Do incentives pay off for S.C.? Panelists question tax cuts, other deals state uses to lure business

South Carolina has offered tax breaks and other subsidies for decades to businesses that invest money and create jobs. For nearly as long, pundits and economists have, on occasion, debated the merits of that economic development tactic.

A government watchdog thinks it’s time to revisit the issue.

“Why a debate on economic incentives? For this reason: Although incentives cost the South Carolina taxpayer millions of dollars in forgone revenue and government spending every year, their effectiveness is rarely even discussed, much less openly debated,” said Barton Swaim, spokesman for the Columbia-based S.C. Policy Council.

The libertarian-leaning nonprofit pried the lid off this dusty can of worms Thursday at the College of Charleston. The 90-minute discussion kept going back to the same handful of political hot potatoes, including fairness, public transparency and accountability.

The title cut to the heart of the matter, which isn’t unique to South Carolina: “Economic Incentives: Capitalism or Corporate Welfare?” While the four panelists included a voice from the pro-incentive camp, the deck was stacked against the status quo.

South Carolina for decades has dangled various species of bait to get business to bite with the Boeing 787 plant in North Charleston being one of the recent prominent examples of the modern era. The practice originally was aimed at luring huge manufacturers, such as tiremaker Michelin’s Upstate plant, that could transform a community by providing good wages and skilled jobs. Other mega-employers came later, but with less frequency.

“What I call ‘the buffalo hunts,’ ” said Frank Hefner, director of the College of Charleston’s Office of Economic Analysis, who has researched South Carolina’s use of corporate sweeteners.

But by-and-by, the state inducement system started showing its age as big smokestack industries began figuring out how to do more work with fewer workers through automation and innovation. Lawmakers responded by inching the incentive bar lower, making it easier for more expansion-minded employers to qualify, Hefner said.

Ross Sobel, a visiting scholar at The Citadel, is no fan of incentives, saying they benefit just six out of every 1,000 South Carolina businesses and that “they have a lot of hidden costs.” For example, the system is set up in a way that small companies without the cash to hire high-powered lawyers and lobbyists can end up subsidizing larger competitors, he said.

By his count, South Carolina now boasts about 50 separate tax credits that cost $300 million annually. Custom-tailored incentives are available for companies that set up corporate headquarters, conduct biomass research, use the public ports and even produce milk.

And the list is growing.

Proponents of tax breaks recognize the system has flaws and inequities.

“In a perfect world ... we can say they are bad,” said Kim Statler, executive director of the Lowcountry Economic Alliance in Beaufort County.

But the reality of the economic development world is quite different. Every other state is aggressively playing the incentive card. South Carolina needs to stay in the game to maintain its competitive footing, she said.

Ashley Landess, president of the Policy Council, organized and participated in Thursday’s discussion to knock the cobwebs off this old issue.

Landess isn’t necessarily opposed to incentives. Rather, she thinks they need more public scrutiny based on her group’s mostly unsuccessful attempts to get information about costs vs. benefits and to learn how the state keeps track of all the tax credits, infrastructure grants and other subsidies.

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“There aren’t enough questions being asked about this,” Landess said.

She compared the state lawmakers and other officials in control of the incentive purse strings to “investment brokers” who are sinking large amounts of their clients’ money, taxpayers, in this case, into businesses with little disclosure or after-the-fact performance reviews.

“If you’re investing in a deal, you’re entitled to some return-on-investment figures. You’re entitled to some market research,” she said.

If there was a point of agreement at Thursday’s talk, it was that sweeping, thought-out changes to the tax code would enable the state to attract employers without incentives.

For example, a small-business owner in the audience called for the General Assembly to “man up” and cut the onerous and widely disparaged 10.5 percent assessment on manufacturing equipment. That likely would eliminate one of the most widely requested corporate incentives and make South Carolina a more inviting place for factory owners.

Easier said than done, said Hefner of the college’s economic analysis office. He explained that particular assessment would be difficult to change because it’s “imbedded” in the state Constitution.

So it all ties together somehow. Like a big fancy knot.

“You wouldn’t need tax incentives if you didn’t create disincentives in the first place,” Hefner said.

Contact John McDermott at 937-5572.