Beating Them At Their Own Game:
Let's Get in the Game
In early 1995, it was revealed that the state government had promised to give over $70 million of the taxpayers' hard-earned money to a giant, highly profitable corporation from out of state.
Was the reaction one of outrage? No it was elation.
The state was Virginia, the corporation was Motorola, and the deal was the announcement that the company would build a new chip-making facility outside Richmond.
In New York State, a $70 million deal like that would likely be denounced in many quarters as "corporate welfare." For many years, New York lived under a political culture that considered it de rigeur to sneer at "giant corporations." We still regularly produce piles of newspaper editorials denouncing "special favors" for companies; we still form citizens' committees to march on the local zoning board and denounce each and every economic development project.
Unencumbered by such attitudes, meanwhile, our rivals in other states have been grabbing new investments and jobs and laughing at us, all the way to the bank.
It is time we started beating them at their own game. And to do that, we have to begin by recognizing that there is nothing wrong with the game itself.
States all around us are competing successfully for major new plants that bring lots of good, new jobs. Particularly as this state's basic business climate improves, New York has what it takes to win some of these contests if we will get in the game, instead of crouching morosely in a dark corner of the dugout. And when we win, the benefits will vastly outweigh the costs as the Motorola case illustrates in Virginia.
Motorola's new facility, in a corporate park known as West Creek, will bring capital investment of $3 billion and employ 5,000 within 10 years. Most of the jobs will be high-paying and offer generous benefits. Taking into account the normal spinoff impact of such a big project, each job should support two others in central Virginia. As many of those workers will, in turn, support families, that one plant will provide a living for some 30,000 to 45,000 people, generating income of $675 million to $1 billion every year.
Motorola's record with such large plants elsewhere indicated the West Creek facility might be followed by more major investment. And that, in fact, turned out to be the case. The company announced in May 1996 it would build a second, $1.5 billion semiconductor plant in the Richmond area in conjunction with the German company Siemens AG a plant that would ultimately employ another 1,000 to 1,500.
How did Richmond attract such a valuable employer?
As with any major business decision, a number of factors were involved.
One key element was relative proximity to markets in the Eastern United States and Europe (the company already has major chip-making facilities in Arizona and Texas). Another was availability of a large, attractive site with easy access to highways and utility connections.
The plant would need a lot of water, some 3 million gallons a day, for use in its manufacturing processes. And company executives wanted an area with good schools quality elementary and secondary schools for the children of employees, and nearby universities and community colleges that could provide the engineers and technicians needed to do the work.
But those weren't the only considerations. Another was whether state labor laws would unduly interfere with Motorola's excellent relationships with its employees. Here, Virginia's status as the Eastern seaboard's northernmost state with a "right-to-work" law, prohibiting compulsory union membership or dues, became important.
In addition to water, a basic ingredient in making computer chips is lots of electricity. At 4.3 cents per kilowatt-hour, Virginia's average cost for industrial users is below the national average.
Taxes are not an issue in Virginia. On a per-capita basis, its overall state and local tax burden ranks 29th among the 50 states; adjusting for personal income, the state ranks 46th. And property taxes are lower than the national average.
Recognizing the tremendous, long-term value the Motorola plant would bring the state, officials in Virginia offered financial and other incentives that could total $86 million over a number of years (including $16 million for local universities whose benefits go beyond the new facility). The incentives will be paid when the plant is built; announcement of the date is pending. North Carolina, the other finalist for the new plant, offered incentives worth $5 million to $6 million, according to the Richmond Times-Dispatch.
Motorola started its search with a list of 300 possible locations. From its perspective, the financial incentives that were part of the winning package were important for bottom-line reasons (see Chapter 2 for a discussion of why). But they were also important as an indication that Virginia was serious about providing a location where the company could be confident its investment would pay off.
For the state, offering those incentives made sense for a simple reason: they work. That explains why states are using incentives more and more including most of the states that have been beating New York in the competition for business and jobs because of things like their lower taxes, cheaper energy and more reasonable laws affecting employee benefits. That means, more than ever, that New York State cannot afford not to be in the game.
What about the claim that financial incentives amount to "corporate welfare?" Tell that to the taxpayers of Virginia, who will see their state treasury recoup far more than the $70 million total that may flow to Motorola if the company creates as many new jobs as expected. The bottom line for the state will end up even better than that, when the accounting includes not just benefits to government but the more important benefits to private-sector workers, their families and their communities.
Great work, if you can get it
Beyond the financial benefits, there's another way to look at what a decision like Motorola's means to Virginia and the communities involved. That more subjective perspective comes from living in an area producing more business and more jobs excellent jobs, in fact, which in turn lead to a higher standard of living and a better quality of life. Families can feel secure for today and look forward to an even better tomorrow for their children in their home state. Community organizations are able to think about what new activities they should undertake, rather than which ones they must eliminate. Local governments enjoy steadily growing revenues to pay for vital services.
