AU-concessions

AU-concessions

10/27/95

By Mitch Emmons (emmonmb@mail.auburn.edu)

AU RESEARCHERS QUESTION STATE'S INDUSTRY-LURING CONCESSIONS


PHOTO CAPTION:
Robert Ekelund, left, and Richard Ault

AUBURN -- The benefits from using tax incentives to lure new business and industry -- such as Mercedes-Benz -- to Alabama may not be the boon first projected, according to two Auburn University economists.

Professor Robert Ekelund Jr. and Associate Professor Richard Ault of AU's Department of Economics say the state's forecasting methods provide only a partial view of the long-term picture. Both say Alabama needs to be more stringent in determining how much and when industry-luring concessions are given.

"Industrial recruitment is a competitive business, and nearly every state offers some kind of a package," Ekelund says. "But such tax incentives should be offered only where the net economic effect on existing Alabama taxpayers fully reflects consideration of all relevant costs and do not exceed the net increase in state revenues that the new industry will generate."

The two became interested in Alabama's industrial recruitment tax incentive program after it was used to bring a Mercedes-Benz plant to Tuscaloosa County. announced. In outbidding other states, Alabama offered a tax incentive and subsidy package worth between $250 million and $300 million.

"The initial publicity was in terms of . . . state tax concessions and the number of jobs the state expected in exchange," Ault said. "It looked like Alabama got a less- good deal with Mercedes than other states obtained in other industry recruitment deals.

"Not that getting (Mercedes) was necessarily a bad deal, but these jobs cost Alabama a lot, where other states were able to recruit new industry for considerably less."

The researchers say the cost-accounting method used by the state to assess the economic benefits of providing tax incentives ignores some critical elements. Among the list are:

** If used to attract industry that competes with existing firms, tax incentives produce a negative impact on the economy because both businesses compete for the same market share;

** Subsidization of new industry that ignores existing industry can reduce the number of new jobs created by expansion -- a feature that the researchers say accounted for 90 percent of Alabama's business growth between 1990-93;

** New industry creates increased costs for providing state and local government services -- directly affecting per capita spending on education, police and fire protection and other services and infrastructure.

The use of tax incentives should be carefully weighed because Alabama has other natural attractions in its favor, the two note in their study. Ekelund and Ault say Alabama is the 11th most attractive state in the nation for business location because of:

** Having the nation's lowest property taxes;

** Having one of the lowest personal income, capital gains and corporate taxes;

** Offering a good labor pool;

** Having a positive regulatory environment and a comparatively low crime rate.

But the AU professors say industry cannot be blamed for taking advantage of recruitment incentives.

"If I owned a company and decided that Alabama is where I need to be, I'm crazy to just go there," Ault said. "I'm going to play hard to get and get as many concessions as I can."

But they note that granting unnecessary tax incentives erodes much needed state revenues and prevents government decision-makers from considering across- the-board tax cuts that could give Alabama a broader appeal.

"We believe that Alabama taxpayers are entitled to know the full costs of tax incentives used to induce entry of business and industry into the state," they wrote.

"If (current) policy remains in effect, within a relatively short period of time, a big chunk of the businesses in this state will be exempt from many state taxes." Ault said. "The only solution then is to increase taxes paid by other businesses, industry and individuals or cut back on services."

Some tax incentives are probably beneficial, Ekelund said, adding,"We're asking for a more stringent standard for evaluating them."

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oct95:AU-concessions

CONTACT: Ault, 334/844-2919; and Ekelund, 334/844-2929.