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 TIME CNN/AllPolitics CNN/AllPolitics with Congressional Quarterly

States at war

Shrewd companies are increasingly pitting politicians against one another in a quest for bigger and better tax breaks. Yet rarely do these subsidies create jobs, and the incentives sometimes rob government coffers of funds that could be used to improve services for you and your neighbors

By Donald L. Barlett and James B. Steele

TIME magazine

(TIME, Nov. 9)

In this story:

ARKANSAS

Ever Try to Drink a Potato Chip?

The water in Evansville, Ark., stinks--literally.

The town sits smack atop a geological formation where sulfur, natural gas and other petroleum products mingle with the groundwater. The result is a nasty mix that is unusable to residents. Many of the town's wells are also contaminated with potentially deadly E. coli pollutants. So a commodity most Americans take for granted simply does not exist in Evansville. "My five-year-old daughter doesn't know what it's like to get water out of a faucet," says resident Helen Martin. For the past five years, 200 families in this hamlet in the northwestern part of the state have sought $750,000 from the Arkansas Economic Development Commission for a new water system. Sorry, comes the reply, there is no money in the budget.

City water in Jonesboro, Ark., doesn't stink. In fact, even wastewater flowing out of the big, new Frito-Lay plant there runs through an expanded treatment facility in order to minimize environmental problems. That expansion was part of a multimillion-dollar incentive package the AEDC gave Frito-Lay to lure the company to Jonesboro. Frito-Lay is not exactly needy. It is a profitable subsidiary of PepsiCo Inc., the giant soft-drink and snack-food company that had sales of $20.9 billion in 1997.

Evansville is one of the minor casualties in the war among the states over jobs. Money is lavished on would-be employers even at the expense of some citizens' basic needs. But in the minds of state politicians and economic developers, this is a small price to pay. From a purely economic point of view, they are dead wrong. But economics and politics are seldom a rational mix.

DURANT, MISSISSIPPI

WHERE IT ALL BEGAN

In 1936, in the midst of the great depression, Mississippi fired the first shot in what is now an internecine, multibillion-dollar battle for jobs among the states. The idea was simple enough: lure businesses from the North with offers of cheap and abundant nonunion labor, low-priced land, minimal taxes and, for the first time, state-sponsored, tax-exempt industrial-revenue bonds. In other words, a coordinated effort to raid other states for their corporations.

The first beneficiary was Real Silk Hosiery Mills Inc. The company, based in Indianapolis, Ind., employed 4,000 knitting-machine operators who turned out half a million pairs of hosiery weekly, which were peddled door to door across the nation by 11,000 sales reps. Hurt first by the Depression and then by a bitter strike in 1934, Real Silk was working its way back to solvency in 1936 when Mississippi came calling.

The town of Durant (pop. 2,500), a farming community with more sidewalks than paved streets, was offering to issue $25,000 in industrial-revenue bonds to buy land and erect a 15,000-sq.-ft. building, which it would lease to Real Silk for 25 years for all of $5 a year. In addition, Durant would waive five years of county taxes on the building and property taxes on the machinery. On top of that, the city would provide insurance, set up a training school and even erect housing for workers. In a front-page editorial that sounds eerily familiar, the Durant News crowed that the project was a great deal for the town. In a special election, the town's voters approved the bond issue, 330 to 19. The people of Durant were in the hosiery business.

At least for a while. Indeed, nine years later, in December 1946, Durant's citizens approved a second bond issue of $60,000 to expand the plant. At its peak, the Durant factory employed about 150 people. They worked three shifts daily, turning out 84,000 pairs of hosiery each week.

By the mid '50s, all that came to an end. Before the first bond was due to be paid off, Real Silk shut all its factories, including Durant, sold off the equipment and became an investment company. The lesson, one that has been lost on generations of mayors, Governors and Presidents, is that capital ultimately ignores such incentives. It seeks its highest reward as dictated by market forces, not political ones. The building that was to put Durant on the industrial map still stands--empty.

And Mississippi? It was the poorest state in the nation when its corporate-welfare program began in 1936. Today, 62 years and hundreds upon hundreds of millions of dollars in economic incentives later, it remains dead last in per capita income.

Jonesboro got its plant after the community and state agreed to enlarge the sewage-treatment facility and provide an array of other economic incentives. Exactly how much aid was pumped into Frito-Lay to build the plant is not easy to find out. A Frito-Lay representative said the information was "proprietary." An AEDC representative, Michaela Johnson, was equally secretive, saying, "That whole project's confidential. We can't divulge that."

