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Economic Development

Subsidies in Mississippi:

High Costs to Public Services,

Missing Taxpayer Safeguards

by

Good Jobs First

for the

American Federation of Teachers

February 2009

Executive Summary

Mississippi, one of the nation’s poorest states, has for many decades tried to use economic development subsidies—large, company-specific subsidies in many different forms—to create jobs and a stronger tax base. Hardly alone among the states, Mississippi has about four dozen such programs, and they evidently cost the state treasury and local governments hundreds of millions of dollars a year.

A detailed evaluation of these programs is impossible because the state does not disclose company-specific costs and benefits of deals; nor does it routinely conduct performance audits of major programs or retain academic experts to review departments or programs. The state declined to even name for us the companies that claim the Jobs Tax Credits.

Instead, costs have often remained hidden while benefits have been exaggerated.

For example, for both auto “transplant deals,” studies were commissioned that produced implausibly high “ripple effect” job projections. The state once even declined to measure the fiscal impact of the massive Nissan deal on local public schools.

Despite spending a great deal of money on subsidies for at least 72 years, the state has made precious little comparative economic progress. And despite many failed deals occurring over the decades, Mississippi’s economic development incentive rules still largely lack common-sense taxpayer safeguards that have become increasingly common in other states, such as online transparency, Job Quality Standards, and clawbacks.

The state’s strategy of giving large subsidy packages to specific companies means less money has been available for two proven economic development strategies: skills and infrastructure. Indeed, Mississippi remains near the 50-state bottom in commonly accepted measures of development such as educational attainment, internet usage, and highway safety.

In addition to traditional “smokestack-chasing” for factories, the state and many of its cities have subsidized two “low road” kinds of projects in the service sector: private, for-profit prisons and Wal-Mart facilities. Each kind of project involves interaction between state statutes that enable such deals and local governments granting them.

Mississippi taxpayers would lower their risk and have more money to invest in skills and infrastructure if the state:

1)     eliminates many of its economic development subsidies; and

2)     redirects the monies into better schools, safer roads, and other ways of broadly creating opportunity such as promoting rural broadband access.

Taxpayers would also gain greater confidence and get a better bang for the buck from their remaining economic development subsidy programs if the state:

1)     makes its company-specific deals highly transparent on the web;

2)     enacts a Unified Development Budget so that legislators can see all forms of state spending for jobs every year and treat them equally during times such as these when difficult budget decisions must be made;

3)     adopts market-based wage and health care standards (as it has on a handful of programs already) so that subsidized employers are not allowed to pay poverty-level wages and incur hidden taxpayer costs in the form of social safety-net expenditures such as Medicaid and State Children’s Health Insurance; and

4)     adopts rules to protect taxpayers if a deal fails by either recapturing monies (via a “clawback”) or at least rescinding or recalibrating future years’ subsidies.

By spending its resources in ways that are more broadly shared and more accountable to taxpayers, Mississippi can make winning investments for the long-term economic gains of its citizens.

Introduction:

After 72 Years, It’s Time to Reconsider

Mississippi is considered by historians (such as James Cobb, author of The Selling of the South) to be the birthplace of what has since come to be called “the economic war among the states,” in which states compete with one another to attract large industrial and commercial projects by offering large, multi-subsidy packages.

As Pulitzer Prize-winning journalists Don Barlett and James Steele recounted in their 1998 Time magazine series on “corporate welfare”:

In 1936, in the midst of the great depression, Mississippi fired the first shot in what is now an internecine, multibillion-dollar battle for jobs among the states. 

…The first beneficiary was Real Silk Hosiery Mills Inc. …Hurt first by the Depression and then by a bitter strike in 1934, Real Silk was working its way back to solvency in 1936 when Mississippi came calling. The town of Durant (pop. 2,500), a farming community with more sidewalks than paved streets, was offering to issue $25,000 in industrial-revenue bonds to buy land and erect a 15,000-sq.-ft. building, which it would lease to Real Silk for 25 years for all of $5 a year. …waive five years of county taxes on the building and property taxes on the machinery. … provide insurance, set up a training school and even erect housing for workers. In a special election, the town's voters approved the bond issue, 330 to 19. …nine years later, in December 1946, Durant’s citizens approved a second bond issue of $60,000 to expand the plant.

At its peak, the Durant factory employed about 150 people [but by] the mid ‘50s, all that came to an end. Before the first bond was due to be paid off, Real Silk shut all its factories, including Durant, sold off the equipment and became an investment company. …The building that was to put Durant on the industrial map still stands—empty.[1]

Barlett and Steele concluded by pointing out that Mississippi still ranked last in per capita income despite spending “hundreds upon hundreds of millions of dollars in economic incentives.”

