Why Welfare Queens Wear Ties
BY JAY HANCOCK
Why do South Carolina and other Sun Belt states face long-term spending crunches even though their growth is the envy of the nation? Look closely at the cost-benefit formulas they use to figure whether business giveaways are good deals. They're tilted in favor of corporate handouts.
The formulas all but ignore the most basic equation in economic development -- that new jobs need new residents to fill them, along with new schools, wider roads, extra police and other government expenses that come with population growth. The result: States growing through business incentives are placing themselves in multiple jeopardy, interviews with development experts and state officials show. They're slashing tax revenue, spurring growth and then fooling themselves about how much that growth will cost.
"The research is fairly consistent on this," said Timothy Bartik, economist with the Upjohn Institute for Employment Research in Kalamazoo, Mich., and an authority on development. "In the long run, if you create five jobs, four of them go to people who otherwise would be living someplace else."
Take South Carolina.
With an unemployment rate of only about 4 percent, it has no choice but to reach across its borders to fill new jobs. But when the state decides whether to award corporate incentives, it calculates that every 10 new jobs will ultimately bring only one worker into a region. That drastically underestimates the long-term expense of incentives, economists said, causing bad decisions on giveaways.
No wonder South Carolina faces ballooning government costs and looming budget shortfalls, as Clemson University reported. This kind of analytical flaw amounts to a massive hidden cost in most states' economic development incentives.
Like most people in South Carolina, A.J. and Margaret DeStefano are paying the government more and getting less. That's what happens when public officials invite hundreds of corporations into your state and cut their taxes to a pittance.
Yearly tax on the DeStefanos' Charleston County home is set to rise by more than a fourth next year, but the crowded local schools can't keep floors dry when it rains, can't stop plaster crumbling from the walls and can't educate most children up to national standards.
Overwhelmed with new residents drawn by job growth, the county created a 1 percent retail sales tax in the early 1990s and recently added a 3 percent telephone tax. But the dangerous Grace Memorial Bridge near the DeStefanos' house has been obsolete for a decade and isn't scheduled to be replaced until 2007. Charleston restaurant taxes doubled in 1997; the state just tripled the registration fee on the DeStefanos' boat; local water rates have jumped 30 percent since the couple moved in seven years ago; and South Carolina's vehicle property tax is so high it deters car sales.
But the visitors center at nearby Charles Towne Landing, the state's first European settlement, hasn't been fixed since it was mauled by Hurricane Hugo a decade ago. South Carolina state troopers make less money than those of almost any other state.
"If you buy a new car, you're talking about $60 to $70 to $80 a month in taxes. A month," said A.J. DeStefano, 68, a retired utility manager who drives a 1992 Cadillac bought used. "I mean, that's ridiculous. That's the reason I'm driving a '92. I'm just leery about buying a new car because of the taxes."
One set of South Carolina taxpayers, however, has been spared the pain of higher taxes: the new companies causing all the growth.
Business taxes aren't rising in South Carolina. They're falling, placing this impoverished and undereducated state in a fiscal vise.
To draw jobs and spur its economy, South Carolina has become perhaps the fiercest aggressor in the interstate jobs war that has swept the country. Its deep discounts on business taxes and its other handouts helped induce 1,395 businesses to locate or expand in the state last year, according to the state Commerce Department. The state has added 200,000 jobs, 300,000 people and 43,000 schoolchildren since 1990. But now the state finds itself an object lesson in the jobs war's peril: Having hollowed its tax base to attract corporations, South Carolina is struggling to afford the resulting boom.
"If something isn't done, they're going to be beyond the point of recovery," said Darla Moore, a Wall Street financier and state native who donated $25 million to the University of South Carolina last year. "Nobody has put this together: What's happening with the businesses, what's happening with the schools."
South Carolina's corporate giveaways are "promiscuous," Moore said, its business-tax revenue "a footnote to the state's budget. ...South Carolina will give everything away not to lose a business to Georgia or Florida."