TIME can. Based on reports published when Jonesboro was recruiting Frito-Lay, and on more recent information obtained from other sources, TIME estimates the value of the Frito-Lay aid package at more than $10 million. And that is in addition to $104.7 million in industrial-development revenue bonds issued by the city of Jonesboro to build and equip the potato-chip plant. The other incentives include the 140-acre plant site, a rail spur, road improvements, a construction grant, tax credits for new employees and a 20% discount on sewer bills for the next 15 years. That sewage-treatment plant, by the way, cost $7 million and is large enough to accommodate a second city the size of Jonesboro (pop. 50,000). So for each of the 165 workers at the plant, the government has invested $61,000--which is a lot of chips.

Lynn Markley, a spokeswoman for Frito-Lay, says the company selects the general region where it wants to locate a new plant. It then prepares a sort of shopping list of requirements for the facility and contacts states about incentives.

"When we need to...build a plant, say, in Jonesboro, [we] look at a 150-mile radius to the center of the market," says Markley. "We knew we needed a plant in the Tennessee-Arkansas-Missouri area. So with very detailed information, we contacted those states and gave them very specific details on what we needed... [And] based on that, the states compete."

Meanwhile, in Evansville the campaign for clean water goes on, and the citizens cope as best they can. Says Janie Watkins, who along with her husband runs the town's only grocery store: "If we take a bath, we don't wash clothes. If we wash clothes, you can't take a bath. Most people get a bath every day. We can't... You get [a bath] every two days or three days, you're lucky."

Christina Seward, mother of three small children, says her boys love to drink water. "But I don't have to tell them not to drink this water," she says. "The taste, the dirt--you wouldn't want to drink it. You put water in a glass, and you can see the dirt settle to the bottom. We don't know what's in it--we just know it's not safe."

Indeed, the Sewards' well was tested by the Arkansas Department of Health in 1996 and found to be contaminated with particles of fecal matter "too numerous to count." The Sewards use well water only to wash clothes, but not light-colored articles. The water turns "white things yellow," says Seward.

In order to drink, cook, bathe and wash, residents haul bottled water from nearby towns or load up on barrels from natural springs in the hills above Evansville. Since their campaign for water began, residents have appealed repeatedly to the state to provide a share of the $1.5 million project. "We've done everything they wanted us to do," says Kaye Trentham, who operates K.T.'s Cafe. "But we still don't have water."

The Evansvilles of America are growing in number as the job wars intensify. Since the 1980s, states have added one economic-incentive program after another to retain existing corporations and lure new ones. Even states that once refused to compete are reversing course. North Carolina, which had long shunned big-ticket deals, abruptly shifted gears last summer and enacted the Economic Opportunity Act of 1998. The first two beneficiaries:

--Federal Express, the global delivery service with headquarters in Memphis, Tenn., that had 1997 revenues of $11.5 billion, will receive $115 million in state tax concessions and other economic benefits to build a hub at Greensboro, N.C.

--Nucor, a company based in Charlotte, N.C., that operates steel mills in half a dozen states and had 1997 revenues of $4.2 billion, will receive $155 million in state economic assistance to build a mini-steel mill in Hertford County in the northeastern corner of the state.

Why has North Carolina joined in the great scramble to give away incentives? The same reason all the other combatants are in it: jobs. Or at least job announcements. As John Hood, president of the John Locke Foundation (a Raleigh, N.C., public policy institute that advocates individual liberty, a free-market economy and limited government), put it, "Creating jobs is not the goal of these [economic-incentive] programs. The goal of these programs is to create job announcements."

And create them they do.

Said David N. Dinkins (then mayor of New York City) in October 1993, on $31 million in incentives awarded to Kidder, Peabody Group Inc.: "The decision by Kidder, Peabody demonstrates in dramatic fashion that our job-retention strategies are working."

Said Jim Rout, mayor of Tennessee's Shelby County (where Memphis is located), in July 1995, on more than $20 million in incentives given to Birmingham Steel Corp.: "These are not expenses--they're investments. These kinds of investments will pay off... It represents skilled, well-paying jobs."

Said Frank O'Bannon, Governor of Indiana, in March 1997, on a $1.7 million tax abatement to Crown Equipment Corp. for a plant in Greencastle, Ind.: "With at least 200 good-paying new jobs, this expansion will be an important addition not only to Putnam County's economy but to all of west-central Indiana."

Said Christine Todd Whitman, Governor of New Jersey, in May 1997, on millions of dollars passed around to four large businesses under the state's new Business Employment Incentive Program: "This is what the BEIP was meant to do, create jobs and increase opportunities for New Jersey families... This is...a red-letter day for jobs [in New Jersey]."

Don't believe it.

Jobs are created, of course, by the American economy--not by this process.

PHILADELPHIA

NEW MATH: $323,000 TO BUY A $50,000 JOB

In 1997 the city and state gave incentives worth $307 million to Kvaerner ASA, a Norwegian global engineering and construction company, to reopen a portion of the defunct Philadelphia Naval Shipyard and employ 950 people.

