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Government-Manipulated Economics Takes Center Stage

March 5, 2010

Government-Manipulated Economics Takes Center Stage

SCHotline Staff Reports

By a curious bit of slight-of-hand, legislation that will codify the General Assembly’s role in government-driven economic development—making it much easier for lawmakers to pick winners and losers among competitors in the marketplace—passed the House today. If that doesn’t sound familiar, it’s because the only provision in H 4478 that is making the news is its reduction in the corporate income tax.

(It’s curious that some media reports have called the tax reduction benefiting all South Carolina corporations “welfare,” but don’t object to hundreds of millions in tax breaks to special interests.)

The real effect of the South Carolina Economic Development Competitiveness Act is to make the entire state an economic development zone—and that means lawmakers will have essentially carte blanche to give away tax dollars to special interests.

So not only have lawmakers camouflaged the real intent of the bill, they once again passed an important bill in a manner designed to avoid public scrutiny. After Thursday’s recorded second reading vote on H 4478, representatives gave unanimous consent to have the bill read for the final time todaya day when representatives are not even required to be physically present in the chamber.

By interesting contrast, this week the General Assembly nixed a deal to give Bass Pro Shops taxpayer-funded incentives. At the same time, lawmakers are pushing through more than $100 million incentives for an out-of-state developer to build an upscale mall in Jasper County. In fact, the Senate fast-tracked the bill by placing it on “Special Order;the vote will likely come this Tuesday.

What’s the difference? Perhaps they just couldn’t stomach asking taxpaying businesses in the state to subsidize their competition. If that were the case, the Okatie Crossings mall deal wouldn’t be galloping through the Statehouse. Even the state’s economist concluded that the mall proposed by The Sembler Co. will only shift jobs—not create them—so it’s another case of lawmakers asking tax-paying businesses to subsidize their competitors.

More likely is that, first, Bass Pro Shops lacks the political connections and lobbying power of The Sembler Co., and second, while the incentives deal passed an earlier reading by voice vote, the measure failed when the bill was subject to a recorded vote.

Clearly, South Carolina needs more transparency when it comes to economic incentives. If you were being asked to invest in a shopping mall, or a retail store, or a manufacturing plant, you’d expect a thorough analysis of the risks and rewards. As a taxpayer, that’s exactly what the General Assembly is asking you to do, except they don’t want to tell you what or who they are investing your money in, nor do they offer you any sort of objective analysis on the potential risk or benefits.

That’s why a Policy Council report on economic incentives argues that applications for economic incentives should explain why a taxpayer-funded subsidy or tax exemption is needed, with special attention as to why the project has failed to attract sufficient private investment.

Also necessary is independent analysis as to why the incentive is needed and what impact it will have on competing businesses and regional employment. Such reforms are part of new transparency legislation.

This week, the Policy Council also released a study questioning whether retail incentives are constitutional. To be constitutional, incentives must have a public benefit, but retail incentives have been shown to generate no net new jobs. No jobs – no, or little, public benefit.

The more fundamental question is whether the state ought to be in the taxpayer-funded economic incentive business at all—clearly they’re not all that good at it.

Just this week came the revelation that Boeing would likely have expanded in North Charleston without a multimillion incentives package; that their union troubles is what prompted them to come to South Carolina. Strikes in Washington state cost Boeing $100 million a day; they wanted to relocate to a non-union state. Add the fact that Boeing was already in Charleston and wanted to expand its east coast presence, and you see why Boeing came to South Carolina. Boeing admits that tax rates had little to do with its decision.

It’s clear that reforming general business conditionsespecially as they relate to fundamental free market principles that benefit all businesses in the stateare far more important to growing South Carolina’s economy than are targeted tax breaks and backroom deals. So is reforming the way our lawmakers go about playing a losing game of government-driven economic development.

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