Historian Cobb told the Atlanta Federal Reserve Board that the state originally intended to use subsidies to attract low-wage, low-skills jobs to stabilize the economy, and then end the practice. Instead, he noted, they were never phased out, instead becoming more elaborate.[2]

To be fair, Mississippi was soon joined in this arms race by other Southern states, and the practice of active solicitation by the South from the North and Midwest became widespread by the 1950s, fueled in part by site location consultants such as the Fantus Factory Relocating Service, which was based in New York City. By the 1980s and 1990s, the story had come full cycle, as many Northern states were now themselves aggressively offering the same kinds of multi-subsidy packages to attract (or retain) large employers.

All of this is to say that, while this study is about Mississippi, we acknowledge that the frustrations suffered by the state are not unique to it—nor are the solutions available to it. But in the current economic climate, it is important for Mississippi’s leaders to make sure that every dollar in their care is invested wisely.  The state has already had to close a gap equal to 2 percent of spending for the current year and is now in its second round of budget cuts.[3] The outlook for the next two years is difficult as well. 

For example, there are reports of school districts that will be unable to make payroll for the rest of the academic year unless they cut staff.[4] Some school districts are cutting back on electives and on vocational programs. During recessions, college enrollments often grow, but at Mississippi’s institutions of higher education, there have been cutbacks in course offerings and increased reliance on large lecture classes.[5] This fiscal stress comes at a time when Mississippians increasingly need public services to weather the dislocations of the economic downturn. 

Given Mississippi’s long and costly history of subsidizing outside companies—and the state’s enduring poverty and poor tax base—there is a pressing need to look at these results and consider changing course. It is in the purview of the state to identify and scale back economic development subsidies that are not leading to the creation of a really vibrant state economy, and some of the strategies and programs identified here should be considered in this light.

Even if there is disagreement about the effectiveness of a specific program in contributing to the state’s real economic development, there is invariably a consensus middle ground that says: let’s make such spending more transparent (so that everyone can better evaluate them) and build in safeguards (so that we create good jobs and have taxpayer protection if a deal fails to deliver). Our purpose here is to offer lessons learned and suggest positive alternatives by “composting” the state’s history.

Mississippi’s Economic Development Subsidies:

Missing Basic Accountability Safeguards

Mississippi, like every state, has a myriad of state programs for economic development, and it uses these programs to pursue strategies that are both explicit and implicit. Because of the dozens of programs and – in Mississippi’s case – a real lack of transparency, it is not possible to quantify the total cost to state taxpayers.  But it is clear that, due to a lack of safeguards now commonly employed by many other states, there have been cases in Mississippi in which substantial taxpayer costs have been incurred but public benefits have not been forthcoming.

As a diagnostic measure of the state’s use of safeguards, or lack thereof, Good Jobs First identified five key programs and performed detailed statutory analysis. The five programs are:

·        Advantage Jobs

·        Growth and Prosperity Program

·        Jobs Tax Credit

·        Rural Economic Development (RED) Bond Credits

·        ACE Fund Program

As summarized in the chart below, our analysis of these five programs finds that they do not measure up to best-practice standards of accountability, as found in many other states. For example, none discloses costs or benefits of specific deals online. Three have no Job Quality Standards, and only one of the other two has a standard that would benefit more than a handful of top managers or highly-paid technical employees. Only one has a partial “clawback,” or money-back recapture provision, for failed deals.

Table 1:

Safeguards in Common Mississippi Economic Development Incentives

Program Name	Advantage Jobs	Growth and Prosperity Program	Jobs Tax Credit	Rural Economic Development  (RED) Bond Credits	ACE Fund Program
Type/Estimated Cost FY 08	Rebate on Payroll Taxes, cost: $9.5M	Full Sales, Use, Income, Franchise and Property Tax Exemptions (excludes schools, police and fire taxes). Estimated cost of this tax expenditure is not available.	Corporate Income Tax Credits, cost: $22 million	Income Tax Credit equal to debt service on Industrial Revenue Bonds (Companies have to have IRBs to qualify), cost: $20 million	Grant Program, Approximate cost: $430,000 approved in FY 2006
Job Quality Standards   And Job-Creation Rules	Average annual wages must match or exceed (depending on the industry) the lower of the average annual county or state wage. Also, employers must provide a basic health benefits plan. Excludes retail, gaming, and some service industries.	No Job Quality Standard. Recipients are required to create 10 jobs.	No Job Quality Standard. Companies must create between 10 and 20 jobs (depending on tier location) in one year, and can claim credits for up to five years.	In tech-intensive industries, at least 10 employees (presumably managers) within a company must make at least 150% of the average state wage. No requirements for other industries.	No Job Quality Standard. Awarded at sole discretion of Mississippi Development Authority.
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