WHAT WAS PAID OUT
Divide the $307 million by 950 jobs, and it turns out each job created cost local taxpayers $323,000.

WHEN IT WILL PAY OFF
Let's say the Philadelphia shipyard jobs pay, on average, $50,000. That would mean that each worker pays roughly $6,700 annually in local and state taxes. It will take more than 48 years of tax collections from the shipyard's employees to earn back the money first granted to create these jobs. And even that assumes that all 950 workers will relocate to Philadelphia from outside the city. In fact, of course, many of the workers will move from existing jobs within the city--where they already pay taxes.

TIME's investigation has established that almost without exception, local and state politicians have doled out tens of billions of taxpayer dollars to businesses that are in fact eliminating rather than creating jobs. Some of the money has gone to prop up individual companies and avoid the consolidation within industries that an unfettered market would bring about. Some has been pumped into profitable companies, making them more profitable. Some has been awarded to companies that have threatened to move if they don't get it. Some has been diverted to businesses that local politicians have somehow divined will be more successful than their competitors. And last, some has gone to entire industries that are shrinking.

Witness a $300,000 grant to Anchor Glass Container Corp. last year, described by Pennsylvania Governor Tom Ridge's administration as part of an effort "to retain 275 existing jobs" at the firm's Connellsville, Pa., plant.

Retain 275 jobs?

A decade earlier, in 1987, Anchor Glass employed 9,900 people nationwide--about 1,000 of them in Pennsylvania. By the time the company began seeking economic incentives, more than half the work force had vanished as employment plunged to 4,500. Two plants were closed in Pennsylvania. And just a few months earlier, the Connellsville plant had completed another round of layoffs, bringing the total for the year to 200. The company was telling the state all it needed to know about what kind of future it saw in Connellsville.

Cities go to extremes to keep jobs in the manufacturing sector, partially because they pay more than most service jobs. Here is how Edward G. Rendell, mayor of Philadelphia, explained why last year $307 million in local and state economic incentives in addition to $119 million in federal aid was being given to Kvaerner ASA, Europe's largest shipbuilder: "Those are good, honest jobs that pay a living wage and significant benefits. Jobs you can build a family on."

True enough. But Rendell cannot reverse the tide of economic forces. And no industry is a better example of the futility of subsidies than American shipbuilding. It has not been a vital U.S. business for decades. Yet surplus shipyards continue to be kept alive by subsidies from local and state governments, the Federal Government and sometimes all three. Without this aid, consolidation would have occurred long ago--as it has in virtually every other field, from defense to banking. Avondale Industries in New Orleans, for example, first went on the corporate-welfare rolls in the 1930s, when the state waived payment of personal property taxes. It's still on the dole today. Over the past decade, Avondale has been excused from paying $8 million in property taxes alone.

NEBRASKA

The Job Is Meaty; The Pay Is Not

Not long ago, the state of Nebraska created an authority to dispense corporate welfare. It's called the Nebraska Quality Jobs Board. So what does the board consider a "quality job"?

Well, when do you want to go to the bathroom? In the morning or the afternoon? Pick one or the other. Not both. That is your choice at Nebraska Beef Ltd., an Omaha beef-packing company and jobs-board beneficiary. Listen to a young Mexican worker--he has taken a few days off at the suggestion of a supervisor, who noted that immigration agents were coming to the plant to inspect citizenship papers. Listen as the worker describes his daily routine on the factory floor, where he wields a 6-in. knife, slashing carcasses on an assembly line that never slows:

LEAN JOBS AT NEBRASKA BEEF

These workers start at about $8 an hour and may work their way up to $9 if they stick around for four years. Many don't: the turnover rate for the subsidized jobs is more than 50%

WHAT WAS PAID OUT
$22 million to $29 million in job, tax and investment credits, grants and other assorted subsidies

$2.5 million to train workers

HOW IT PAID OFF
Low-paying jobs. Because of the high turnover rate, the training money ran out in less than a year, so more than 200 replacement workers were never trained. Others continue to flee these grueling jobs

"We tell the [supervisors], 'Hey, I want to use the rest room.' [They say,] 'O.K., 10 minutes. Go now.' [That's] only once a day [you can go]... I have to think if I can go drink some water because I know I'm going to have to go use the rest room." He continues: "We start at 6 o'clock in the morning. But I got there at 5 o'clock to just get ready, drink my coffee, work my steel... If we work 10 hours, they give us a break at 2:30. If we was going to go nine hours, they don't give us no break."

Nebraska Beef is the entity that got the breaks. The jobs board awarded the company an estimated $7.5 million in tax credits in 1996, as well as a laundry list of other benefits. The award was all the more curious because the company had started work on its new plant before the board even existed. Other aid has pushed the total value of giveaways to Nebraska Beef to between $24 million and $31 million.