On its current course, South Carolina will deliver what incentives critics have been expecting somewhere in the country for years: a striking case of incentives trauma. As the jobs war escalated, critics figured, eventually some state would give away so much tax revenue in the name of luring companies that it would jeopardize its fiscal health.
South Carolina is that state.
It has slashed taxes for an elite class of movable businesses by $2.7 billion over the next dozen years, according to a study by Clemson University's Strom Thurmond Institute. Even after a recent flurry of tax increases on households, the study said, the state should expect budget deficits well into the next century, and tax trends "allow little leeway for improvements in the quality and variety of school district services."
As the number of South Carolina businesses has soared to an all-time high, the state's corporate income-tax revenue has fallen by 6 percent since 1994, a "quite unusual" result, said economist Bill Schweke of the Corporation for Enterprise Development, an economic development think tank.
Other business-tax collections are languishing, too. Across the state, local property tax revenue on business equipment plummeted 13 percent from 1993 to 1997, the most recent year for which statistics are available.
It's not as if South Carolina doesn't need the money.
As its job base and population soar, the state needs to spend $57 billion on schools, roads, sewers and other infrastructure by 2015, a legislative commission found -- even though the state can't deliver adequate services now.
South Carolina suffers the lowest SAT scores in the country. Its infant mortality rate is among the worst. Its per-capita crime rate increased by 19 percent from 1987 to 1997, according to the FBI. Four homes in 10 aren't connected to sewers. Booming traffic on narrow, outdated roads contributes to its status as the eighth-deadliest state for car accidents.
In Charleston County, 35 public schools reported leaking roofs last year. Two dozen had worn-out carpets; more than a dozen relied on trailers for classrooms.
Ashley River Creative Arts School is a prestigious magnet school in Charleston, offering ballet, violin, Spanish and drama lessons to primary pupils. Condemned years ago because it was falling apart, the building reopened in the 1980s when the district ran out of space.
Its exterior hasn't been repainted since 1984. The windows are a half-century old. Mildew thrives everywhere. The fire alarm doesn't work in the gym or portable classrooms. Six classrooms have only one electrical outlet, forcing the dangerous use of multiple plugs and extension cords.
Rain makes them even more dangerous.
"In a really driving rainstorm, you could probably find from 12 to 15 significant leaks in this building," said Principal Jayne Ellicott. "We have like a little pool of water that goes across the center hallway when we get rain. ...When a teacher has a major leak in the classroom, then we move to the media center and have class there. We just work around it."
How can business taxes be falling in the hottest economy in South Carolina's history? Take a close look at German car maker BMW.
Immune from many taxes
The company, which has assembled luxury cars in Greer since 1994, is the state's most famous business trophy and the subject of much political pride. But in many ways it is a typical recipient of South Carolina's business largess.
BMW Group earned worldwide profits of about $500 million in 1998. Its publicly traded stock has doubled since it opened its South Carolina plant. But, thanks to incentives, BMW's South Carolina plant has escaped millions of dollars in taxes and costs that industrial companies expect to pay in developed nations.
BMW paid only $1.4 million in state taxes of all kinds in 1998 and $6.7 million in local taxes, mostly building and equipment taxes to one small school district. Together, that's less than 2 percent of what the company paid in worldwide taxes for the year.
Government giveaways permeate BMW's finances.
South Carolina taxpayers spent $40 million on a runway for BMW's planes. They furnished millions more for BMW worker "training," including whitewater rafting trips for BMW executives. The company pays $1 a year to lease its $36 million piece of land. It pays no land tax to Spartanburg County. Building and equipment tax on the first phase of BMW's plant is 43 percent lower than what established businesses have to pay. Tax discounts on BMW's second phase are even bigger -- 62 percent -- even though the expansion couldn't have been built anywhere but Greer.
BMW has never paid South Carolina's 5 percent tax on corporate profits and shows no signs of doing so for years. Start-up and depreciation costs will delay profitability "until early in the next century," said BMW spokesman Bobby Hitt. But even then, tens of millions of dollars in incentive credits will keep BMW immune to income taxes for much longer.
