What causes business-development incentives to work or fail? Examples from the Midwest offer clues.
In 1995, Michigan created a program to issue tax credits aimed at creating jobs in a state hurt badly by the U.S. auto industry slump. Over 12 years, the state handed out enticements valued at $2.3 billion over time to 309 projects.
The initiative's impact has been the topic of sharp debate. Skeptics say the state failed to choose carefully among companies seeking aid, pointing to Kmart Corp. (SHLD) as an example. Beginning in 1998, Kmart received tax credits valued at more than $30 million over 20 years. The retail chain, then based in Troy, Mich., agreed to preserve 7,721 jobs in Michigan and create 875 new ones. But even with help, Kmart stumbled and in 2002 filed for Chapter 11 protection. Its head count fell below what it had promised, ending its eligibility for more tax breaks. Kmart merged with Sears Holding Corp. (SHLD) in 2005 and moved its headquarters to Hoffman Estates, Ill.
Michigan's program lacks "clawback" provisions permitting recovery of incentives when companies fail to hold up their end of the bargain. As a result, the state couldn't get back $6.1 million in benefits from Kmart.
The state can, however, point to some successes, such as Haworth Inc., a furniture manufacturer that recently consolidated its operations in Michigan and employs 2,700. Overall, the program has created or retained 38,800 jobs, according to the state.
But a study issued in 2005 by the Mackinac Center for Public Policy, a nonprofit free-market-oriented research group in Midland, Mich., concluded that statewide, Michigan had continued to lose jobs while incentives were being doled out. U.S. Census data show job growth in Michigan from 1995 to 2000, but significant contraction from 2001 to 2003, the last year for which statistics are available. The Michigan Economic Development Corp. says far more jobs would have been lost without the probusiness inducements.
Public policy experts generally give high grades to a deal crafted by Chicago and the state of Illinois to encourage Ford Motor Co. (F) to build a 155-acre parts-supplier campus near its Chicago assembly plant. But even that project hasn't been a complete success.
In 1999, Ford invited Chicago to compete for the supplier complex against Atlanta, where the automaker also assembled cars. City and state officials collaborated on a deal valued at $117 million over three years, which included road and sewer improvements and worker training. Ford agreed to build 1 million square feet of space for its suppliers and see that 750 full-time jobs were created. The company didn't receive any financial incentives until it met the construction and job goals. Clawback clauses would punish Ford if it failed to deliver.
The supplier campus opened in 2004 with 11 parts companies, and by 2005 it employed 1,038 workers. Tower Automotive and Brose North America Inc. are among the suppliers that feed instrument panels, doors, and other components to the Ford plant a mile down newly extended 126th Street.
Timing helped. After reporting large losses for 2005, Ford announced it would eliminate 30,000 jobs and close 14 plants across North America. Among the casualties: the plant near Atlanta. Having invested heavily in Chicago, Ford spared the 2,300 jobs at its assembly plant there.
But the Chicago complex suffered a big loss in April when parts supplier Visteon Corp. closed its doors, eliminating 290 jobs. That leaves 1,100 supplier employees. "Even with the job losses," says Paul O'Connor, executive director of World Business Chicago, part of the city's Planning Dept., "we still have a state-of-the-art facility on which we can grow."
By Coleman Cowan