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Illegal Bait?

The latest in business lures: Tax incentives may be unconstitutional.

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The cheering NASCAR fans on Capitol Square last week may or may not sway racing officials to choose Richmond for its new Hall of Fame, but one thing is certain: Gov. Mark Warner says Virginia is poised and ready to pony up a "significant" multimillion-dollar incentive package to finance the $103 million tourist magnet.

The incentives aren't really news. They're rather common practice these days. At least two of the five cities competing for the hall already have promised $30 million in tax breaks and kickbacks to win the heart of NASCAR.

But are incentives fair? Not to competing cities, but to local developers who want to build a new baseball stadium in Shockoe Bottom for the Richmond Braves. Gov. Warner isn't offering any "cash incentives" for that project, and Mayor L. Douglas Wilder has ruled out giving the minor-league club any tax inducements.

They are different projects, to be sure. One could draw a potential 700,000 NASCAR-loving tourists a year from all across the country and most definitely would have a much bigger economic impact on the region, which officials say justifies the incentive package. But one could argue that the Braves franchise could do the same, albeit on a smaller scale. When you factor in how long the Braves have been contributing to the Richmond economy — 39 years — why should they be treated any differently?

As whooping race fans lobby for a racetrack-themed Cooperstown in Henrico County, the issue of local and state officials baiting business with huge tax incentives is receiving intense scrutiny by a broad cross section of lawyers, politicians and academics. Economic incentives are unfairly distributed, they say, to only the biggest, wealthiest corporations. They contend it's unconstitutional. So far, federal courts concur.

When governments give incentives to businesses to locate within their municipality's borders, are they penalizing companies that do business out of state? And what about those who are already there, contributing to the local economy sans subsidy?

A year ago, the 6th Circuit Court of Appeals decided that the $280 million in tax breaks Ohio awarded Daimler Chrysler for a new Jeep plant were unconstitutional. The court ruled that part of the incentive package — a mix of real estate and job tax credits — violated the Commerce Clause of the U.S. Constitution.

"It not only creates real distortions in the tax base, it shifts the burden to smaller businesses and regular taxpayers like you and me," says Peter Enrich, professor of law at Northeastern University, who specializes in state and local tax policy. "There are very deep constitutional problems with a great number of these cases."

In Wisconsin, Northwest Airlines sued the state for giving $2.5 million a year in property tax breaks to a rival airline, claiming the tax breaks made Northwest, based in Minnesota, less competitive. That court also ruled the tax breaks unconstitutional (the state is appealing the decision).

Similar cases in North Carolina, Nebraska and Minnesota are expected to further test economic incentives and may wind up before the U.S. Supreme Court, which is expected to decide whether to take up the issue in the fall.

If the lower-court rulings stand, this could significantly alter economic development programs at the state and local levels. In metro Richmond, for example, Stony Point Fashion Park received $13.5 million worth of free infrastructure from the city, and Short Pump Town Center received $22 million in incentives for road and site improvements from Henrico County.

Ditto for the $4.6 million in infrastructure and tax breaks worth more than $12 million, at least in 2002, that the city gave to developers Cordish Co. and Daniel Corp. for its Riverside on the James condo, office and retail project on Brown's Island.

"Richmond is ripe enough that we don't have to be shelling out the big incentives," says Ben Armbruster, project development manager in the city's economic development office. "Five years ago, no one would have ever asked to build a huge condo project on the Turning Basin without asking for something. Now, we don't need to be doing that."

Richmond is backing off incentives, but Philip Morris still managed to get $3 million worth in land from the city, plus another $3 million in incentives from the state, to build a new $266 million research center downtown. Armbruster says that project is clearly worth it: It will bring 500 jobs to the city and become an economic catalyst downtown.

Fairness is just one issue, however. An increasing amount of research suggests there is little evidence that companies decide where to locate based on incentives they receive from states and localities. Robert G. Lynch, an economist at Washington College, argues in "Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development," a research paper published last year, that incentives play no substantive role.

In an analysis of tax kickbacks and incentives, Lynch found that the financial impact of economic inducements was too small to outweigh more important factors in business location, such as demographics, educational facilities and the quality of surrounding roads and highways.

In 2000, for example, the average state and local tax burden on business represented only 1.2 percent of total expenditures, and state and federal tax breaks reduced that burden to only 0.8 percent of total costs. The impact is so low, Lynch concludes, that business tax breaks actually hurt the local economy more than help.

Consider: A portion of each dollar Daimler Chrysler receives from the state to produce Jeeps will be spent outside the state. But all of that same dollar, if it remained in government coffers, would be used to help finance government operations and services such as police, schools and roads, ultimately funneling back into the state economy.

And while incentives make little sense at the state level, Northeastern's Enrich says, even bigger abuses can occur at the local level.

"Using incentives for retail is probably the most blatant evidence of how so off the track this incentive business has gone," Enrich says. "Retail is going to locate where the customers are," he adds, not where incentives are offered.

Gregory H. Wingfield, president of the Greater Richmond Partnership Inc., the region's joint economic-development group, agrees that going too far with incentives is a mistake. And he's against offering tax breaks to retailers.

"Retail in my mind is market-driven," Wingfield says. What's more, he says, the economic-development community would welcome a Supreme Court ruling that banned all economic incentives in the United States. The problem now, he says, is that states that don't pony up inducements are often seen as anti-business. To stay competitive, anyone who wants to compete for the tax-producing business must pony up.

"In a perfect world," Wingfield says, "if the courts say no, you can't put incentives out there anymore, then everyone's on an even playing field."

Frederick Agostino, economic-development director for Henrico County, concurs.

"I'd think we'd be better off without it," Agostino says. "We'd be delighted to compete with all the states that we generally compete with on the basis of what's the best place for an operation with no incentives at all.

"I'd dare say we'd do even better than we do now." S



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