A LOOK AT . . . Breaks for Business: Paying Ransom Is No Way to Build a State's Economy

By Robert D. Atkinson

Sunday, March 14, 1999; Page B03

In the old, industrial economy where low costs were the key to economic development success, the deal that Maryland Gov. Parris N. Glendening struck last week to keep Marriott International Inc. from moving to Northern Virginia would have been seen as a coup.

Under the terms of the deal announced Thursday--the largest such deal in state history--Maryland is set to provide Marriott with between $49.2 million and $73.8 million in tax breaks, forgivable loans and road improvements. (The precise figure depends upon whether Marriott keeps its headquarters in Bethesda or moves to Rockville.) The announcement was the culmination of months of negotiation and battles between Maryland and Virginia over which state would get Marriott, which has been based in Montgomery County for 44 years. Virginia was willing to offer a maximum of $6 million.

This approach to economic development is emblematic of old economy thinking. It ignores the fact that a New Economy has emerged based on knowledge and technological innovation--and that this region has the opportunity to be a global leader, but only if we invest in the fundamental building blocks: good public education, an R&D infrastructure, job-specific skills training, quality of life, transportation infrastructure, and efficient and high-quality governments. Instead of competing in the zero-sum game of corporate giveaways, regional governments should be cooperating to build the foundations that will make this entire region an entrepreneurial and technology hotbed.

But it will be hard to resist the temptation to continue striking deals like this, especially now that other Maryland companies have seen how easy it is to get a government handout. Moreover, these roots run deep. The Marriott deal is just the latest chapter in a long-running story of competition among jurisdictions to land companies. It has roots in the 1930s, when Mississippi began enticing Northern factories with incentives such as right-to-work laws, cheap labor, free land and large tax breaks.

By the 1950s, most Southern states had joined in. By the '60s, Northern states were battling back, offering similar incentives.

But that was only the opening round. The plant closures and downsizings of the 1980s and '90s have led to an all-out subsidy war. Now almost every state, county and city in the nation offers financial inducements to companies to either stay in their jurisdiction or relocate there.

What started as a strategy for economically depressed regions to develop has turned into a national epidemic of job blackmail. Of the subsidies that can be measured, states and localities provide more than $15 billion annually to individual companies, according to Kenneth Thomas, a political scientist at the University of Missouri at St. Louis.

These incentives range from a small firm getting several hundred thousand dollars in property tax discounts, to mega-deals such as the $600 million New York City recently gave the New York Stock Exchange to stay in Manhattan's financial district.

Sometimes, governments are so assertive they offer money upfront to try to lure companies to move. When I was director of the Rhode Island Economic Policy Council, a public-private partnership aimed at revitalizing the state's economy, I received a letter from the CEO of a large insurance firm there. His company was being deluged with incentive offers, he said. With the letter was a check for $7 million from the city of Amarillo, Tex. To cash it, all the company had to do was move to Amarillo.

Why have incentives gotten so out of hand? Why did Maryland take the bait and provide such a huge corporate incentive deal? First, no elected official wants to be known as the one "who lost China," or in this case, the one who lost Marriott and its 3,500 jobs. Glendening would have been unfairly blamed for losing Marriott. But he gets scant credit for Maryland's vibrant economy: The state ranks fifth in the nation in the rate of new business start-ups.

But there's another reason the state made this deal. The political benefits are all up front: In announcing the deal, Glendening touted it as "proof positive that we have been, and continue to be, on the right track in moving Maryland's economy forward." In contrast, most of the financial costs are down the road in the form of future forgone tax revenues.

It is not clear, however, that the state needed to do anything to keep Marriott. In fact, there are plenty of reasons why the company would stay in Montgomery County.

For one thing, moving its headquarters would have been very disruptive for the company as well as for its 1,900 employees who live in the county. In any such relocation, businesses expect to lose employees who view selling the house, pulling the kids out of school and upsetting their spouse's commute--or facing a longer commute--as a lose-lose proposition. And with a Washington area unemployment rate of less than 3 percent--lower for white-collar workers--Marriott likely would have found it difficult to replace a large number of lost employees.

