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BACON'S
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There's a right and
a wrong way to promote economic development in
Virginia. Let's address the wrong way first: tax incentives and giveaways. Specifically, let's take a look at the latest loophole used to help wealthy companies avoid paying millions of dollars in sales taxes. In Loudoun County, the Industrial Development Authority approved a deal in July to act as a buyer for Orbital Sciences Corp., a satellite and rocket maker expanding its corporate headquarters near Dulles airport. The IDA would use the firm's own money to purchase building materials. But the authority's tax-exempt status would allow Orbital Sciences to avoid an estimated $2 million in sales taxes. |
| Virginia's taxation department has ruled such deals legal, according to The Washington Post, and word has spread. MCI WorldCom Inc. wants the same deal for a corporate campus it plans to build in Loudoun for 20,000 workers. Baan Co., a Dutch software giant, has inquired about the tax break. And next door in Warren County, the IDA has used the loophole to benefit four companies. |
This is insane! We're talking tranquilizers, straitjackets and Nurse Ratchett here. Loudoun County, like many other fast-growing Virginia localities, is suffering from fiscal stress. Dependent on a stagnant real estate tax base, it can't keep up with the pace of development. Local residents and politicians are clamouring for growth controls. In this climate, the IDA is sheltering taxes.
Orbital Sciences' $2 million tax break comes out of the state's pocket, but the county suffers too: A big chunk of salex tax revenue is cycled back to localities in the form of school funding. Why should Orbital Science and MCI WorldCom avoid paying the full freight for the quality schools demanded by their employees settling in the county? Why should the tax burden be shifted to existing residents and businesses?
I'm assuming that IDA officials wanted to do eveything they could to ensure that Orbital Sciences expanded in the county. In the long run, the company will still be a significant contributor to the county's tax base. But isn't there a better way? Can't Virginia localities attract fine companies like Orbital Sciences without exempting them from their tax obligations paid by every other corporate citizen?
Yes, there is a right way to do ecnomic development. But it may require changes to ingrained practices. Instead of giving tax breaks, state and local government should focus on speeding the site location decision-making process, then eliminating regulatory hurdles that slow the construction of new facilities.
When a company decides it's time to expand, it wants two key things: to reduce the upfront project costs and to reduce the time it takes to complete the project. Economic developers apply their creativity to cutying costs. By knocking $2 million off the upfront costs of Orbital Sciences' ne wfacility, the Loudoun IDA undoubtedly made builiding in the county more attractive.
But time is money, too. Increasingly, it's vital to be the first to market with a new product or service. The first to market enjoys a burst of pricing power before the competitors rush in. The first to market gets a head start climbing the learning curve and driving down manufacturing costs. The first to market gets the first crack at establishing customer relationships and insights into where the market is heading.
Here's a novel proposition: Virginia economic developers should focus on helping businesses be the first to market.
To get a sense of what's possible, pay a visit to the Virginia Economic Development Partnership's new showroom in downtown Richmond. Sure, the partnership offers the usual video and slide presentations, but it also has one of the most sophicticated geographic information systems in the country. Mounted on the wall, a computer-generated map of the state displays every industrial park in Virginia. Visitors can sort through the database according to proximity to interstates, railroads and airports and other key criteria. As the partnership builds its database, it will be able to sort by work force characteristics as well. Once the sites have been narrowed to a manageable number, the display zooms to a map of an individual property, showing topography, lot boundaries and the location of roads and utilities. Instead of taking weeks to select the best two or three candidates, a prospect can do it in a couple of hours.
Following the partnership's lead, Virginia should work on cutting the time it takes to get facilities up and running. Rather than handing out tax breaks, localities should make the public investments necessary to ensure an ample supply of industrial and commercial sites. Grade the land. Install water and sewer lines. Erect a shell building.
Perhaps most important of all, eliminate regulatory uncertainties. Localities should have all zoning and local environmental issues settled ahead of time. The state's Department of Environmental Quality, already known for its streamlined permitting processes, should continue to compress its turnaround times.
Let other states compete on the basis of incentives and giveaways. Virginia can carve out its own niche. We do business on Internet time. We're fast, we're flexible, we're dependable. We're the first-to-market state.
James
A. Bacon
Publisher & Editor in Chief
© JANUARY 1999, VIRGINIA BUSINESS
MAGAZINE