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Unraveling the incentive question

The panelists – representing K-12 education, higher ed, the environmental community and human services, along with your business columnist, who was designated to discuss economic development – were convened by the League of Women Voters of Tacoma-Pierce County to consider the question “Why do we pay taxes?”

Our assignment: Explain – or defend – why each area deserves to be allocated more, the same amount or less money out of an excruciatingly tight state budget.

You try arguing for more money for business development at the expense of kids, the homeless or cute and cuddly nature.

But economic development spending ought to get close scrutiny, in good times and bad. Tax dollars are scarce resources, even if the state doesn’t treat them as such in the middle of boom times, so it’s imperative to know whether those dollars are being spent wisely or effectively.

Washington state spends a lot on economic development, far more than what might be apparent from programs specifically designated to generate jobs and economic growth. That spending includes state promotional and recruitment efforts in tourism, aerospace, clean tech and other industries, grants for improvements to ports, industrial parks and infrastructure, and research facilities at state universities that serve existing companies as well as produce the underlying technology for new companies.

Then there’s the matter of what the state doesn’t collect in the way of taxes that are foregone through exemptions and credits for economic development activities such as high-tech research and development.

So what are we getting for what we spend or don’t collect? Do economic development programs work? Are they necessary? Are they fair?

Advocates of economic- development tax incentive programs argue that the state isn’t really losing any money by offering them, because it wouldn’t have received that money anyway if the businesses being enticed didn’t move to or invest in Washington. Meanwhile, they add, the state gains tax income from the ripple effects of increased economic activity.

This argument gets a rather frosty reception across the ideological spectrum. Liberals don’t like economic development incentives because they smack of corporate welfare. Conservatives don’t like them because they smack of centralized planning and choosing economic winners and losers. And many businesses, regardless of ideological orientation, don’t like them because the incentives are offered to newcomers, while neglecting companies already established here, and often provide aid to a newly arrived competitor. The incentive to develop your industry, which you believe is crucial to the future of the state, just looks like a boondoggle to someone else who has to finance it but isn’t getting the same sweet deal.

So why offer them at all? Because they work – sometimes, or not really, depending on who is advocating what.

Many factors go into corporate relocation and investment decisions. Remember that the state of Washington seemed perfectly willing to do a lot for Boeing to land the second 787 line, but incentives were a secondary consideration to the company; its fractured relations with its labor unions were at the top of the list. Could South Carolina have landed Boeing without the estimated $900 million in incentives it offered? Perhaps, but if you were Boeing and you were being offered both incentives and a better labor climate, how hard a call would that be to make?

Washington could decide not to spend on economic development on philosophical grounds (see above) or practical reasons (see the lack of money in the state coffers). That’s a strategy that works as long as everyone lays down their weapons. Otherwise, unilateral disarmament is not a viable option – unless the prospect of Idaho, or South Carolina, or other ambitious states continuing to picking off even more Washington-based jobs and companies is attractive to you.

What’s left is for Washington to comb through the spending and incentives on economic development and decide what it can really afford. Do we really need as many taxing authorities in this state as we have (King County alone has 166), with virtually no one talking to one another about how much to carve out of taxpayers and with almost every one spending on economic development in some form? Do we really need, for example, film recruitment offices when decisions on movie locations seem to be driven primarily by the exchange rate for the Canadian dollar, and what spending we get is temporary at best? Would we be better off just getting rid of incentive programs but simultaneously slashing business tax rates for everyone?

Do we have a systematic, thought-out rationale for why we spend what we spend where we spend?

That’s a lot of detail work when, frankly, neither the budget shortfalls nor the time available to close them allows for a lot of detail work. As with most else in our tax system, we’ve gotten to the point we’re at in economic development spending on a piecemeal and uncoordinated basis.

It would be nice to unravel this tangled ball of string, to figure out which strands are still usable. Or we could just take a meat cleaver to it and chop it up and hope we find something of value.

Or we could do what we frequently do in Washington, which is appoint a commission to study the problem in the hope that by the time it comes back with a report, the economy has improved to the point that we’ve forgotten why we asked for it in the first place.

But we shouldn’t feel any pressure or urgency to get this right. It’s only the taxpayers’ money and jobs and the economic future of this state we’re dealing with.

Bill Virgin’s column on business and economics appears Sunday in The News Tribune. He is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at bill.virgin@yahoo.com

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