Another reason for it to stay was the cost of doing business.

Marriott's most compelling argument for leaving, it said, was that moving to Virginia would have meant lower taxes. The company never disclosed its numbers, so it's hard to evaluate its claim. But existing data suggest otherwise.

Overall, Maryland and Montgomery County business taxes are competitive with other jurisdictions. Maryland ranked 33rd nationally in combined individual and business taxes paid per $1,000 in personal income in 1995, the latest year for which figures are available. That's just 8 percent higher than Virginia, according the U.S. Census Bureau.

Moreover, with regard specifically to business taxes, Maryland is extremely competitive. A study by Federal Reserve economist Robert Tannenwald comparing business taxes in 22 states found that Maryland had the second-lowest business taxes; Virginia was not included.

And Montgomery County's business costs appear to be even lower than Fairfax County's. Class A office space is 30 percent more expensive in suburban Virginia than in suburban Maryland. And according to a 1995 study by the accounting firm Coopers & Lybrand for the Greater Washington Initiative, a typical corporate headquarters facility in Montgomery County would pay 11 percent less in state and local business taxes than in Fairfax; 8 percent less than in the region as a whole; and 45 percent less than in an average of 12 other major jurisdictions around the country.

Even if Marriott intended to move, it is not clear that the subsidies are a wise investment for Maryland. While the state and county would have lost corporate tax revenues had Marriott relocated, they would have lost little if any of the personal income, property and sales taxes paid by the majority of Marriott employees who--with the company moving such a short distance--probably would have continued to live in the county.

But that's all water under the bridge. The question now is, what should Maryland do the next time it confronts such an ultimatum?

First, Maryland should work with other states to encourage the federal government to pass legislation that limits the use of incentives. Rep. David Minge (D-Minn.) recently introduced legislation that would tax company-specific subsidies. By reducing the value of incentives, such legislation would help all states resist the urge to open up their checkbooks any time a company comes with hat in hand.

Second, Maryland needs to develop the equivalent of the military's "rules of engagement"--in advance. How high is it willing to bid per job? Will it give incentives only for expansions and new construction? Will it pay only for tangible items that remain if the company decides to leave, such as transportation improvements, buildings, a trained work force? Will it institute "clawbacks" so that it gets its money back if the company does not deliver on its commitments? Will it limit incentives to companies located in distressed areas of the state?

Third, Maryland needs to focus on the building blocks of the New Economy. Glendening has succeeded in making state government more efficient, eliminating 2,550 positions, and more can be done. He should also continue his efforts to reform regulations, streamline the permit process and invest in educational opportunities for all Marylanders.

Fourth, and perhaps most important, the state needs to do more to build on its strengths in technology innovation. Maryland ranks first in the nation in per-capita university research and development and second in federal R&D funding. But Maryland and Virginia are among the few high-tech states without a tax credit for research and development expenditures. Moreover, Maryland has done less to invest in technology-led growth than has Virginia, which created its Center for Innovative Technology (CIT) under the leadership of former governor Charles S. Robb in the mid-1980s. Maryland needs a CIT equivalent to help capitalize on its biotech and information technology clusters.

Fifth, if the state does not solve its growing transportation gridlock, all the incentives in the world won't make any difference. The construction of the intercounty connector between I-270 and I-95 might be the best investment the state could make to ensure the sustainability of Montgomery and Prince George's counties' economies.

Finally, the region's political leaders need to call a cease-fire in the incentive wars and work cooperatively.

It's time for the whole region to invest in education and training initiatives, universities, transportation infrastructure, and public policies supporting technological innovation. Successful economic development in the New Economy is not about subsidies to an individual company. Rather, it is about the kinds of investments that will drive our economy, improve our quality of life and raise incomes for all in the next century.

Robert Atkinson, a Montgomery County resident, is the former executive director of the Rhode Island Economic Policy Council.

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