States fighting other states over businesses has long been a blood sport. Though no one keeps figures on just how many deals are cut each year, state and local governments pay out billions to companies in cash grants, land and tax breaks to get new jobs or hold on to old ones. But the recent round of economic civil wars - from recent dogfights over airline maintenance facilities to the struggle over which GM plants will close in the company’s 74,000-person layoff plan - have state officials and taxpayers wondering whether the investment pays. Too many states have found that the new businesses aren’t creating a new golden age-and many bring big troubles. Texas doled out grants and incentives worth $225 million to woo Formosa Plastics in 1989; the company was fined $5 million last year for dangerous discharges.
Now many states are looking for a way to call a truce. New York City, New York State, New Jersey and Connecticut have signed an agreement to halt certain advertisements aimed at raiding their neighbors, and last week in Washington, Illinois Gov. Jim Edgar asked the National Governors’ Association to stand down in the “bidding wars.” “We all favor disarmament,” he said, “but nobody wants to do it unilaterally.”
It’s easy to see why states fight over businesses: as President George Bush would put it, “jobs, jobs, jobs.” When J.C. Penney moves from New York to Texas or W.R. Grace to Florida, it can be a bonanza for the new corporate home. For the loser, the pain can spread well beyond the factory floor. Consider Jack Hanna, who opened the doors on his Williams Fried Chicken franchise just across the street from General Motors’ Arlington plant two months before GM announced it would shutter either that site or another plant in Ypsilanti, Mich. Hanna figures the plant’s 3,000 workers account for about half of his business. “If they shut that sucker up,” he says, “it’ll be a disaster for me.” And not just for the likes of Hanna. Politicians who resist “smokestack chasing” take a big risk, says Dan Pilcher, who oversees the economic-development program for the National Conference of State Legislatures in Denver: “To say we’re not going to play this game really opens you up to political sniping from your opponents.”
Executives, of course, understand this. Some companies “whipsaw” one state against another to boost inducements, or threaten to pull up stakes unless the state provides aid. When Chase Manhattan was considering moving its backoffice operation and about 5,000 workers to Jersey City in 1988, the city and state of New York stepped in with a commitment of $235 million in tax breaks and subsidies. New York legislators are also relaxing consumer-protection provisions–eliminating the grace period on credit-card debt-in an effort to keep Chemical Bank from moving its credit-card operations out of state. Some companies truly need the help to survive; other times it’s just “polite extortion,” says Ray Horton, president of the New York watchdog-group Citizens Budget Commission. ,
Even smaller companies can score big by playing state against state. US Software had been looking to move from its Omaha headquarters when last summer it contacted representatives of four states, including Nebraska. All four put together packages. Now the $5 million company is readying to move all the way to Iowa-a grand total of 12 miles. In exchange for the company’s promise to increase staffing from 60 to 100 in two years, Iowa gave it $575,000 in cash and “forgivable” loans. What clinched the deal? Says US Software finance director John Morey, “Iowa put money in our hands faster.”
For the states, the thrill of victory can sometimes end up looking more like the agony of defeat. With local governments feeling the recession’s squeeze, many deals don’t look so rosy. Minnesota’s looming $343 million deficit won’t help with its share of the $838 million in loans, loan guarantees and outright grants promised Northwest Airlines for two new maintenance facilities. Northwest counsel Ben Hirst says “the partnership is in everybody’s best interest.” Not so, said 51 percent of Minnesotans polled just weeks before the deal narrowly won legislative approval late last year. University of Minnesota economics professor C. Ford Runge figures that each of the 1,500 or more permanent jobs created by the project will cost the state about $500,000. (State officials prefer to count only the deal’s cash part, which puts the cost per job closer to $50,000.)
The fights over closing GM plants could bring a new round of civil wars. GM has announced it will close some 21 plants by 1995. The company insists it wants no deals. Says GM spokesperson John Mueller: “We’re not interested in whipsawing anybody … The decision is going to be based on whether it’s good business, not on the basis of what somebody is offering.” That may be true, but it hasn’t stopped governors from trying to stoke the incentive machinery. Zell Miller of Georgia has a call in to GM chairman Robert Stempel to try to save his Doraville plant, and Texas Gov. Ann Richards also has a master plan to keep GM’s Arlington plant. Michigan Gov. John Engler first proclaimed he would not be caught in a bidding war to save his Ypsilanti factory–but angry protests in recent weeks prompted Engler to promise that he would match Texas “concession for concession.” The Texas governor’s proposal, which she presented to Stempel with other Texas officials last week, does represent an effort to avoid pitting state against state. The innovative plan would give GM state and local grants and tax abatements worth a modest $30 million to convert the plant to an entirely new purpose: making cars that run on natural gas. Texas would also provide a $50 million loan fund to help local officials buy such cars. “It is a win-win for GM and for the state,” says Richards, and it would eliminate “us or them” conflicts against other plants.
The bidding wars might be on the decline. Don Haider of the Kellogg School of Management at Northwestern University says, “This thing has been ratcheted down.” The advertising agreement announced by New York City, New York State, New Jersey and Connecticut is one small step in this direction. So far, the truce goes no farther than a voluntary ban on ads in which one state snipes at another.
If states aren’t going to waste money on raiding their neighbors, what are their alternatives? Many experts suggest that they spread it around. Arthur Rolnick of the Federal Reserve Bank of Minneapolis urges states to “take that money and stick it in your roads, your sewer systems, your schools. That’s the way you create a good business environment.” David Alan Aschauer, an economics professor at Bates College, estimates that spending $100 on water and sewer systems will prompt $250 in private-sector production, which is a more efficient use of government funds than is projected for most giveaway deals. Some state officials are listening-at least for now. They may not be so steady in their determination once the economy turns back up again. Just as there are economic cycles, there are cycles of folly as well. Let’s Make a Deal
GM announced it will close 21 plants by 1995. A potential showdown is brewing between Arlington, Texas, and Ypsilanti, Mich. - GM says it will close a plant in one city. No deal yet
Indianapolis maintenance base could bring 6,300 jobs. Along with cash, United gets tax breaks and 300 acres of free land. $300 million cash
To get the airlines new maintenance facilities (and hold on to its headquarters), Minnesota gave a massive package of loans and grants. $838 million
The prospect of as many as 12,000 jobs for a plant to build the new MD-12 commercial jet has nine cities offering hundreds of millions in incentives. No deal yet
Texas offered big money to the Taiwan manufacturer; the new plant has already run afoul of the Environmental Protection Agency for excessive levels of toxic emissions. $225 million
