Tax Incentives

A look at how local communities and the state use tax incentives to attract business and grow jobs with economic development expert Ioanna Morfessis, president and chief strategist of IO.INC; Economist Elliott D. Pollack; Bob Robb, columnist, Arizona Republic; and Steve Voeller, president of the Arizona Free Enterprise Club.

Transcript:

Ted Simons: Tonight we take a look at the use of tax incentives for economic development. Critics call them corporate welfare. But others say they're necessary if Arizona expects to compete for high-quality jobs. That's the case in the west valley where, as David Majure reports, leaders have applied for a foreign trade zone.

Package: This is a busy place. About 2500 40-foot shipping containers are unloaded here each year. Chances are you're familiar with some of the products that pass through this 600,000 square foot facility. The building is located in Glendale, Arizona, but to U.S. customs, it's outside the United States. That's because it's in a foreign trade zone, a special designation that allows companies to avoid or defer payment of customs duties on goods they import and get a huge property tax break from the state of Arizona. Harry Paxton is economic development director for the city of Goodyear, which is seeking foreign trade zone status at two locations.

One of the sites is just north the 303. Just east and west side. There's about 235 acres here. This is a prime location and we're fortunate to have this building that was constructed a couple years ago and is available today.

Finding tenants and turning hundreds of acres of farmland into an industrial park could reap big rewards in the form of jobs and tax revenue but without a foreign zone --

You're not in the game. There are companies I've talked to who say, why don't you have a foreign trade zone? Many companies will go through a list of communities that have a foreign trade zone that are prepared. If you're not prepared, many times you don't make the list for consideration.

It's one the perfect things for Westmarc to be involved in.

Jack Lunsford is president and CEO of Westmarc, which is working with Good Year and other west valley cities to get a foreign trade zone west of I-17.

The west valley needs a foreign trade zone from a sheer competitive stand point and from an economic development incentive standpoint so we can compete on the same playing field that others compete on.

Of course, CONAIR gained foreign status anyway. Although located in Glendale its distribution center operates in a subzone of a foreign trade zone administered by Phoenix. Paxton says gaining trade zone status is cumbersome for companies.

What we needed at Goodyear, we needed a foreign trade zone and each community needs to make those decisions and that reduces the time. We didn't want to saddle businesses with the challenge of going through our local government and then going through another local government to get approved. It's time for the foreign trade zone in the west valley. It becomes a catalyst for investment.

The property tax benefits are a big draw. Arizona adds about a 5% assessment ratio about 75% less than other commercial properties--

When you have an area that's a greenfield site, there's little taxes being collected. When you bring enough investment, even though it's assessed at a 5%. You're going to collect a lot more in property taxes on the actual real property taxes and the personal property taxes, the business equipment, even though it's a 5% assessment ratio than you do on agricultural land today.

The critics will consider the fairness of giving tax breaks to some companies and not giving some to others. .

For those who believe that tax incentives are not good and they're a bad word or a bad public policy, I would submit to them that they need to evaluate what's going on in other communities. We know that businesses are locating in other places that don't have Arizona's good weather and climate and so why are they locating there? They're locating there because they're receiving incentives.

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Ted Simons: Joining me to talk about the use of tax incentives for economic development is Ioanna Morfessis, president of IO.Inc, an economic development growth strategy firm. Bob Robb, an editorial columnist for "The Arizona Republic." Elliot Pollack, an economist whose company provided the Arizona speaker of the house with recommendations for growing high-quality jobs. And Steve Voeller, president of the Arizona Free Enterprise Club. Good to have you all on "Horizon" this evening. Let's start with you. Those companies, are they there without incentives?

Ioanna Morfessis: The ones they're hoping to attract, some are there with incentives that are located here. Conair was an early GPEC from the early '90s. Our region and state had to work hard to attract them. The economic development toolkit in place will be helpful to improve our competitiveness, because, Ted, we're not competitive in the incentive arena.

Ted Simons: Bob, those companies we saw, without incentives, are they there?

Bob Robb: Well, probably not, but incentives aren't created equal. Some are unoffensive and some are more offensive than others. In the foreign trade zone, it's a federal program that exists all over the country. So it is reasonable to say that if we're not in that game, there's going to be some companies we're not going to get and it's reasonable to be in that game and that's vastly different than subsidizing office or retail space and I think it's different -- in a foreign trade zone, it's open to anyone who can fit the category and get there. That's even different than for manufacturing companies, saying we're going to give a special incentive for this company, that's not necessarily available to other companies.

Ted Simons: The idea, I think at the core, we're going to talk about tonight, some say it's simply not fair. You're giving help and assistance to some and not to all.

Elliot Pollack: First of all, it's a competitive world. I hate to agree with bob, but I have to. You should only be giving incentives to those companies who could be somewhere else. There's no sense in giving a retailer or a local base industry, be it a barbershop or grocery store, incentives. Because it's a competitive world. They're the ones who bring in money from the outside and they're large and have national and international markets and that's the market in which we must compete. So incentives should be very limited and only go to those types of companies. The incentive should be a good tax policy. Low corporate tax rates. We have it, but we advertise it wrong and doing away, or at least substantially reducing for those companies, personal property taxes because that's their major complaint. To land them, you need incentives whether it be job training -- and by the way, we're the only state in the country that doesn't have an active job training program. And whether a high job rebate, if you will, and a closing fund. We need those things.

