A NO-WIN WAR BETWEEN THE STATES

By John Greenwald

SELF-IMPOSED RAPE." THAT IS THE twisted phrase North Carolina attorney William Maready uses to describe the fevered frequency with which U.S. cities, counties and states are flinging open their coffers to attract big businesses and the jobs they bring. Maready, a trial lawyer whose challenge to the practice was turned back by the North Carolina supreme court last month, is hardly alone in attacking the use of taxpayer funds in the relocation sweepstakes. "We're spending billions of dollars to fund the moving van," says state senator Charles Horn of Ohio, which trucked more than $2.4 billion last year to lure or keep companies in industries ranging from banking to steel. "In the process, we're draining our budgets in education, research and technology--the very things our future depends on."

With many state budgets strained and many corporations in a downsizing mode, conflicts over job-development subsidies are white-hot. Critics denounce incentives as welfare for private enterprise that isn't paying off. "This is an issue whose time has come because too many giveaways are gnawing away at the tax base of our communities," says Jim Benn, executive director of the Federation for Industrial Retention and Renewal, a grass-roots research group in Chicago. "Teachers and firemen are being laid off, and homeowners and small businesses are getting stuck with even more of the burden."

While some incentives seem to pull in enough new jobs and taxes to recoup the lost revenues, other giveaways fail to do so. The pain is most acute when corporations pocket the money and then cut their work force or defect to a new location. New York City knows the feeling only too well. In a case that still rankles, it handed AT&T $20 million in tax relief in the 1980s, only to see the phone company later disconnect and move most of its corporate staff to New Jersey. Still, the city is frenetically defending its turf with handouts, especially to financial companies such as CS First Boston.

Even the winners of this war between the states may have lingering doubts about the price they have paid. Alabama pledged property-tax relief and other giveaways worth some $250 million--or more than $160,000 per job--to persuade Mercedes-Benz to locate in the town of Vance (pop. 400) a $520 million plant that will begin building sport-utility vehicles next year. A new crop of state leaders declare that their predecessors could have driven a harder bargain.

Experts say that how well incentives pay off depends on how shrewdly local politicians weigh the costs and benefits. "Incentives shouldn't be a one-size-fits-all deal," says Ken Kuhl, manager of Arthur Andersen's business-relocation service in Atlanta. "What's outrageous for one community may be perfectly reasonable for another." The trouble comes when politicians get caught up in battles with rival cities and states and frantically hurl money at corporations.

State development agencies decry these bidding wars, but none is going to be the first to walk away. "If this is what we have to do, by God, we're going to show that we can be competitive," says Charles Gargano, chairman of New York's Empire State Development Corporation, which dispenses tax breaks to recruit and retain big businesses. The state agency recently kicked in $26 million to a $99 million war chest that New York City hopes will keep both the Coffee, Sugar & Cocoa Exchange and the New York Cotton Exchange from moving to New Jersey with their 5,000 jobs.

Corporations, skilled at negotiating the price of everything from toilet paper to aircraft, can play states off against one another, as the two commodity exchanges did. Martha Hunt, president of the Connecticut Economic Resource Center, contends that her state has no choice but to play the game. Says she: "Our neighbors would pick our industrial base dry if we sat on our hands and did nothing."

Nor are such sentiments confined to the hard-pressed Northeast. "The people of North Carolina want us to get jobs," declares Democratic Governor Jim Hunt. "They want us to compete." At Hunt's urging, the Tar Heel State's Development Board has proposed a package of tax incentives that include cutting the corporate income tax from 7.75% to less than 7%.

The dirty little secret in the incentives game is that the real criteria for site selection are skill and cost of labor, proximity to customers and price of real estate. Tax breaks are rarely the dealmaker. Barry Rubin, a professor of public and environmental affairs at Indiana University, notes that of a firm's variable costs--charges that come on top of fixed expenses like lease payments--state and local taxes make up at most 3%. Giveaways are likely to have little impact unless other factors are virtually equal.

But that hardly stopped the city of Los Angeles from showering $85 million in tax credits and other incentives on DreamWorks SKG, the new Hollywood studio formed by moguls Steven Spielberg, Jeffrey Katzenberg and David Geffen. Also in on the deal were four high-tech companies, including IBM and Silicon Graphics, that are teaming up with DreamWorks to build an entertainment factory on 260 acres of wetlands where Howard Hughes once assembled his lumbering wooden "Spruce Goose" plane. DreamWorks wasn't leaving the area--it needs the specialized talent that lives there--yet Los Angeles mayor Richard Riordan didn't want the project to go to neighboring Burbank or Universal City. Complains councilman Nate Holden, a Democrat who represents part of inner-city Los Angeles and was the lone dissenter when the council voted on the project: "We're being asked to help the rich. This is a bunch of fat cats getting together and giving to one another."

Other states have treated California the way the Spanish did Mexico: they have plundered it, taking more than 800 large employers between 1989 and '92. So Republican Governor Pete Wilson pushed through a package of incentives, including across-the-board tax credits aimed at high-tech manufacturers, and created so-called Red Teams of public and private officials to persuade wavering companies not to move. One payoff came last year when a Long Beach--led team assembled an $80 million package that kept McDonnell Douglas from shifting part of the production of its new MD-11 jetliner to other states.

But California can't arbitrarily lower its cost of labor or real estate. Intel, the world's largest maker of microchips, chose Albuquerque, New Mexico, as the site for a new $1.3 billion semiconductor plant, stiffing its own headquarters location in pricey Silicon Valley. New Mexico sweetened the deal further by giving Intel a 30-year exemption from property taxes for the plant, which Intel says will create 3,000 jobs. The exemption formed the bulk of a 30-year, $566 million incentive package from New Mexico that works out to nearly $190,000 per job. (New Mexico's unemployment rate stands at 6.3%, compared with 7.6% for California.) Oregon used property-tax abatements to help land two more Intel facilities--a $735 million plant expansion in Aloha and a new $2.2 billion microchip factory in Hillsboro.

In the midst of this scramble, some governments are setting up controls to keep the fight from getting completely out of hand. Connecticut, for example, has created "clawback" agreements that require corporations that fail to meet job targets to repay tax subsidies. Minnesota scaled back $620 million in aid to Northwest Airlines after it delivered fewer than 1,000 of 1,500 promised jobs. Washington has also grown concerned. Senator Jeff Bingaman, a New Mexico Democrat, wants the Commerce Department to decide whether companies that receive tax benefits should be required to file cost-benefit analyses and stand behind their job pledges.

Such proposals might barely slow the incentive race. "You can ask, 'Wouldn't it be better to let the free market run its course and not have governments compete against each other this way?'" says North Carolina attorney general Michael Easley. "But that's just not an option when you have 49 other states plus foreign countries using incentives." In other words, the Governor will be keeping his checkbook handy.

--Reported by Jordan Bonfante/Sacramento, James L. Graff/ Chicago, Thomas McCarroll/New York and Lisa H. Towle/Raleigh

With reporting by JORDAN BONFANTE/SACRAMENTO, JAMES L. GRAFF/CHICAGO, THOMAS MCCARROLL/NEW YORK AND LISA H. TOWLE/RALEIGH