Mamtek failure among states' tax incentives called into question
Friday, December 2, 2011
MOBERLY, Mo. (AP) — For residents in the rural Midwest, the governor’s announcement was golden: A global company with Chinese ownership planned to hire 612 people at a new factory making artificial sweetener.
But a little over a year later, the deal has turned sour. The half-built facility sits idle, as quiet as the cemetery across the street. The city plans to default on $39 million of bonds issued on behalf of Mamtek U.S. Inc. And many of the thousands of people who picked up applications for jobs there still are looking for work.
“They said they were going to bring in all these jobs, they had all this stuff lined up,” said Patrick Thieman, a 40-year-old laid off call-center employee who had applied for an office job at Mamtek. “They didn’t fulfill.”
The failure highlights an uncomfortable reality for candidates in a 2012 campaign season focused on the economy. President Barack Obama and his Republican challengers, along with many contenders for state offices, can promote their plans for creating jobs, but carrying them out is easier said than done. Government efforts in a number of states are coming up short this year. And in one state that has been especially ambitious, Ohio, decades worth of data show the deals often fail to produce the jobs promised.
Some states have started to rethink their tax giveaways to businesses, concerned about the costs and about diverting more tax revenue from education and social services. But many others are determined to keep trying. Such efforts are under way even in places where conservatives are criticizing government for trying to “pick winners” in a free market economy.
“As a whole, there tends to be more now than there have been ever before,” said Kenneth E. Poole, executive director of the Arlington, Va.-based Council for Community and Economic Research, which maintains a database on state tax incentive programs. “The fundamental philosophy is that if something isn’t working, you’re really trying to figure out is there a better way for the programs to operate?”
Over roughly the past decade, states have doubled the number of loans, grants, tax credits and other business incentives offered, to about 2,000, according to the council’s data. Continued high unemployment rates in many states testify to the overall results. But there is no nationwide accounting of successes or flops. Nor is there even any standard definition of “success” for the billions of dollars of incentives provided.
In what it touted as a first-in-the-nation analysis, Maine recently assessed how many of its incentives packages in 2008 actually created or saved jobs. The result was “confounding — to put it mildly,” said Catherine Renault, who at the time directed the Maine Office of Innovation and now is a consultant. Businesses that received state aid reported creating 3,602 more jobs and retaining an additional 13,090. Yet government labor data showed that those businesses’ employment actually fell 1.8 percent that year — little different than the statewide decline of 1.9 percent.
About two-thirds of the states now offer tax breaks for businesses that hire new employees, according to an Associated Press review of state programs. In Ohio alone, the state Tax Credit Authority approved job-creation tax credits for 2,059 projects from 1993 to 2009. Records show that some worked, but nearly half were terminated or canceled before completion.
“It’s very difficult for anyone to make the call of how any company is going to perform,” said Jerry Good, deputy chief of Ohio’s Division of Strategic Business Investment.
One of the winners was Kroger Co., which promised 557 jobs under two incentive plans and produced twice that many within four years. But Skybus Airlines Inc., based in Columbus, projected 869 new jobs as part of a $40 million project in 2006 but was out of business by 2008.
In Iowa, 15 companies defaulted on their hiring promises over the past year — equaling the failures for the previous three fiscal years combined, according to the Des Moines Register. Just 16 of the 191 active job-creation agreements in Wisconsin have produced the number of jobs promised, according to a Gannett Wisconsin Media analysis.
Yet Wisconsin doubled-down on its efforts this year. Gov. Scott Walker, who campaigned on a pledge to create 250,000 jobs during his four-year term, signed legislation to provide a tax deduction worth between $92 and $316 for every new job a business adds.
Missouri Gov. Jay Nixon has also pushed for new incentives despite three embarrassing failures in the past year. “We’ve got to be aggressive; we’ve got to look to the future,” he said.
Supporters insist the successes justify the gamble. A Nissan plant that was offered $363 million in tax incentives by Mississippi a decade ago now employs about 3,200 people.
But the cost of the failures can be high. The California energy company Solyndra recently filed for bankruptcy protection despite a $528 million federal loan. In Texas, biotech firm Lexicon Genetics got $35 million in 2005 to create 1,662 jobs by the end of 2011. But its work force has fallen below 300 and the company has renegotiated its deadline.
Many states hedge the risk by paying the tax incentives only after the employees are on the payroll — but those deals are less attractive to businesses than the upfront cash offered in Texas and other places.
Some economists doubt the incentives actually do much to influence hiring decisions. A company still has to consider the long-term costs of the workers’ wages and benefits, and whether there will be an increased demand for the products they make.
Judith Stallmann, a professor of applied economics at the University of Missouri’s Truman School of Public Affairs, compares state incentives to a sports fan who stands up at a crowded football game. The first to rise temporarily gets a better view. But soon other fans also rise and everyone’s view is about the same as if he or she had remained seated.
In competition for businesses, states “are basically, in some cases, paying firms to do something that they would have done anyway,” Stallman said.
She cities a 2004 research paper by University of Iowa professors Alan Peters and Peter Fisher, who taught urban and regional planning, which concluded “the best case is that incentives work about 10 percent of the time, and are simply a waste of money the other 90 percent.”
Officials in Moberly have been anxiously searching for a new company to take over the partially completed Mamtek artificial sweetener factory that was being built in a soybean field. The prospects are uncertain. On one fall day, the leader of the local economic development organization was one of only two people at the site. The other was a contractor disconnecting the electricity.
“There is no work going on here,” said Corey Mehaffy, executive director of the Moberly Area Economic Development Corp.