Virginia’s gubernatorial candidates agree on this much when it comes to job creation in the commonwealth: After a golden era of growth fueled by federal spending, trouble is on the horizon.
The budget wars in Washington are slowing the flow of federal money, which analysts say supports about 30 percent of Virginia’s economy. Meanwhile, Congress is lurching from one budget crisis to the next, sowing havoc for businesses in Virginia and elsewhere.
The biggest hurdle for the state’s next governor will be to find a way to reenergize Virginia’s economic momentum. The candidates recognize the challenge, but their plans for confronting it diverge: Terry McAuliffe (D) wants to enhance grants, tax breaks and other incentives to attract businesses, while Ken Cuccinelli II (R) says such programs are not as effective in creating jobs as just cutting taxes.
For McAuliffe, a former Democratic National Committee chairman, the question of business incentives has a personal connection. After his failed 2009 gubernatorial bid, he started work on building GreenTech, an electric car company he founded before resigning as chairman last year.
In deciding where to put the firm’s manufacturing plant, government incentives were among the items on his shopping list. While Virginia officials were still considering his plans, the company received millions of dollars in incentives from Mississippi and began operations there. As McAuliffe sees it, business incentives can be pivotal.
“Incentives play a critical role in making Virginia a competitive state in which to grow or locate your business,” McAuliffe said in response to a questionnaire from the Virginia Economic Developers Association. “For many years, Virginia was able to get by without having a robust incentive program by virtue of our proximity to the federal capital and the tremendous amount of military spending in Virginia.”
McAuliffe has promised to expand Virginia’s already broad array of incentive programs to better target growing industries, including biotechnology.
Cuccinelli, the state’s attorney general, is more circumspect. He says incentives have value, but he worries that they put too much power in the hands of state officials to pick economic winners and losers.
Cuccinelli has promised to analyze the long list of the state’s incentive programs — which range from tax breaks for businesses that establish on-site day-care facilities to grants for firms that create more than four jobs in a year.
“Incentives have a place,” Cuccinelli told the nonpartisan Virginia Prosperity Project. But, he added, “my measure of success of a good tax incentive is one that helps beyond the business that is targeted, so that it helps the rest of the community that is paying for it.”
He said the best job-creation tool is to lower taxes across the board, which he said would enhance Virginia’s business environment for all companies.
McAuliffe, who has said he would not raise taxes, called Cuccinelli’s tax-cut proposal “fiscally irresponsible” because it would drain badly needed revenue, leaving the state unable to make needed investments that also help the job market, including transportation and education.
Robert Sarvis, the Libertarian candidate, has taken a stand against incentives. To level the economic playing field, he has promised to eliminate them while streamlining regulations and cutting taxes.
Many of Virginia’s business incentive programs work by formula, leaving elected and other state officials no say in who benefits. But others are aimed at “closing the deal,” allowing officials to step in when a firm is considering moving to or expanding in the state.
The best-known program is the Governor’s Opportunity Fund, which in 2012 doled out 26 grants worth $15.1 million. State officials say the grants were well worth the investment because they leveraged $970 million in investment while creating more than 5,000 jobs. The state said that those jobs paid, on average, $57,000 a year — more than 33 percent higher than other jobs in the state.
Not all incentive programs work equally well. A review of 18 of the state’s incentive grant programs last year found that over the previous decade, Virginia had approved 3,400 grants totaling $718 million. The money helped create 68,000 jobs, the report said.
But the review asked whether many of those jobs would have come even without the incentives. Overall, the report concluded, the grants were a “positive but small” factor in whether businesses decided to build or expand in the state.
Still, some officials say cutting too many incentives would leave Virginia at a disadvantage.
“Incentives are absolutely critical, especially for larger deals,” said Sandra Jones McNinch, general counsel for the Virginia Economic Development Partnership. “If we were to unilaterally disarm, we would still get our share of small and medium-size deals, but the big ones will fly by us. That may be wrong, but I think that is reality.”
But more than incentives or cutting taxes, many businesses say the bigger factor is the pullback in federal spending in the state.
For years, Virginia has been buoyed by a rising tide of federal spending, which helped it get through the recession and the sluggish recovery much better than most of the country. The state’s jobless rate was 5.8 percent in August, well below the nationwide rate of 7.3 percent.
But with budget cuts and serial fiscal crises emanating from Washington, the federal government is looming as a hindrance for businesses.
“You cannot be strategic. You do not know whether you need to grow or get smaller,” said Deborah Stearns, regional chairwoman of the Hampton Roads Chamber of Commerce. “What we need is certainty.”