An exact total is not available, since the state refuses to disclose the amount of taxpayer funds for this or any other approved project. But Nebraska does say that the tax credits were extended under programs that "could substantially reduce or even eliminate [a] company's tax liability."

When state lawmakers created the jobs board in 1995, they had in mind "major business expansion and relocation projects needed to stimulate the growth of populations and create better jobs for the citizens of Nebraska."

At Nebraska Beef, many of the workers are not citizens, in part because even hardworking Nebraskans aren't likely to come running for jobs that start at about $8 an hour for such grueling labor. Nebraska Beef employees can count on a raise of 25[cents] an hour every year they stay on the job, which means that in two years, a butcher is making $8.50. That is $17,680 a year for a 40-hr. week, about $1,200 above the poverty level for a family of four.

Not surprisingly, Nebraska Beef goes through employees the way it does carcasses: at one point, 50% of the workers who completed state training for their jobs were gone within 10 months. A review by the state auditor of public accounts showed that Nebraska Beef had used at least a million dollars in state funds in one year to train workers who eventually left their jobs. The audit noted dryly, "It would appear the number of employees no longer employed with the company and amount of money spent for job training on these individuals was not in the best interest of the state of Nebraska."

Nebraska Beef did not respond to our inquiries.

NEW YORK

When Factories Become Fixer-Uppers

Defenders of economic incentives like to say that safeguards can be built into the law, so that if companies fail to deliver on the promised number of jobs, they can be required to pay back the taxes that have been canceled. If you believe that, it might be worth pondering the story of ABB Instrumentation Inc. in Rochester, N.Y. The company, which makes industrial instruments, is a subsidiary of ABB Asea Brown Boveri Ltd., the giant Swiss and Swedish conglomerate with interests in power generation, transmission and distribution.

In 1991, ABB applied to the County of Monroe Industrial Development Agency, requesting tax breaks and other incentives to move from its aging downtown Rochester location into a new building in a suburban industrial park. The company explained that its plant, built in 1906, was in a "declining industrial neighborhood on the west side of Rochester." ABB said there had been "no significant cost improvements or modernization...since 1950," which threatened its "ability to compete in a tightening world market." In short, neither ABB nor its predecessor had spent money updating the plant.

Nonetheless, the company was quite blunt about what it would do if economic aid was not forthcoming: relocate to Ohio, or England, or even Mexico or Venezuela. Only then did COMIDA agree to issue $21 million in industrial revenue bonds, with ABB using the proceeds to erect a new building. COMIDA excused the company from paying sales tax on materials to construct the plant. And it waived a chunk of ABB's real estate taxes for 10 years. Overall, the tax breaks were worth about $5 million.

LAID OFF AT GENERAL MOTORS

New York State officials leaped at the chance to help GM retool an existing plant in Tonawanda in 1996 to build new engines and generate jobs. Net effect: fewer jobs now than then

WHAT WAS PAID OUT
$16.9 million in tax exemptions, training grants, reduced borrowing charges and lower power costs from the state

$3 million in property- and sales-tax reductions from local governments

HOW IT PAID OFF
Lost jobs. The Tonawanda plant employed 3,800 workers in 1996. A GM spokesman said the work force today is about 3,600. State and local governments thus provided $99,000 in incentives for each job GM has eliminated

To secure a real estate-tax abatement, a company is required by Monroe County to guarantee that it will create 25 new jobs. If it fails to do so, it must refund a portion of the reduced taxes. ABB promised to boost employment at the new facility from 723 workers in the first year to 819 by the third. Instead, even before moving into its new building, the company began cutbacks. By December 1996, ABB reported that its work force totaled just 393. In short, rather than creating the 25 positions required by the county, ABB eliminated 426 real and projected jobs.

Then ABB cried poverty, telling the development agency, "If you rescind the tax exemption, we'll owe $1.2 million in taxes, which we can't afford."

To date, Monroe County has waived collection. Thus, a division of a multinational company--which had sales of $31 billion last year--received some $26 million in tax breaks and economic aid. For what? To eliminate 426 jobs.

ABB illustrates another corporate-welfare story that TIME encountered repeatedly. After failing to keep a facility up to date, a company claims a plant is "archaic" and threatens to close it unless government officials come up with incentives to help pay for modernization. That is what happened in Louisville, Ky., where a much larger conglomerate, General Electric Co., said that to meet profit goals, its plant had to be modernized--with taxpayer dollars. This from a company that appears at the top of the lists of the "best managed" corporations in America, whose revenue last year reached $91 billion and whose earnings topped $8 billion.

GE, which over the years had failed to update a washing-machine factory in Louisville--described as an "obsolete facility" that is "just one step above archaic"--threatened to close it unless state and local governments helped subsidize its modernization and 7,000 hourly employees agreed to cost-cutting work rules.

