States Shifting Strategy in Bid to Lure Plants : Big Incentives Rarely Sway Firms’ Choice of Location for Facility

Fort Howard Paper Co. announced last fall that it would build a huge, $500-million recycled paper mill, with new jobs for as many as 1,000 workers, along the Savannah River where it winds through a depressed, rural area of the Old South.

“Unfortunately,” Robert A. Rotan Jr., a Georgia state government official, noted ruefully, “the Savannah River has two sides”--and one of them is in South Carolina. Georgia and South Carolina immediately began feverish campaigns to lure the factory to their side of the river, holding out such enticements as subsidized job training, tax abatements, new roads and fast-track environmental permits. Such interstate bidding wars for new business and new jobs have become an increasingly common prelude to major new plant openings all across the country. But nearly all analysts are now convinced that “smokestack chasing,” as they disdainfully call it, does little to sway key corporate location decisions.

And in their often desperate effort to satisfy the demands of companies that offer an economic bonanza of new jobs and multimillion-dollar investments, state officials not only end up handing out needless subsidies, but they also frequently divert their attention from other, less visible undertakings that may be for more important in spurring real economic development.

Fort Howard earlier this month chose Georgia over South Carolina--not, company officials say, because Georgia offered them a more enticing package but because Georgia’s side of the Savannah River is a physically superior location. And in many other cases, such factors as labor and transportation costs prove far more significant than anything a state government can offer.

“The research is overwhelming that state and local taxes have little or no effect on industrial location decisions,” said Roger Schmenner, a business professor at Duke University in North Carolina whose 1982 book is the most extensive analysis of the process. “But that hasn’t stopped tax abatement and industrial recruitment from becoming the lazy legislatures’ favorite approach to economic development.”

And the Fort Howard case is by no means the most extensive example. While Georgia and South Carolina were fighting that battle, 27 other governors and dozens of local communities offered giveaway packages worth as much as $1 billion to attract General Motors Corp.’s new Saturn auto factory, which promises to hire 6,000 workers and generate perhaps as many as 14,000 spin-off jobs.

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Seven governors appeared on the Phil Donahue television show to promote their states. Thousands of children from depressed Youngstown, Ohio, wrote letters to GM Chairman Roger Smith to plead for the $5-billion development.

GM bills the Saturn as a last-ditch effort to build a high-tech, low-cost small car in the United States that can compete profitably with the Japanese.

Some experts believe the frenzied competition for the Saturn plant is finally leading to a reexamination of smokestack chasing. “The Saturn decision,” said Roger Vaughn, a frequent state government consultant on economic development issues, “may be the last hurrah for such big bidding wars.”

With Japanese auto makers Toyota Motor Co. and Mitsubishi Manufacturing Co. announcing plans to build large factories in the United States, few analysts expect states to abandon their efforts to entice highly visible manufacturing plants. But the struggles are likely to be more low-key than either the Fort Howard or Saturn contests.

Missouri and other states that already appear to have lost out in the Saturn contest are now making their incentive packages available on a smaller scale to other firms that want to locate there.

Minnesota Gov. Rudy Perpich touted his own promotion efforts on the Donahue show. “I served over 100 days last year outside Minnesota traveling the world, literally,” to tell chief executives that Minnesota has what they are looking for, Perpich said.

Expanding Programs

With state politicians under increasing pressure to attract a diminishing number of big new plants, many states are expanding their programs of low-cost loans, tax abatements, job training and advertising. Twenty-four states have enacted laws making tax and regulatory relief available in specific “enterprise zones,” according to the National Governors Assn., and four more governors have proposed similar legislation this year.

And the states believe their efforts pay off. When Fort Howard disclosed that it would locate its new factory--one of the largest ever in the South--on Georgia’s side of the Savannah River, Georgia Gov. Joe Frank Harris was understandably elated.

“This is a project that was actively sought and aggressively pursued,” Harris said at a news conference. “Today, we know the satisfaction of having given it our best efforts and having come out on top. Today, we know that every extra hour, day and night . . . was for a good reason.”

