Closing the Gap: Economic incentives or bust?

• By GARY PERILLOUX
• Advocate business writer
• Published: Jul 22, 2007 - Page: 6A

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The recent bidding battle between Louisiana and Alabama for ThyssenKrupp’s $4 billion steel mill exposed a poorly kept secret — states covet big capital investments with lucrative jobs.

Alabama offered $811 million in incentives, plus a 30-year tax credit allowing the steelmaker to recoup its entire investment. Louisiana offered $1.6 billion in incentives, plus a mechanism to match Alabama’s 30-year deal. The scale of the packages speaks to the keen competition for mega-deals.

Every state does it, the argument goes, and the deals won’t come to states that don’t open their wallet.

Nonsense, says Maurice McTigue, a former New Zealand cabinet member who helped transform that nation’s economy — one about the size of Louisiana’s — in the 1980s and 1990s. Companies will invest capital in economies that are progressive, he said.

Resorting to “bribes” to lure new companies “has never been a successful option,” McTigue said, adding that governments are doomed to continue “bribing” businesses to stay put.

“One of the things New Zealand did was to eliminate all special considerations and all special deals for capital,” he said.

Among the actions New Zealand’s parliament took were:

• Slashing personal income-tax rates in half to brackets of 19 percent and 33 percent.
• Cutting corporate income tax rates from 48 percent to 33 percent (2 percent lower than the current chief U.S. rate).
• Cutting two-thirds of the time needed for business deal approvals.
• Easing access to student loan capital, increasing the rate of high school graduates going to college to more than 70 percent (better than twice Louisiana’s).

The broad-based economic incentives reversed the migration of young New Zealanders out of the nation.

Since 1991, New Zealand’s population has grown from 3.49 million to 4.18 million in an isolated locale.

By comparison, Louisiana’s population has remained largely stagnant over the same period. The Census shows the state’s population at 4.22 million in 1990 and 4.29 million in 2006 (which includes the loss of 250,000 people after hurricanes Katrina and Rita).

New Zealand’s experience notwithstanding, resorting to incentives may be a necessary cost of business while Louisiana continues to struggle with flaws, LSU economist Jim Richardson said.

“In the ideal world, you would not need these special exemptions to recruit business,” he said. “Businesses would come because it’s a good place to do business.”

He noted companies are wary of states that tinker repeatedly with taxes, as Louisiana has done in recent years.

“I think the real element is we need to make a decision at some point and say we’re really going to do something to improve the educational output of our system,” he said.