Ted Simons: Steve, do we need those things?

Steve Voeller: No, Oregon has a robust and aggressive incentive package. But if -- that shouldn't be the measuring stick. The measuring stick should be, how is Oregon's economy? They have a higher unemployment rate than Arizona by two percentage points. I don't want to emulate Oregon.

Ted Simons: A basic question here. Do these incentives or do they increase wages faster than otherwise and retain jobs?

Ioanna Morfessis: Incentives are imperative to attract jobs and retain them. New York state gave jet blue airways $32 million to add jobs. And we can say we don't want to be like Oregon, but to retain our own companies wooed by other states that do offer incentives as well as other countries because the competition no longer is confined to the United States of America, but we're competing with companies on every continent that are covering money. I would say, yes, they make a difference. I agree we have to focus those incentives on high-value-added jobs and hold those companies accountable and transparent. So if they don't perform, the community gets its money back. That's called a clawback provision. Many states require that when they offer incentives.

Bob Robb: Ted, incentives work in the sense if you dangle money in front of businesses, some people -- some businesses are going to take it. But the claim for incentives is that they move a broad-based economy further and faster than would otherwise be the case and there's no evidence of that. I took a look at states that are aggressive, about 17 states are aggressive in providing incentives, versus the performance of 19 states that don't do much of it at all and the high incentive states had no better track record of keeping or creating manufacturing jobs and actually had a lower rate of average wage growth than the non-incentive states. The problem is one of scale. When you've got a state economy as Arizona does of $250 billion with 2.8 million employees, these incentives simply don't scale up enough to have a noticeable effect on the trajectory of the broad-based economy. Only broad-based incentives that provide rewards to small businesses and individuals for entrepreneurial activity can do that.

Ted Simons: Elliot.

Elliot Pollack: I disagree. We looked at all 50 states and found that incentives do matter in certain states. Not all states are the same. I don't care how many incentives South Dakota gives, no one wants to live there so it doesn't matter. And even places like Kansas which bob likes to say doesn't matter, it does, because they're better off than they otherwise would have been. I'm not saying you should basically throw money at companies. All I'm saying, get in the game so you're competitive and can land some. I agree it takes a long time for this to occur. If you don't start now, 10 years from now, you'll be no better off and we're losing our base. We're losing semiconductors and risk losing aerospace.

Bob Robb: I looked five years out and 10 years out, there's no record that they outperform.

Ted Simons: Focusing on the base companies, as Elliot describes, but making sure you're not throwing money every which way, why does that not make sense?

Steve Voeller: We have to move the tax code and carve it up when we do tax incentives. A much more honest approach would be to go to the appropriations committee and say if we want to be a leader in solar manufacturing, put it in the budget and let's pay for it. But when you carve out a section of the code, everybody else that doesn't get it, has to subsidize that tax credit.

Elliot Pollack: I have no problem with that. I have no problem with certain industries subsidizing others. I have a problem with picking winners and losers and you better have an overall structure that works. We don't know in solar in its present form is going to be worth a darn. You have to basically structure your economy and taxes so that you're attractive and only -- and you're attractive to industries that bring in wealth to a community and as I told you before, the ghost towns of the old west became ghost towns because the reason for theirs existence went away. We're not here because chase is here, we're here because of Boeing and J.D. software and American Express' regional office and Intel. And we had better retain those companies and get new ones like them.

Ted Simons: The idea of winners and losers always comes up in this debate. How do you work with that dynamic?

Ioanna Morfessis: It's a harsh reality. That's why the United States does not have a national industrial policy because congress and the president are always loath to pick winners and losers. It's not really a clear-cut case, Ted. Elliot referred to American Express. I could add Schwab and Vanguard and Boeing. They came here with incentives. We have the workforce they wanted and we had incentives to make it a little bit more attractive, whether it was job training or whatever the case may be. Yes, it's imperative to keep them, but we also have to be very mindful that those factors that brought them here in the '80s and '90s, are not as strong competitively when you look at other states that have become stronger and as well as other countries that have emerged and using their treasuries to buy new companies. That's not what incentives are all about in the terms that Elliot is presenting it or my practice in economic development. Incentives have to be carefully utilized tools that are going to make a difference but for that incentive, that project would not happen and there has to be a high rate of return.

Ted Simons: Is there the ideology of incentives, the theory of incentives, which some are against and some for, and the reality if Arizona doesn't do it, New Mexico will or Oregon will? And all of these base companies that could be here -- oh, I think I like it better in Colorado.

Bob Robb: Well, in the first place, I disagree with the view it's only base industries that create the growth of wealth within a community. And local trade makes a very strong contribution and it's simply untrue the only way you can grow an economy is import cash and export product or there wouldn't be anything such as global growth. We don't import from Venus and export to Mars. So I disagree with the basic premise -- and what was the other question?