While Georgia officials avoided giving away extensive state tax breaks to lure Fort Howard, they acknowledge that the company, based in Green Bay, Wis., will receive a host of other “incentives.” A new law approved by voters in Effingham County will exempt business inventories from taxation. The state will subsidize job training at Fort Howard and float industrial development bonds, whose interest payments are exempt from federal taxation, to finance the plant’s pollution controls, estimated to cost more than $50 million.

Lower Interest Rates

The industrial development bonds will not cost the state anything, but the company will pay lower interest rates because the buyers will pay no taxes on the interest. Federal taxpayers, in effect, will underwrite the anti-pollution costs of the mill.

“The company played it for all it was worth,” admitted Paul Radford of the Georgia Community Affairs Department. “But we have a policy of not getting too far into the giveaway game because we don’t want to undermine our existing industries simply to chase every will-o-wisp that comes along.”

In the end, Fort Howard officials privately conceded, neither taxes nor other state incentives made much difference in their decision, although they said the state and local assistance is desirable and the interstate competition helped speed up the permit process.

“If you listened to all the rhetoric put out by industry, you would think that minor variations in state taxes and ‘business climate’ make all the difference in economic growth,” said Karl E. Case, an economist who prepared a study of state business taxes for New York state. “But if you examine the evidence of actual business decisions, it shows they don’t really matter very much.”

Low on the List

A survey of more than 2,000 manufacturing executives by Michael Kieschnick, former state economic development director in California, found that business and personal tax levels were far down the list of factors important to location decisions. The vast majority of companies that responded acknowledged that they never even considered investing in a different state.

Moreover, most job creation does not derive from the expansion of such industrial giants as GM or even Fort Howard. David Birch of the Massachusetts Institute of Technology says 80% of the new jobs created in the 1970s were produced by small businesses, with all the Fortune 500 firms combined providing no net gain in U.S. jobs.

Half the jobs added recently, according to a study by economic consultant Vaughn for the Council of State Planning Agencies, have come from self-employment or the formation of new businesses.

But state economic development officials often ignore the nearly invisible efforts of thousands of individual entrepreneurs and healthy smaller firms when a major corporation threatens to shut down a large factory or a firm proposes to put up a shiny new office building.

“For a politician, it’s lots of fun to cut ribbons and it can really hurt when local papers are full of headlines about a plant closing,” said Donald Ratajczak, director of the economic forecasting project at Georgia State University here. “That increases the temptation to give away too much on the splashy cases, but it is the extension of existing operations that creates most jobs.”

Shifting Strategies

Some states, apparently recognizing the futility of depending on industrial recruitment alone, are slowly beginning to shift their economic development strategies. More states are devoting greater attention to small business, according to the National Governors Assn., and more are emphasizing the quality of education and other state services instead of low taxes.

“States are finally becoming more sophisticated about economic development,” said Vaughn, “instead of focusing on just one dimension.”

At a recent conference in Menlo Park sponsored by the Council of State Planning Agencies and SRI International for about 150 state officials, the emphasis was on clearing away barriers to free-market competition to help create new wealth for society rather than tax concessions and incentive packages that simply lure jobs to one location over another.

“They may be happy to accept the tax incentives, but I don’t think most companies like to get into these public bidding wars,” said Duke’s Schmenner. “After all, there can only be one winner and a lot of losers. Business executives don’t like to (irritate) people any more than you or I do.”

Even in South Carolina, officials remain reluctant to express any criticism of the bidding war that preceded Fort Howard’s decision to locate in Georgia.

“This is a competitive business,” said Joseph Sapp, chairman of the state Development Board. He acknowledged he has become convinced that state tax burdens are not “as large a factor as some people might assume,” but he sees few alternatives to the continuing effort to attract new business to the state.

“We gave it our best shot,” he said. “I guess we’ll just keep struggling to do the best we can.”