Dell proves high cost of tax giveaways

By LOREN STEFFY Copyright 2009 Houston Chronicle

Remember Winston-Salem.

That should be the new rallying cry every time a politician starts talking about the need for tax breaks or other incentives to lure jobs.

This month, Round Rock-based Dell announced plans to close its factory in the North Carolina city by January, less than five years after it opened. In the process, it's eliminating about 900 jobs as it cuts costs by shifting manufacturing overseas.

In wooing the plant, North Carolina officials offered Dell more than $240 million in tax breaks over 15 years, touting the possibility that the plant could someday employ 8,000.

Instead, the soon-to-be-shuttered factory stands as a monument to the dangers of overzealous economic development, when local governments give away revenue in exchange for the long-term promises of jobs that can't be kept.

“This is just another example of the risk that a state and local government is taking when it gives a tax break,” said Bernard Weinstein, an economist at Southern Methodist University and a longtime critic of such tax abatement programs. “It makes no sense in economics, but I do understand the politics. Politicians want to be seen as delivering jobs to their communities.”

The process has become institutionalized, with legions of consultants that herald every corporate relocation, bidding one city against another.

“It really becomes a game of who can give away the most,” Weinstein said.

The game becomes an economic trap. Governments give away tax revenue to attract jobs, even as those jobs increase demand for services, which requires additional tax revenue.

“This game is actually getting more competitive every year, particularly in a period of economic downturn,” Weinstein said.

A study two years ago by the North Carolina Justice Center found that the state overpaid for the Dell factory, offering far more than the $37 million rival bid from Virginia.

More important, though, numerous studies have found that such offers have little effect on corporate relocations. Of all the things companies consider, taxes are far down on the list.

“In most instances a company does not make a locational decision based on the level of local taxes,” Weinstein said.

Even if they do, companies can't possibly promise to hire over such a long period. No one can accurately forecast the economy or a company's growth that far out.

Local governments have tried to enact “claw-back” provisions requiring that companies repay part of the giveaway if they fall short of the job goals. The Texas Enterprise Fund, the deal-closing pool distributed by the governor, uses such clauses, and some of its biggest grants may be subject to them, but it's unclear whether the state will actually collect.

In Dell's case, North Carolina has said it will ask the company to repay it $8.5 million, and Winston-Salem has said Dell will pay the city $15.6 million.

In announcing the closing, a Dell official said the company would honor its agreement with the city, county and state.

By my rough calculation, though, Dell's still ahead by more than $50 million, tax revenue that should have been collected from the factory during the past five years.

I asked Weinstein how to break this giveaway. The best way, he said, was for the federal government to declare it will hold back a dollar of federal aid for every dollar of tax revenue state or local governments abate for businesses.

But the feds have no incentive to do that. Local and state tax breaks actually increase the federal tax liability for businesses by lowering their deduction for local taxes. So blocking local tax abatements would reduce federal tax revenue.

The tax giveaway game has become insidious, but it's a game that neither taxpayers nor governments win.

Lest we forget that, we should remember Winston-Salem.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at http://blogs.chron.com/lorensteffy/.