As business competition sharpens, government incentives raise fresh questions

For decades, municipalities in Pennsylvania have relied on state tax incentives to attract businesses.

Proponents of the incentives, which include tax credits, abatements and grants, say they are a way to bring jobs and additional tax revenue to an area that may not otherwise get them.

The subsidies have built stadiums, arenas, factories and countless other facilities around the commonwealth.

But two recent events have emboldened skeptics to question the need for such incentives, particularly the billions of dollars that go to larger companies promising thousands of jobs.

“You are talking about billionaires. Why do they need taxpayer dollars?” said Michael Leeds, an economics professor of the Fox School of Business and Management at Temple University in Philadelphia.

The first event involves e-commerce giant Amazon, which pulled the plug last month on its plans to build one of two second headquarters, dubbed HQ2, in Long Island City, New York. It is planning to build its other second headquarters in Northern Virginia

The e-commerce giant cited a lack of support from stakeholders and other groups in New York. Taxpayers would have handed over billions to Amazon in the form of grants and tax breaks that the corporation would use to develop a site near Queens.

Out of the running

Some businesses, mostly smaller ones, stay out of the game entirely, largely because the process of applying for incentives and credits is not easy for them.

“Some of these programs are really difficult for some of the smaller enterprises to take advantage of,” said Jeff Berdahl, a shareholder with RLB Certified Public Accountants in Allentown, adding: “A lot of times, small businesses don’t want to deal with it. They don’t have the capacity or time to do it.”

He thinks the state should simplify the process for smaller businesses. Help is available, however, said Brent Vernon, executive director of the Governor’s Action Team at the Pennsylvania Department of Community and Economic Development in Harrisburg.

Small businesses without staff to handle tax-credit applications can turn to the state’s One Stop Shop website established in 2018 at www.businesspa.gov, Vernon said.

The second comes from Wisconsin, where in June 2017 Gov. Scott Walker joined Foxconn and federal officials, including President Donald Trump, to announce the start of construction on a 20-million-square-foot facility that would create 3,000 jobs and eventually employ up to 13,000 workers.

Foxconn, a Taiwan-based company that manufactures flat screens for TVs and other devices, said it would invest $10 billion to build the facility in Wisconsin. It had also looked at the Lehigh Valley for a smaller support facility before shelving those plans.

According to the Associated Press, Walker signed an unprecedented $3 billion state incentive package for the plant. However, 18 months later, the plan for the Wisconsin plant has been scaled back. It’s still expected to open sometime in 2020 but it will employ fewer people, and shift away from manufacturing to research and development.

The Amazon case, in particular, showed some evidence of a backlash against tax incentives for private-sector companies. But it is not yet significant, said Leeds, the Temple professor.

“I think since the Great Recession, there’s been a little pushback,” Leeds said. “But then you see cities shelling out hundreds of millions to build stadiums. Even today, you see a lot of this going on. You are seeing some pushback, but I don’t think it’s become a genuine movement.”

Competition gone wild?

Subsidies are not new. But Amazon’s search for a second headquarters laid bare how competitive they have become.

Amazon essentially announced it was accepting “bids” from cities and states that wanted to be picked to house one of its two second headquarters. The entrants included the Lehigh Valley Economic Development Corp.

Some governments may have gone too far, Leeds said.

“The clamoring of cities for Amazon was indicative to me that cities have lost their moorings,” Leeds said. “Sometimes providing a little bit of incentive will provide great benefit and you have to be careful how you do this. I do think, far too often, cities are not careful.”

He described the competition as an auction. And the winner, he said, may end up bidding more than the item for sale is worth.

He said the same scenario can play out with short-term events often viewed as an economic boost for hotels, restaurants and other hospitality venues.

Leeds said he is starting to study how cities often end up paying more than they gain to host high-profile events such as the Olympics, the Super Bowl or soccer’s World Cup.

“It’s like a sugar high,” Leeds said. “There’s some short-term profits but then the bill comes.”

To avoid the crash, city leaders and officials should focus on completing a careful cost-benefit analysis, he said.

Subsidies are typically not free. Companies often have to pledge to create or retain jobs over a period of time, and governments have been known to take back money they have given out.

When companies want tax incentives to locate in a particular region of Pennsylvania, state officials will look at a variety of factors.

They include the scope of the project, where the company is going, the quality of jobs and the impact of the investment in a community, said Brent Vernon, executive director of the Governor’s Action Team at the Pennsylvania Department of Community and Economic Development in Harrisburg.

“Companies are certainly obligated by contract to fulfill that commitment and they are monitored,” Vernon said.

As for the bigger picture, Vernon acknowledged there is more competition between states in landing companies.

“I think it’s not only become more competitive but it’s been more accelerated,” Vernon said. “It’s most sensitive when there’s a construction timeline.”

Other factors matter

In most cases, however, the incentives are not the main draw for a business, said Matthew Tuerk, vice president of economic development and marketing for the Lehigh Valley Economic Development Corp.

“There’s a lot of reasons companies want to be in a place like the Lehigh Valley,” Tuerk said. “Incentives are sometimes things that clear the final hurdle.”

The region’s attributes include its colleges and universities, access to major highways, the available workforce and quality of life.

Indeed, when a company wants a tax incentive to locate somewhere, it’s often part of a much larger decision-making process, said Pamela Shupp, executive vice president and COO of the Greater Reading Chamber Alliance.

“With incentives aside, the project still has to make economic sense for the company,” Shupp said. “Certainly in many instances, it is not the thing that puts their decision over the top.”

And there are other ways to ensure projects happen, she said.

“We feel the best incentive we can provide is a predictable permitting process,” Shupp said.

Shupp said Berks County officials work to expedite permitting by hosting meetings with company executives and municipal, zoning, county and state officials. Shupp said.

Greater Reading Chamber Alliance facilitates the meetings on behalf of the Berks County Commissioners. Of course, the host municipality for the project has to want the project for the expedited permitting process to proceed, she added.

And the risk remains that highly touted projects fall through, as was the case for Amazon’s HQ2 in New York.

The Empire State may have lost more than one company.

Businesses that might have wanted to locate next to Amazon may see New York as less desirable, according to Tuerk.

“That’s the big knock on New York losing out: The Amazon ecosystem has gone away,” Tuerk said.

Brian Pedersen
Reporter Brian Pedersen covers construction, development, warehousing and real estate and keeps you up to date on the changing landscape of our community. He can be reached at brianp@lvb.com or 610-807-9619, ext. 4108.

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