Faced with this threat, Kentucky officials hired Coopers & Lybrand, an accounting and consulting firm, to conduct a study--paid for by GE--on whether the company really intended to turn out the lights. The answer Coopers & Lybrand came up with: yes.

It is not clear why the state of Kentucky believed it was the responsibility of taxpayers to improve GE's profit margins. Nevertheless, in 1993, Kentucky granted $19 million in income tax breaks over 10 years to the washing-machine factory in GE's sprawling Appliance Park complex. The city of Louisville and Jefferson County kicked in an additional $1 million.

The tax break notwithstanding, employment in Appliance Park continues to fall. Last February, GE announced that over the next two years, 1,500 jobs would be eliminated as range and dryer production is phased out and moved to Georgia, where wages are lower, and Mexico, where wages are much lower. Today 6,200 people work in Appliance Park--down 72% from a high of 22,250 in 1973.

NEW MEXICO

Intel's Billion-Dollar Bunny Suits

With ABB and GE, the threat of losing jobs often became too much for a community to bear. The workers, their families and local politicians wanted to keep the jobs at all costs.

Yet the same hysteria flows when large, fast-growing high-tech companies start shopping around for new plant locations. Intel Corp. invited six Western states--Arizona, California, New Mexico, Oregon, Texas and Utah--to compete for a new computer-chip fabrication plant, or fab, and selected the winner in March 1993. A senior executive explained the decision this way to the San Jose Mercury News: "We're going to build where Intel gets the best deal."

And what a deal it got. New Mexico and the community of Rio Rancho, just north of Albuquerque, won the bidding war by showering Intel with tax abatements and other assistance. Sandoval County, where the company erected its fab, authorized $2 billion in industrial revenue bonds in 1993 and an additional $8 billion in 1995--the largest local-government bond offering in history. The county held title to the land, building and equipment, which it leased back to Intel.

THE SCRAMBLE FOR JOBS

PLAYING THE ZERO-SUM GAME

If you have any doubt that the war among the states to offer tax breaks and other economic incentives is a zero-sum game that creates no jobs, consider the case of the Bagcraft Corp., based in Chicago. In 1993, Bagcraft, whose claim to fame is the doggie bag, let out word that the paper bag-making factory it had operated in Joplin, Mo., for more than 20 years would be replaced.

Six towns in Missouri, Kansas and Colorado jumped at the bait, offering the company free land, infrastructure improvements and real estate-tax abatements. Meanwhile, Joplin tried hard to keep Bagcraft in town, assembling what a city official described as the most aggressive incentives package in this small (pop. 45,000) city's history--tax abatements for as long as 12 years, plus a town-funded day-care center for Bagcraft employees. "When you offer a private company incentives worth $5 million, coming from the taxpayers, I don't know how much more you can do," said Joplin city manager Leonard Martin.

Neighboring Baxter Springs, Kans., came up with more--a lot more. Working with state officials, the town of 4,000 crafted a deal that included free land and a 10-year exemption from real estate taxes. But Baxter Springs trumped Joplin by finding a low-interest loan from the U.S. Department of Housing and Urban Development. The final tab: $15.8 million, or more than seven times the size of the town budget.

Not surprisingly, Baxter Springs won out. In 1994, Bagcraft closed the Joplin plant and moved 20 miles west across the state line to a new $12 million, 265,000-sq.-ft. facility.

All this was cause for celebration in Baxter Springs when, on Nov. 18, 1994, corporate and civic leaders gathered to dedicate the new plant. Of the participants, none was more pleased than then Kansas Governor Joan Finney. "Dreams are the seedlings of reality," she told the crowd. "Seeing what has been brought to reality here, through governmental cooperation at all levels with the company, is perhaps one of the best days I've had in 42 years of government service at different levels."

Let's hope not.

Baxter Springs did get 350 jobs, but Bagcraft did not create 350 jobs. Roughly half the work force transferred from the Joplin plant when it closed. Additional employees migrated from other Bagcraft plants that were closed.

The bottom line for the company's payroll: in 1993 about 700 people were making bags and other paper products at four Bagcraft plants. According to a company spokesman, today that number is the same.

WHAT WAS PAID OUT $15.8 million, including free real estate, a 10-year freeze on property taxes and a low-interest loan from HUD

HOW IT PAID OFF It didn't. Bagcraft closed plants in Missouri, New Jersey and Georgia. New jobs created nationwide: zero

Since governments are not taxable, this arrangement enabled Intel to escape property and sales taxes. Then there is the investment-tax-credit deal, which allows Intel to pocket a portion of the state income taxes withheld from its bunny-suited tech workers' paychecks. In addition, the state provided money to train workers. These and other benefits add up to a third of a billion dollars in aid for Intel.