Many communities in New York State have a more wistful perspective on what a major new business would mean. Cities and towns in every corner of New York can remember when they did enjoy the fruits of similar economic bonanzas. Or, at least, they can remember long periods when the local economy was stable, having experienced the growth decades earlier. Too many communities here are down now and are trying desperately to hold onto hope for the future.
From that perspective, attracting new business is not simply a matter of growth. It's one of survival.
Some New Yorkers seem to have given up on making our state and our communities survive let alone thrive. Our political dialogue gets bogged down in managing decline, fighting over shares of a shrinking pie, rather than strategizing growth.
How can New York State grab more of the job growth that will make our communities not only survive, but thrive into the next century?
Getting better but getting no respect
To be sure, things are better in New York now than they were not too long ago. After years of lagging far behind other states for growth in jobs, our private-sector employment is rising at a rate closer to the national average. But we still have a long way to go to claim our share of the nation's economic growth partly because, while our climate for job growth is vastly improved, it still has a long way to go. Our taxes are still out of line, for instance, and our energy costs are as well. (See Chapters 2 and 4.)
Worse, we're getting little credit nationally for the major changes made under the administration of Governor Pataki the nation's biggest tax cuts, revolutionary changes in state regulatory practices, and dramatic reductions in workers' compensation costs. Business executives in other states, academic experts and writers for national publications still think New York is "extremely anti-business," as one put it.
That's not fair. But it is our image, and we in New York have to deal with it.
We must do so in two ways. First, both Albany and our local governments must take bold action to improve our business climate in general. That's the most important thing for the long run. But it won't happen overnight. And it will take a while for the world to notice once we do cut taxes further, reduce our energy costs and enact other changes.
That's where the second, more immediate, solution comes in. We've got to get serious about proving to business executives that New York is the best place to invest right now not simply that we're making great progress toward becoming a good place to do business in the next century. And in that effort, we can't be afraid to use one of the most powerful weapons in other states' arsenals major incentives, the kind that will pay off in big gains of jobs, income and future tax revenue.
Beating them at their own game
We need to beat other states at the game they've been playing for years, and that we've barely begun: using significant financial incentives as part of the recruitment package for major new businesses.
"The 1980s were clearly an era for the dramatic growth of state economic development budgets," the National Association of State Development Agencies said in a recent report. During the early 1990s, such spending leveled off, and some states reduced economic development funding, as the recession took a toll on state treasuries. But for most states, the growth returned after the recession, NASDA said.(1)
"New state tax concessions are constantly being enacted," State Policy Reports, an independent newsletter on activities in the states, reported recently. "States are also granting local governments new flexibility to make concessions in local tax policy. States and local governments appear increasingly willing to redirect spending on roads, water and sewer systems, and other infrastructure to lure business. State and local 'war chests' of discretionary money that can be used to sweeten incentive packages are growing."(2)
A recent article in The Wall Street Journal, reporting on the growth of auto-industry jobs in Southern states, also cited the importance of incentives, along with state labor policies.
"What's the region's appeal?" the Journal asked. "For one thing, the South offers cheaper labor, a largely union-free environment and juicy tax breaks and incentives." It added: "Perhaps most importantly, Southern states have been more willing than states in other regions to court the major auto makers with large incentives."(3)
New York State has been actively involved in government-sponsored economic development activities for decades. But those efforts have focused mainly on small and medium-sized businesses. For years, politicians felt it necessary to insist the only appropriate assistance was that for "small business." We want all the small businesses we can get, of course. But we also need all the big businesses we can get.
It wasn't until the 1996-97 fiscal year that economic developers in New York were able to make use of significant financial incentives that make it easier for businesses to afford the huge up-front investment associated with a major new facility. Initially proposed by Senate Majority Leader Joseph L. Bruno, a new, $20 million JOBS NOW fund provides some capital for such incentives, and will work to create jobs in the Empire State. But its effectiveness is limited by its size; the fund has been little used so far because state officials are saving the bulk of it for one or more truly large projects. Governor Pataki's proposed budget for the fiscal year that started April 1 would increase the fund to $30 million. That's good. An even more useful amount might be three to five times the original $20 million.
Such seed money for large capital projects makes sense especially in light of a major new study of the U.S. manufacturing sector during the past two decades.
Job Creation And Destruction, by three economists who used newly available data from the U.S. Census Bureau, shows that "most job creation occurs at relatively few plants that grow much more rapidly than the typical growing plant." Contrary to the conventional wisdom which holds that small business creates most new jobs, the book shows that big business is especially important. And significant economic development incentives such as those involved in Motorola's decision to place 6,000 or more jobs in Virginia can be very important to those big businesses. (For more discussion, see Chapters 2 and 3.)
While outright grants provide a bottom-line incentive for major new projects, the state should also consider a separate, JOBS NOW-type fund specifically for job training. It may seem a paradox, but New York has both too few jobs overall and, in some areas, too few well-trained workers. The lack of skilled technical workers is especially critical in places including Rochester, Buffalo and Jamestown; manufacturers in the Rochester area say they have been forced to turn work away because they can't find enough skilled workers. Other approaches, such as an "as of right" tax credit for job training, may also be worth consideration.