BMW uses as many services as other companies. Its 2,500 employees have just as many school-age children as workers at other businesses. Its trucks wear down South Carolina's roads just as much as other companies' trucks. Thanks to the incentives war between the states, however, BMW has been able to carve its own special deal, a deal shielding it from obligations for other services that most South Carolina companies accept as the cost of doing business.
But it isn't just luxury-car manufacturers that are getting lucrative incentives in South Carolina. Unlike some states, which have spent heavily on auto plants but limited handouts for lesser operations, South Carolina has invited hundreds of businesses to sup at the incentives trough.
"It's a feeding frenzy," said Mat Self, chairman of Greenwood Mills, a big, historic textile company in the center of the state. "Not only do you have the state doing incentives, but you've got localities and services doing it. What are the infrastructure needs that are not being funded?"
Sweetheart tax codes
More than 200 companies have won property-tax discounts similar to BMW's from South Carolina cities and counties -- although the state doesn't know the exact number; it didn't track the deals until 1997.
These discounts, known as payments or fees "in lieu of tax," are gaining a hold in Maryland, where the state Supreme Court recently upheld a disputed $75 million tax discount for a Baltimore hotel.
Hundreds more firms have obtained income-tax discounts from South Carolina. Nobody -- not even the Clemson researchers -- has measured the training grants, land subsidies and other grants companies have gotten.
Subsidy winners include amusement parks, cable makers, data-storage firms, an Amway supplier, food warehouses, furniture-foam makers, printers, metal fabricators, health-product distributors, textile companies, telephone-call centers and magazine sellers. Many employ as few as 50 or 100 workers. Most have gotten 20-year tax discounts. Many, like BMW's parts suppliers, would have located in South Carolina anyway but extracted millions in incentives that were there for the taking.
It wasn't always like this. But in a pattern that mirrors incentives escalation in other states, South Carolina has layered giveaway on giveaway to create what is essentially a separate, sweetheart tax code for footloose companies.
One big move came in the late 1980s, when the state gave counties and cities the ability to grant "fee-in-lieu" property-tax discounts to employers that demanded them. At first the program was limited and focused, offering discounts of up to 43 percent and only on investments of more than $85 million. But lately the investment requirement has sunk to $5 million, the price of a small warehouse, and some companies are getting discounts of up to 72 percent.
The state, meanwhile, was piling on incentives, too. It altered the depreciation schedule for manufacturers, which slashed business property taxes even more. It passed job-creation tax credits, then increased and expanded them, turning all of South Carolina into the kind of enterprise zone that some states reserve for slums.
But that wasn't enough. South Carolina cut factory taxes even more by changing the way it measures in-state income, and it began awarding rebates on payroll taxes, too.
"We have lost and we continue to lose the battle to South Carolina on projects that tend to be inducement-driven," said Maurice Ewing, head of economic development in Cabarrus County, N.C., just over the border. "The more they give away, the less likely they are to have the dollars to fund the schools. Where are the revenues going to come from to support the infrastructure?"
Individual taxpayers can answer that question.
"I look around at what's happening just to me," said Butch Brindel, executive vice president of the York County Association of Realtors. "And I just keep paying at the pump. I can't keep paying."
As governments strive to pay for roads, sewers, police officers, schools and other costs of growth, higher consumer taxes are rolling across South Carolina.
School districts are raising homeowner taxes to help cover more than $1 billion in new construction bonds. York County just boosted its retail sales tax to widen clogged roads. Edgefield County quintupled inspection fees for its abundant mobile homes. Dorchester and Aiken counties raised trash fees. Dozens of localities have passed new telephone taxes. A dozen have jacked up restaurant taxes. The state is considering $2 tolls on major highways, a 6-cent tax per gallon of gas and a lottery.
"My school taxes have tripled" in nine years, said William Smiley, a York County retiree who lives on a gravel road with no sewer or water service. "They keep raising the taxes on the people who live here to pay for all the people moving in."