Ted Simons: The question was the playing field is different now. It's not just Arizona cities. It's everyone and their brother going against all others.

Bob Robb: I think it's accurate that there are certain businesses and certain fields of business that if you're not in the incentive game, you're not going to get it. Solar energy is one of them. People are throwing stuff at them. Large national projects are one of those. The tricky part is in limiting your incentives only to those types of competitions or those types of industries. And the present bill before the Arizona legislature doesn't do that at all. Because if you don't do it, you end up subsidizing growth that would have occurred anyway, and creating tax shifts to small businesses and entrepreneurs which are your true job creators.

Ted Simons: Elliot, again --

Elliot Pollack: Bob, that's a ridiculous example and I'll tell you why. Because -- the one about global growth. And that shows that --

Bob Robb: I didn't say -- I said it's not true that that's the only way you create growth. That local trade can't create wealth.

Elliot Pollack: :It's the Ricardo and Smith pretty well disproved. First, I won't need export growth if you had all the factors of growth in one area. You don't. My argument with you is -- with what you're saying, is that think of an economy that is not growing that has no industries, that basically brings money in from the outside and if you can think of one, let me know what it is.

Bob Robb: But that doesn't describe -- no one is suggesting we not be in the export business. And that we only grow our own. What we're saying is we will export some stuff. Import some stuff, but let's base it on comparative advantage and not presume that government is bright enough to know what the mix ought to be and what should be subsidized or not.

Elliot Pollack: We're in perfect agreement.

Ted Simons: The idea of tax incentives and subsidies--let's talk about that:

Steve Voeller: I think Goldwater Institute has started new ground and spoken on the case. Every deal going forward is going to have to meet new criteria that otherwise wouldn't have been but the fascinating part of this topic, everyone is talking the same thing we're talking about, which is taxes matter. When we talk about an incentive for an industry or a company, the reason we're not landing those companies or the reason those companies are accepting those is to lower their tax burden. We think the government should not pick winners and losers and we're not talking about -- we all agree with that, but incentives to play the winners and losers game and if taxes matter and they matter for other companies and other industries and we should not --

Ted Simons:Let me ask you this. Should a mall developer be treated the same as a coffee shop?

Steve Voeller: Yes.

Ted Simons: Should an industry, as Elliot says, exports more than imports or whatever the case may be, a major big -- just a big player, the same as a coffee shop?

Steve Voeller: The tax code should be neutral. Transparent and easily understood so that taxpayers know what is funding government.

Ioanna Morfessis: The tax code is set up for economic failure. It's dependent on growth. Construction sales tax. The disposable income part. We've never focused on developing policies whether they're taxation or regulatory or otherwise, to create wealth. Meaning for people to have jobs and earnings opportunities, meaning businesses, where they have the disposable income. So consequently a car dealer is more important than an Intel plant. I've worked on 300 projects, 175 of them in this state and I know what an economic development professional goes up against politically to land their project. We value sales tax collections way more than we -- and the entities that generate them -- way more than we should value them. We're the only state in the United States that does. We should be valuing equally, if not more, the Intels and Boeings and American Expresses and Schwabs and fender guitar---. Those are more generative for opportunities than ones that generate the sales tax.

Steve Voeller: You mentioned the subsidy that New York gave jet blue. High wealth and fleeing New York because of high taxes. The eastern seaboard. So you can offer subsidies and try to land companies but the wealth is leaving.

Ted Simons: Please, go ahead.

Bob Robb: And this -- the question of whether we should treat value-big companies more than small companies or treat them equally, I think is answered by the track record. Not only is it right from the standpoint of equity, but the coffee shop owners of Arizona and the world will end up creating more jobs than the large companies that tend to move them around.

Elliott Pollack: If the large companies were not here, there would not be any coffee shops. The ripple effect.

Bob Robb: You can go to towns all across America that do not have large manufacturers and you'll be able to get a cup of coffee.

Elliott Pollack: They have some export related industry, otherwise they wouldn't be alive.

Ted Simons: The idea of paying businesses to do business here, how do you respond?

Elliott Pollack: That's never been the case. Virtually all of the major companies -- there are exceptions -- but they're children and grandchildren of companies that came in in the '40s and '50s and '60s, we haven't changed our economic policy in 60 years and starting to lose our economic base and it's a big deal.

Ted Simons: Are we forgetting history by saying we don't need these incentives?

Steve Voeller: The tax code should be competitive in the region and country and around the world.

Rob Bobb: I think you would have three out of four people --
But it's untrue we've stood still since the -- over the last 60 years, we've reduced income rates for -- income tax rates and the depreciation schedule for personal property and we're in a far better competitive position there and we have waited -- the corporate -- weighted the corporate income tax heavily in favor of industries. And economic growth as you know that's near the top in the country.

Ted Simons: 30 seconds. No? Not enough. We'll have to stop it there. We'll see it -- we'll see with the job bill, the recovery act, we'll see how it resolves.