Most fundamentally, a new attitude
But by far the biggest change New Yorkers must make in government, and in the state as a whole is in the attitude that potential new businesses face. Fortunately, that's begun to happen.
Eastman Kodak CEO George M.C. Fisher, after seeing major tax reductions and a sea change in Albany's regulatory policies, had this observation: "There is absolutely no reason, given all the recent policy changes, that New York cannot become a preferred location for manufacturing."
To do that, we need a new attitude throughout New York -- a new attitude about the businesses that can create new jobs here.
Sometimes, though, New Yorkers are their own worst enemies. An example is the case of Spurlock Adhesives Inc., which announced plans to build a $10 million formaldehyde and resin plant in a longtime industrial site near the Port of Albany. The plant would mean 15 to 30 good jobs for the Capital Region, which has suffered a decline in both private-sector manufacturing and taxpayer-funded state employment. The preferred site is in the Town of Bethlehem, where the schools superintendent has been pointing out for years that new business is needed to provide new tax revenue for a burgeoning school population. Spurlock would take over and clean up a contaminated former oil terminal, and pay $406,000 in taxes to the school district, the town and Albany County over 10 years. The plant, of course, would be required to meet New York's environmental standards among the strictest in the world.
With no evidence of potential danger, more than 200 local residents attended a town public hearing to protest the company's plan. One said it would "risk the lives" of all 28,000 people living in the town.
Elected officials from the area had crowded the podium a few months earlier, when Spurlock announced it planned to bring jobs to the area. But after the public hubbub, most of those same officials both Democrats and Republicans began publicly raising questions about potential environmental problems from the plant. This, despite the company's good record in other areas, and despite its intention to clean up an oil-contaminated site along New York's most important waterway.
Having been told by state and local officials that a time-consuming, in-depth review of the project (the kind that drove jobs out of New York for years) would not be necessary, Spurlock reacted to the local controversy by voluntarily agreeing to such a review.
There's a potentially happy ending for the Capital Region economy, despite some opposition. The episode shows, though, that the half-million jobs lost throughout New York in the early 1990s most of which we have yet to recover were not enough to convince all of us that economic growth is a good thing. And, even if the Spurlock project goes through, it will leave a lingering bad taste for many prospective businesses. Big companies that are considering locating in a new area commonly have site development staff read several years' worth of back newspapers precisely to find whether previous projects have encountered such problems.
"Unfortunately, word travels fast in the business world," the president of the Albany-Colonie Regional Chamber of Commerce, Wallace Altes, wrote in commenting on community opposition to the Spurlock project. "We may have trouble bringing any type of industry into our community if we persist in furthering the anti-business reputation for which our state has long been known."
Turning that reputation around in part by showing a new attitude among New Yorkers is a key step toward reclaiming our fair share of the nation's job growth still to come.
The jobs are out there
The potential payoff is huge. Imagine what a Motorola-type plant could mean for the Hudson Valley or Long Island, or what a new facility with, say, 500 to 1,000 quality jobs would mean to a community such as Albany, Utica or Binghamton. How much better life in New York City and Buffalo would be if those cities could create new jobs at the rate of locales such as Boston and Portland.
The jobs are out there. The new study of the American industrial sector mentioned earlier shows that some 1.7 million new manufacturing jobs are created nationwide, every year -- regardless of whether the net total of such jobs is growing or shrinking.
On a net basis, an estimated 2.1 million jobs will be created in all sectors nationwide in 1997. If we just grab our fair share, based on our existing share of the nation's economy, we'll gain about 174,000 jobs. Experts predict today, though, that New York will only add 70,000 or so private-sector jobs in the coming year. That means we'll miss out on 100,000 jobs we should have.
There is simply no reason we can't attract those other jobs. Ohio, another mature, northern state with a heavy manufacturing presence (that is, part of the supposedly accursed Frostbelt/Rustbelt economy), led the nation in attracting major new business facilities three years in a row. Michigan's job growth has been better than the national average.
What must we do to get our fair share of the new jobs those 100,000 jobs that should be coming to New York, but instead appear likely to go to Georgia, Ohio, Florida, Michigan and other states? Even better, what must New York do to grab MORE than our fair share of those jobs say, another 100,000 a year?
First, stop believing we don't have a chance. The next big plant the one that will employ thousands and create millions in income for some state can be attracted to New York. We just need to decide we're going to go after it.
Then: Beat the competition. Beat them using New York's traditional advantages such as our good workforce and abundant capital. And beat them in the race to show businesses we want them here in New York.
We can make those things happen. We can beat other states at their own game. We can bring those new jobs to New York, and further restore the position of economic leadership that is so much a part of our history.
1. Directory of Incentives for Business Investment and Development in the United States: A State-By-State Guide, National Association of State Development Agencies, Washington, D.C.; 1995.
2. "Is competition heating up?", State Policy Reports, Columbus, Ohio; Vol. 14, No. 16, August, 1996.
3. "Audi May Join Car Makers' Caravan to Southern States," The Wall Street Journal, March 13, 1997; page B-1.
The Public Policy Institute of New York State, Inc.
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