It's not just consumers who are paying extra. Established businesses are taxed much more heavily than newcomers.
"Many of them were really pissed off about it," said Alfred Stuart, a professor who surveyed local companies for the Greenville Chamber of Commerce. "They said, 'I've been in business for years, been paying taxes, and they're not doing anything for me. And now they're shelling out for this German company.' "
Greenwood Mills pays property tax on its factories at more than double the rate of some new arrivals -- and has to compete with them for labor.
Self, the Greenwood Mills chairman, says on the record what many South Carolina business people say privately: "Existing industry is paying for more than its share of infrastructure. You've got $57 billion in infrastructure needs in the state, and you're reducing taxes?"
South Carolina authorities and incentive recipients vigorously dispute the criticism. They note South Carolina's $400 million budget surplus last year. They point to its individual income-tax receipts, swollen by a healthy stock market and a flush national economy.
They note all the new jobs, the new tax revenue flowing to school districts where major companies such as BMW, Fuji and Michelin have located.
"Economy is pretty flush"
"We spent $1 billion buying goods and services in the U.S. [last year]," BMW's Hitt said earlier this year. "We employ 2,300 people directly, and we have 32 suppliers in South Carolina, 22 of which were not here before. ...As you can notice from the housing trends, we've got a housing boom going on here. If you talk to the county administrators here, they would tell you the economy is pretty flush."
BMW's school district is so wealthy that it boasts a symphony orchestra, two new schools, a new soccer field and computer engineering classes for sixth-graders, a schools spokeswoman said.
"We don't write checks. We don't give away things," said Helen Munnerlyn, spokeswoman for the state Department of Commerce. "We do encourage development. We really give an awful lot of leeway to the communities to get the kind of companies they want. We have to make a judgment call. And sometimes a judgment call is based on: Does the community really need the jobs?"
But critics argue that the only winners in South Carolina are the firms getting the giveaways. Sure, the state's revenue is rising, they say. But costs are rising even faster.
Even after weighing the jobs, new taxes and other benefits brought by employers to South Carolina, studies in other states warn that "the fiscal impact of these tax breaks is likely to be negative for quite some time," the Clemson study said.
Many of the jobs don't even pay well. South Carolina's average manufacturing wage rose by 5 percent, to $10.54, from 1994 to 1998, far less than inflation and less than the 12 percent increase of manufacturing wages nationally during the same time. The average national factory wage last year was $13.49 per hour. "These foreign companies that come in there don't care that the schools are terrible," said Moore, the Wall Street executive. "They just want the cheap labor. And the incentives are so extraordinary."
What's worse, the vigorous national economy topping off South Carolina's and most states' tax tills is not likely to last, economists said.
"You can't tell on the basis of one economic cycle," said James Hite, a former Clemson economist who worked on the tax study. "Every state is doing well right now. It's no great sign of success for South Carolina that they're doing well on the revenue side. And we may be about to see. It looks like the economy's about to slow down."
Tax windfalls enjoyed by a few localities with big new employers are misleading, opponents argue, because the money pools up in tiny areas while the companies draw on government services far beyond their districts. Big manufacturers often import employees from a half-dozen counties; what property taxes they pay in South Carolina generally go to just one county and one school district.
Take the schools surrounding BMW. While the minuscule district luxuriates in the car maker's $4 million annual tax contributions, it educates only about 20 children out of all of BMW's employee families, according to a recent company study.
BMW relies on 2,500 workers from all over Upstate South Carolina, from localities that get little or none of the taxes it pays. Some come from nearby Pickens County, which collects hardly any BMW tax and where Clemson basketball coach Rick Barnes lived until leaving for the University of Texas last year.
Many wondered why Barnes would leave Clemson for Austin, Texas. In a conversation unexpectedly recorded by TV cameras, he gave the answer:
"That's the real reason she wanted to leave Clemson," he said of his wife, Candy. "The schools are horrible."
Jay Hancock is a reporter for The Sun in Boston, where this article originally appeared. POINT has reprinted the story with the author's permission.