From Intel's vantage point, that is simply the way the system works. A company spokesperson said that states offer incentives "because they want to compete, and they obviously want the project in their jurisdiction rather than somebody else's... They try to develop their incentive package around those specific industries...that they want to build."

In any event, when some local residents challenged the giveaways as too costly, a citizens group supported by Intel commissioned a study to determine the company's impact. It concluded that the incentives "resulted in a good deal for New Mexico" and that Intel's expansion had created 10,000 jobs statewide by 1995.

But a TIME analysis of federal tax-return data raises questions. Let's look at two four-year periods, before and after Intel's massive Rio Rancho project.

Between 1989 and 1992, the number of federal income tax returns filed by New Mexico residents who showed wage income increased by 35,770--or 6.6%. Between 1993 and 1996, when the Intel-related jobs were created, wage returns rose 40,551, or 6.8%, a marginal increase.

More significantly, tax returns showing wages in three income groups ($30,000 to $50,000, $50,000 to $75,000 and $75,000 to $100,000) went up at a faster pace in the 1989-92 period than in the post-Intel era. Only two income groups increased faster in the later years: those at the bottom, with earnings of less than $30,000; and those at the top, with earnings in excess of $200,000.

Even more telling is the jump in the number of federal tax returns from New Mexico claiming the earned income tax credit. That is the credit intended to supplement the income of the working poor. Between 1989 and 1992, the number of such returns went up 14%, from 112,334 to 127,900. But between 1993 and 1996, it climbed twice as fast, shooting up 31%, from 134,613 to 175,797.

And although Intel is one of the largest corporate income taxpayers in the state, it has fared well in recent years. Documents filed with the U.S. Securities and Exchange Commission show that in 1991, Intel paid corporate income taxes to state governments at an effective rate of 8.6%. By 1997, while the company's taxable income had spiraled upward 1,097%, its overall state tax rate had dropped to 4.8%.

Let's put those numbers in more personal terms. Suppose in 1991 you had a household income of $30,000. If your income had gone up at the same rate as Intel's, by 1997 you would have earned $359,100. Yet you would have saved $13,600 in state taxes. And you would owe it to the clout you exercise: the ability to demand and receive special tax treatment.

KENTUCKY

An Extra-Special Delivery for UPS

Among the variables that companies take into consideration in site selection is the labor pool. They are concerned not just with wage rates but also with the availability and quality of workers. So some states and municipalities, in partnership with business, have created industrial-education programs, mainly in community colleges. The schools' curriculums are often designed to train skilled workers for the area's most prominent industries.

The state of Kentucky took a different tack earlier this year when it agreed to create higher-education programs specifically designed to provide United Parcel Service of America Inc. with a steady flow of part-time workers to load and unload packages from airplanes and trucks.

Confronted with a need to build an international air-hub facility and with a shrinking supply of willing workers at existing pay rates, UPS advised Louisville and Kentucky officials that it would pull 15,000 jobs out of the state if it did not receive suitable aid.

Government officials complied. On top of the usual assortment of incentives, worth more than $80 million, they agreed to form a joint educational venture, a sort of UPS University, that will allow students to attend classes offered by the University of Louisville, Jefferson Community College and Kentucky Tech-Jefferson Campus. Students enrolled in what has been dubbed the Metropolitan Scholars Program will be able to earn technical certifications and two-year or four-year degrees.

Most important, college life will be designed to fit the needs of UPS. Student workers, the company says, "will experience a daily schedule that will essentially reverse their internal clocks. Class schedules, social activities and sleep patterns will evolve around the hours of the night shift at UPS." This means classes will be held between 5 p.m. and 10 p.m., allowing students to work through the night and sleep during the day. Classes cease between Thanksgiving and New Year's Day, the company's peak delivery period. Special dorms will be built to accommodate the night-working students. Tuition will be free, with the state and other sources picking up half the cost and UPS the other half if "the student completes his or her work obligation."

To Kentucky Governor Paul Patton, this is one for the win column. "We will ensure that UPS has the workers it needs," he said. To fiscal conservatives, there is something wrong with this picture. If UPS wants to assure itself an adequate supply of labor, it might try raising wages. But with well-paying jobs now plentiful in the area, the company was having difficulty attracting a sufficient number of workers for part-time work, much of which is on the night shift. College students--the traditional source of night-shift workers for UPS--were not responding to the $8.50 an hour wage it offered, even with benefits. So the state will, in effect, create more college students.

Local authorities defend the deal with a rosy economic forecast prepared for Greater Louisville Inc., the metropolitan area Chamber of Commerce. The chamber study predicts that 6,000 UPS jobs "will spawn nearly 8,000 additional jobs" throughout the region. It is estimated that all those jobs in turn "will generate more than $477 million annually in payroll growth." As is the case with many economic-impact statements, the numbers are fuzzy. But whatever the case, growth would have occurred somewhere in the U.S., perhaps even in Louisville, where UPS is already heavily invested. To remain competitive, UPS had no choice but to build an air-hub facility somewhere, with or without taxpayer dollars.

