CORPORATE RELOCATION Bribes don't attract businesses

Our View
June 23, 2008 - 10:07PM

Here's one for the popular TV show "Myth Busters," which typically blows holes in conventional wisdom and urban legends. The myth: companies relocate to the communities that pay them the most, in the form of economic development tax incentives and subsidies.

Citizens of Colorado Springs hear the myth each time some company, or even a government agency, considers moving somewhere else. We hear it when a company actually moves, or when a corporation that was considering the Springs decides on another place.

Most recently we heard it when Hewlett-Packard Co. announced last week that it would open customer service and technical support centers in New Mexico and Arkansas. The company employs about 1,800 in Colorado Springs and civic leaders were hoping the new operations would open here. It would have been a coup, because more people would have moved to Colorado Springs to buy houses and cars, pay taxes, and generally help bolster the economy.

Conway, Ark., agreed to give Hewlett-Packard a $28 million, 150,000-square-foot building for the company to lease, along with $7.2 million in cash incentives. The state offered an additional $10 million, along with tax credits as performance incentives. New Mexico offered more than $30 million in job-training tax incentives, and the governor wants the legislature to kick in $12 million in capital improvement financing.

Colorado Springs Mayor Lionel Rivera said his city was outgunned in the incentives battle. Mike Kazmierski, president of the Colorado Springs Economic Development Corp, said Colorado doesn't compete well when it comes to incentives.

That's good news, because incentives packages given to for-profit companies are a waste. Just ask Robert Ady. He's the former longtime executive of Fantus Company who heads Ady International. In Greg LeRoy's book "The Great American Jobs Scam," Ady is identified as having assisted with more corporate site relocations than any other living person. Ady said taxes, and therefore tax incentives, are the least important cost factor weighed by any company when making relocation decisions. The book cites IRS statistics that show state and local taxes comprise only 1.2 percent of the average company's overhead, dwarfed by costs of labor, materials, marketing, overhead and transportation.

The jobs scam book quotes Bruce Maus, a veteran site location consultant in Minneapolis, who cautions corporate CEOs to give economic development subsidies minimal consideration. He explains that on a 10-year basis the incentives wash out, as they're dwarfed by basic business expenses such as labor and transportation, which are the more important considerations of relocation.

The book details how corporate executives sometimes move the headquarters to a location where the CEO and other top executives live or would like to live. It explains that when a group of New York investors bought Kinko's, they moved the company from California to Dallas because the new CEO lived there. When HP chose to locate operations in the Springs in 1961, it was partly because David Packard was from nearby Pueblo.

"Companies base their decisions on business basics - affordable supply of key inputs and proximity to suppliers and customers," the book states. "Key inputs vary and so do linkages ... food processing companies locate facilities close to the farms and ranches that supply them and close to interstate highways and railheads to get product to market. Emerging high-technology companies need engineering schools and venture capital; Silicon Valley had both. Financial wheeler-dealers thrive on gossip and face-to-face meetings, so New York's Wall Street zoomed in the 1980s and 1990s. ... Sports franchises want the fattest TV contracts, so they go to the biggest metro area that is not already taken."

Though an HP spokesman said incentives were a "factor" in the decisions involving Arkansas and New Mexico, they may have been more of an afterthought. LeRoy found that relocation consultants typically knock on doors of community leaders seeking subsidies only after the relocation decision has been made. Community leaders, excited at the prospect of prosperity and jobs, don't see the real factors that went into the decision. All they see is a salesperson seeking money and promising a return.

"They don't see that the only reason the consultant is spending any time with them is because their community is an inherently profitable location for the company - it has the business basics. Any subsidies are icing on the cake, but the cake is already baked," LeRoy wrote.

Of course that's true. Any business that makes major decisions mostly on the basis of temporary subsidies isn't much of a business at all. If a business moves to Pocatello for a $10 million check, it will gladly move to Poughkeepsie a few years later for a $15 million check. Corporate prostitution isn't the key to long term success, for businesses or communities.

Paul O'Neill, former CEO of Alcoa and former secretary of the Treasury, said it best: "If you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements, they do it because they can see that they are going to be able to earn the cost of capital out of their own intelligence and organization of resources."

Colorado Springs has what lots of businesses want: a great geographic location with easy access to two commercial airports, beautiful scenery, a great climate, cosmopolitan amenities and small-town charm, easy access to a major American city, major rail and highway access, good colleges and schools, and an educated work force. Businesses that can thrive in Colorado Springs will feel privileged to move here. They don't need kickbacks to make themselves at home in this metropolis at the base of majesty.