State incentives pay a return on investment

Our View - June 2010

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Print this page Bernie Niemeier

The recessionary fog is lifting, but what a hangover!  Nationally, we are in a difficult environment for those inclined to be pro-business. Oil spills, Wall Street investigations and new financial regulations all could add up to a long recovery from the recession.

It is difficult to make economic progress in a world where special interest groups advocate alternative energy but oppose the placement of wind turbines or energy transmission lines.  From the left and the right, whether it’s health care, taxation, regulation, energy, the environment or myriad other issues, there seems to be plenty of “not in my backyard” sentiment to be found.

In Virginia, one thing we all should agree upon is that what is good for the commonwealth is good for everyone.  This, of course, depends on the definition of “good.”  At Virginia Business, we think that economic development is good.

Judging from the headlines, it is apparent that not everyone may agree.  On April 28, the lead story in the Richmond Times-Dispatch carried the headline, “Va. investing millions on Northrop Grumman.” The story about Northrop Grumman’s decision to move its headquarters to Northern Virginia compared the state’s $12 million to $14 million incentive package to other recent deals that involved less money.

The previous day, The Washington Post, citing anonymous Fairfax County officials, said that among other things Northrop Grumman sought discounted hangar space for its corporate jet and money for country club memberships. In a Post article appearing the following morning, Northrop Grumman denied making these requests although it was revealed that, among other incentives, Fairfax’s final offer included discounted rates for hangar space at Washington Dulles International Airport.

Let’s not overthink this, but it ought to be no surprise that a company which manufactures jets might actually own and use one or that executive perks for a global company with $33.8 billion in revenue might include country club memberships.

It is a mistake to think of economic development incentives as some sort of ransom paid by states to get companies to expand or relocate.  What the headlines have failed to tell us is that these incentives are actually calculated business investments that produce a return.

I’ve talked with Gov. Bob McDonnell and officials at the Virginia Economic Development Partnership (VEDP). They say that the incentives offered Northrop Grumman compare very equitably with other deals in terms of the return on investment arising from job creation, income and sales taxes, and other yardsticks.

In fact, VEDP has studied 187 projects that have been funded by state incentives during the past seven years and found that the actual returns are on the order of $7 for every $1 invested.  When the seven-year period is expanded to a 10-year projection, the ratio rises to 10:1.

If the size of the incentive packages is really the issue, then let’s take a look at a few numbers from other states:

• In 2004, Texas committed more than $300 million to a 1,000-job Texas Instruments semiconductor chip manufacturing plant.

• In 2006, Georgia successfully recruited Kia Motors with a $400 million incentive package.

• In 2007, Alabama successfully competed for ad­­vanced manufacturer Thyssen-Krupp with $461.1 million in direct financial aid and another $350.3 million in tax abatements.

• In 2008, Tennessee committed $577 million for a 2,000-job Volkswagen automotive manufacturing complex.

• Florida recently an­­nounced that it would provide $310 million to the Scripps Research Institute.

These numbers dwarf incentives offered by Virginia to Northrop Grumman, SAIC, Hilton Worldwide, Rolls-Royce, Volkswagen of America and others.  Economic development is highly competitive.  The returns justify the investments. 

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