ALABAMA

Singing Lessons from An Auto Company

There was no question that like UPS, Mercedes-Benz was going to build a plant someplace in this country. First of all, the U.S. is an important market for Mercedes; second, wages and more flexible work schedules make manufacturing costs lower here than in Europe.

IN THE SHADOW OF MERCEDES

Kids in Vance, Ala., are part of a school district so hard up that it relies on portable classrooms. Nearby is Mercedes' new plant, put up with a $253 million package of incentives

WHAT WAS PAID OUT
$77.5 million for roads, water and sewer lines, and other infrastructure improvements $92.1 million to acquire the site, build the plant and construct a training school $83.6 million in training funds, tax rebates and other incentives

HOW IT PAID OFF
Crowded schools. For the Vance Elementary School, it's meant more portable classrooms--the school now has 17--with two a year being added to house the school's burgeoning enrollment

Lower than Mercedes-Benz ever imagined. Alabama taxpayers essentially built and equipped a new plant for the company in the tiny town of Vance, a few miles east of Tuscaloosa. Mercedes received a package of incentives that totaled $253 million in value. For example, Alabama acquired and developed the plant site in Vance for $60 million. It used National Guard troops to clear the land and spent $77.5 million on utility improvements and roads.

The Mercedes-Benz plant illustrates a fundamental principle of corporate welfare: everyone else pays for economic incentives--either with higher taxes, fewer services or both.

To understand this, go to the Vance Elementary School, located a football field or two from the plant. Of course, you cannot actually see the school building. That is because it is surrounded by portable classrooms--17 in all. They are being added at the rate of two a year. Inside the school, the results of crowding 540 pupils (expected to be 700 to 800 within the next two years) into a building designed for 290 are readily apparent--a marked contrast with the roominess of the $30 million training school the state built for Mercedes. Throughout the school day, students stand in line to take their turn in one of the six tiny rest rooms serviced by a septic system, which produces its own unpleasant consequences on occasion, since the septic tanks were also built for 290 pupils. That contrasts with the new sewer lines the state laid for Mercedes. Then there is the cafeteria. Because of the overcrowding, lunch starts at 10:30 a.m.--soon to be 10:15--not long after many pupils ate breakfast. Last there is the safety issue. Vance and other schools in the area are in the middle of tornado alley. Whenever a tornado watch is sounded, the portable classrooms are emptied, and pupils are shepherded into classrooms in the main building.

To be sure, Mercedes is not responsible for all these deficiencies. Alabama traditionally has ranked near the bottom of the 50 states when it comes to education. But the presence of Mercedes has not added anything, except more students.

Nevertheless, at the elementary school, principal David Thompson is an unabashed Benz booster. When the school needed extra buses to transport pupils to the ballet, Thompson said, Mercedes provided them. And when the car company learned the school was mounting a production of Hansel and Gretel, it dispatched several of its expats to help the pupils learn German songs. The experience made a lasting impression on the students. As Thompson put it, "They couldn't tell you your multiplication tables if you asked them. If you say, 'What's 9 times 7?', they probably have already forgotten it. But they can still sing those songs in German."

OHIO

Does GM Mean General Movers?

Given the money politicians are willing to spend, it is no wonder companies have made their assets portable--game pieces that can be moved around the board of economic development. General Motors Corp. has played the game like a champion, a classic example of a company that has secured hundreds of millions of dollars in corporate welfare at the same time that it has eliminated thousands of jobs. And, according to business analysts, GM has to eliminate 50,000 more jobs if it wants to survive the next century.

In effect, the company is in the process of auctioning its surviving jobs to the highest bidders in the communities where it does business. Here's how it works: during the summer of 1997, GM let it be known that it was considering a $355 million expansion of an assembly plant in Moraine, Ohio, to build sport-utility vehicles. The decision would hinge on the size of tax breaks granted by the city government. After all, two other cities with GM truck plants--Shreveport, La., and Linden, N.J.--were vying for the new facility. At least that is what GM officials hinted to Moraine officials. And that is what the local newspaper, the Dayton Daily News, duly reported.

TIME WARNER

WE PLAY THE GAME TOO

Like most major corporations, Time Warner Inc., the parent company of TIME, has received millions of dollars in tax concessions or free services from federal, state and local governments over the years. The benefits include:

--A $2 million-a-year exemption from Florida sales taxes on promotional items mailed from the Time Customer Service Center in Tampa, which sells and renews magazine subscriptions to TIME, PEOPLE, LIFE and SPORTS ILLUSTRATED.

