Tight times lead to fewer special breaks for corporations

Attracting new jobs to states sometimes takes money.

New Jersey tries to woo companies from New York with financial incentives. New York counters with its own grants, loans, and tax holidays.

Every state from Florida to Michigan has its own "economic development" plan to create new jobs or keep companies from moving to greener pastures. Although critics call it corporate welfare, the programs have expanded over the past decade into an economic war-between-the-states.

Now, with state budgets deeply in the red, these programs are facing a diet. Site consultants estimate that at least half the states have cut their economic-development budgets by 15 to 35 percent.

Many have tightened incentive standards so fewer companies will be eligible. In a few states, entire programs are facing the ax.

"I don't remember this being done where the cuts are so deep," says corporate location consultant Dennis Donovan of the Wadley-Donovan Group, in Edison, N.J.

Take California. To balance his budget, Gov. Gray Davis is proposing cutting 56 percent from the economic development budget over two years. After taking out money for programs such as the California Film Commission, business groups worry there won't be anything left for attracting new business. "It puts them on their knees to provide a viable economic development program," says Wayne Shell, president of the California Association for Local Economic Development in Sacramento.

The ramifications of the cuts may mean that some states now have a distinct advantage over others, says Gary LaDonne, national director of state and local tax practice at Ernst & Young, LLP. "If three states have the programs today and one eliminates a program, the playing field has changed," he says. "States in a better fiscal situation are in a better position to attract new employers."

Critics of the programs, however, say it's about time they were either ended or scaled back. "They are counterproductive and unfair for those not lucky enough to receive government favors," says Michael LaFaive, director of fiscal policy for the Mackinac Center for Public Policy, a think tank that espouses a free-market perspective.

Mr. LaFaive says KMart is an example of why these programs are questionable. Only eighteen months after receiving $6 million from the state of Michigan, "those jobs vanished due to their bankruptcy," he says.

However, some companies maintain that the money is important to them. A biotech company, Nephros Therapeutics of Lincoln, R.I., received $1 million from the state of Michigan. "That money was instrumental in the conduct of our clinical operations in Michigan," says Richard Andrews, president and CEO of the company.

And the programs remain popular with legislators and local officials who like to show the voters they are doing something to attract new factories. That's why some proposals to cut such programs are meeting resistance.

That's what's happening in Albany, N.Y., where Gov. George Pataki facing an $11.5 billion deficit over the next two years, has proposed what his office terms a "modest" cut in the Empire Zone program, which pays local property taxes among other benefits.

Under the governor's proposal, counties would pick up half of the property tax relief.

"We wanted to do a sharing of future costs based on new companies locating in the zones," says a spokesman for the governor.

However, last month, the New York State Senate said it wanted to add 18 new zones to the program, not reduce it. "I think the governor will revisit his initial proposal," predicts Steven Strichman of the Schenectady/Glenville Empire Zone. "We will stop certifying new businesses if we have to pick up 50 percent of the property tax."

Statements like that concern people like Mr. Donovan who advises companies on relocation. If the Pataki cuts are enacted, he says, it will cause "grave consternation" among some of his clients. "Some are contemplating moves to New York State, and we will revisit this if the proposal is enacted," he says.

Many states are trying to keep their programs going with even with less money.

That's the case for Iowa, which has a projected budget deficit of $300 to $400 million. The governor has proposed paring 24 percent from the Economic Development agency, but Tina Hoffman, a spokeswoman for the department, says "We've kept the same programs but they have fewer dollars."

As some of the development agencies lose funding, they also lose staff.

That's what's happening in Florida where Enterprise Florida, the state's development agency, has had to lay-off 15 percent of its staff. "We got leaner," says Lorri Shaban, a spokeswoman. "But we are hoping in the new fiscal year we get restored to full funding."

And Florida, which tries to recruit foreign companies, has had to suspend contracts with at least six agents for the state. Most of them, however, have agreed to continue to represent the state for free until the state restores funding.