spite of those bitter local lessons and cries from academics that tax breaks targeted at specific companies are less influential than politicians believe them to be, the size of the packages being offered has continued to grow. Now virtually every new manufacturing facility demands and gets government incentives. Matched today against counterparts in West Virginia and Ohio offering billions in their attempts to woo Shell Oil Co. and its proposed ethane-processing "cracker" plant, Pennsylvania economic development officials say they've had to ante up or step aside.
"If the commonwealth passively stands by and does nothing, we will not only lose the Shell project, but we will lose our ability to grow this industry in Pennsylvania," Alan Walker, the state Department of Community and Economic Development secretary, said at an event last week near the Beaver County site that Shell continues to analyze.
Stacking Pennsylvania's offer to Shell against those from neighboring states is tricky, since full details are not publicly available.
At a minimum, the commonwealth's deal may include 15 years of tax breaks due to the pending designation of a Keystone Opportunity Zone, up to $11 million in subsidies from the new shale-drilling law, and now up to $1.65 billion in tax credits for ethane purchases over 25 years.
In comparison, West Virginia offered to slash property taxes for 25 years, and Ohio reportedly promised a package worth $1.4 billion for infrastructure updates, job training dollars and other financial assistance.
Those figures -- though somewhat different than the upfront grants used in earlier deals -- dwarf what Pennsylvania has put on the bidding table in the past, and also loom large compared to the most lucrative offers reported elsewhere.
Policy experts still point to a $253 million offer from Alabama to Mercedes-Benz in 1993, which successfully secured a new plant, as a turning point in the incentives arms race.
Other eye-popping examples also often involve the automotive industry, including Tennessee's $500 million offer to German automaker Volkswagen about four years ago.
Albeit ultimately unsuccessful, Ohio is believed to have offered Sears Holding Corp. $400 million in incentives last year as it sought to lure the department-store's headquarters away from Illinois.
In Pennsylvania, the Volkswagen deal in 1978 appears to be one of the earliest large subsidies, totaling about $70 million in state incentives. The company's fuel-efficient Rabbits rolled off the assembly line for a decade; then the company closed its doors amid slumping sales.
"I don't know if Pennsylvania and Westmoreland County ever recouped what they put in," said Robert Strauss, a professor of economics and public policy at Carnegie Mellon University.
That location was revived as a Sony electronics plant in the 1990s, assisted by $40 million in state tax breaks. Sony vacated the property in 2007, and another $20 million in grants and loans were announced this year to help a battery-maker move into the site.
Perhaps the largest state package to date involved the Norwegian-based shipbuilder Kvaerner during Republican Gov. Tom Ridge's tenure. About $227 million, mostly in state grants and bolstered by hundreds of millions in local and federal assistance, went toward resuscitating Philadelphia's shipyard.
Reports at the time said investment by state officials and Kvaerner was expected create 6,000 direct and indirect jobs. Mark Holman, who served as Mr. Ridge's first chief of staff, said in an interview that the deal has proved to be an "extraordinary success" by bringing new life back to the surrounding area.
The Shell ethane plant could have a much more powerful return on state dollars due to its network of ancillary chemical operations, he said.
"We've never had a plant that is so directly tied into the resource," Mr. Holman said. "This is a whole product line. In pulling from our [gas] reserve, in many respects, it's a safer long-term investment than an auto plant or a shipyard."
Mr. Strauss of Carnegie Mellon also described the proposed Shell plant as "uniquely different" due to its tie to the Marcellus Shale gas reserves. But the real question, he said, is how to weigh the potential revenue benefits against the tax losses.
"From a transportation and logistics perspective, the state has to ask, 'Do we have compelling advantages?' " he said. "If so, there's no need to give away more and more."
David Brunori, a professor at George Washington University, took that argument a step further, saying that tax costs are a very small part of the cost of doing business. "If Ohio is a better place to build, they will build it in Ohio no matter how much other states spend," Mr. Brunori said.
But the state bidding wars show no signs of ceasing, leaving administration officials looking for ways to protect taxpayers against misfires like Volkswagen.
A key tool, say former officials, is linking state aid to creating a minimum number of jobs.
"Everyone who comes through the door who wants state money will have a number of jobs they say they can create," said Steve Crawford, ex-chief of staff to former Democratic Gov. Ed Rendell, adding that such provisions "mean if the job numbers aren't met, payment comes back to the taxpayers."
Pennsylvania Revenue Secretary Dan Meuser makes the case for tax credits. Forum, B-1
First Published June 17, 2012 12:00 am