--A five-year freeze on real and personal property taxes (a savings of $224,550) from Shelby County and Memphis, Tenn., on an operations center for cable installers.

--A rebate of $168,800 from Simi Valley, Calif., to defray construction costs of a warehouse for Warner/Electra/Atlantic Corp., a music subsidiary.

Time Warner is based in New York City, and the company is expected to ask the city for a large incentives package for building its new headquarters at Columbus Circle, on the southwest corner of Central Park. Known as Columbus Centre, the $1.3 billion project has been called by one developer the "Rockefeller Center of the 21st Century." Time Warner president Richard D. Parsons confirmed that the company would ask for tax breaks--though he emphasized that the project was not contingent upon receiving them.

If Time Warner gets a special deal from New York, it will join a host of media companies that have received tax relief and other incentives worth an estimated $400 million to build new offices or to keep their work forces in New York. The list includes Germany's Bertelsmann AG, which now owns Random House and Bantam Doubleday Dell; ABC, part of the Walt Disney Co.; Conde Nast; McGraw-Hill; NBC, owned by General Electric; the New York Times Co.; the New York Post and its parent company, the News Corp., which also owns Fox; Reuters; and Viacom.

There was one problem. The story GM floated was not true. Company executives later apologized for any misunderstanding. Erroneous claims aside, Moraine agreed to exempt General Motors from taxes on $355 million worth of machinery, equipment and inventory for 10 years and to excuse the company from real estate taxes for 15 years on the planned $65 million building.

So how much did GM save? Moraine city officials will not say, but county officials estimate GM is off the hook for $30 million in real estate and personal property taxes. GM also put the touch on the county economic-development authority for a cash grant of $1 million.

GM extracted the concessions at a time when the company's profits for 1995 and 1996 totaled $11.8 billion. To put that figure in context, it would be enough money to run the West Carrollton schools, where most Moraine children attend classes, for the next 400 years. As 1997 gave way to 1998, GM dangled the possibility of yet another plant before the Moraine city fathers, and they jumped. This time the tax relief amounts to an estimated $28 million--or about $156,000 for each of the 180 new jobs to be created.

One final twist: Moraine employees will be hired under a new, three-tiered wage scale, with workers starting at about $9 an hour. Once upon a time, the starting wage for such jobs was in the double digits. Nonetheless, Mayor Roger Matheny said that "this offers us job security and lets us know GM is going to be here for a long while."

Not necessarily. Other communities have showered tax breaks on GM and its partners, assuming they would create or at least retain jobs. They were wrong. Volvo-GM closed a jointly owned plant (GM was the minority partner) in Orrville, Ohio, in 1996--just seven years after the county cut property and inventory taxes in half. Some 400 jobs were lost. The two automakers moved operations to Pulaski County, Va., where millions of dollars more in economic incentives awaited.

In 1984 and 1988, Ypsilanti Township, Mich., granted 12-year tax abatements on $250 million worth of new equipment and machinery that GM installed in its Willow Run assembly plant. On its application for the second tax abatement, GM said no new jobs would be created but 4,900 existing jobs "will be retained as a result of the project." A GM executive reaffirmed the company's commitment at a township board meeting.

But in February 1992, GM announced it intended to close Willow Run and move production to Arlington, Texas, where it got a better deal. The township countered with a lawsuit, charging that the tax abatements created a binding obligation. A local judge agreed, accusing GM of "having lulled" the people of Ypsilanti and then trying to skip town. The state court of appeals reversed the decision and concluded that "hyperbole and puffery" in seeking tax breaks "does not necessarily create a promise."

In interviews with TIME, GM executives say they merely do what everyone else does. Moreover, they say, local and state governments often come calling on them. As a GM official explained, when Saturn was conceived, it was a clean sheet, a new type of plant representing a huge investment. Once it became publicly known what GM was planning, he said, "we received proposals from every state in the union except Hawaii and Alaska. We had file cabinets full of material from every state... Every one had to be responded to. It took on a life of its own."

Yet there had to be states that knew GM could not build there just for logistical reasons, he said. Nevertheless, government officials submitted formal proposals so they could tell their constituents they had at least tried. "[A politician] always wants to be perceived as someone who tried to bring home the bacon, even if the bacon doesn't arrive."

And that is where the real blame for corporate welfare rests.

As Ohio state senator Charles Horn, a persistent critic of tax abatements, put it when commenting on concessions granted GM, "We know companies are manipulative, but it's the nature of business to go after every dollar that's legally available. Don't place the blame on the company; place the blame on government. This is government's folly."

--With reporting by Laura Karmatz and Aisha Labi, and research by Joan Levinstein

Next Week: Life with America's Biggest Sugar Daddy


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Cover Date: November 9, 1998

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