Virginia programs that provide financial incentives to lure companies to the state or keep them from moving elsewhere are cost-effective and worth continuing even in grim budget times, a legislative committee said in a report released today.
The committee studied two years -- 1997 and 1998 -- during the height of the Internet economic boom. It found that Virginia paid more than $30 million in incentives to businesses during that time. But it said that amount was recovered in higher income taxes in three to five years.
Lawmakers this summer requested a study of the often-controversial practice of providing businesses with cash payments or other incentives. Virginia offers cash grants through the Governor's Opportunity Fund and payments tied to the number of jobs created after a business comes to the state.
Staff members for the Joint Legislative Audit and Review Committee said they believe both programs are worth continuing.
"If the state eliminated funding of its two largest business incentive grant programs, there would be longer-term consequences," the report states. "In two or three years, the state's resulting loss in individual income tax revenues would likely be more than the amount saved by cutting these programs."
In Northern Virginia, for example, the study looked at MCI WorldCom Inc., which was promised a $2 million payment from the opportunity fund and $300,000 in payments tied to the company's 3,500 jobs. The study estimated that those workers had paid $7.6 million in income taxes by last year.
The study did not look at the impact of WorldCom's bankruptcy filing or its recent debt-related financial troubles. State officials said WorldCom's $2 million grant has not been paid pending the outcome of the company's financial troubles.
The study found that Virginia has promised companies a total of $170 million over the next 13 years. But it noted that the amount could shrink if companies scale back their plans in Virginia or if businesses don't meet the requirements for earning the payments.
Government-sponsored incentive payments, which sometimes amount to tens of millions of dollars, have been controversial for years across the country. Critics say they are a waste of money that pits one state or locality against another.
Bill Schweke, research director for the Corporation for Enterprise Development, a nonprofit group that says its mission is to make sure low-income people benefit from economic development, said budget crises in Virginia and other states make the incentive payments even more questionable.
"The essentials related to roads and ports and the quality of education and universities -- those are the most important," Schweke said. "It's just not wise to play this game."
Schweke questioned the committee's assumption that all of the companies studied would have gone to other states if the incentive payments had not been made.
"That's a big assumption," he said. "No company is going to come anywhere unless they are already interested. The incentive is just a sweetener. It's the fundamental characteristics of the labor force, the location, the market, the proximity to natural resources . . . that are essential."
John Sternlicht, the legislative director for the Virginia Economic Development Partnership, which operates the opportunity fund, said that he wished there was no need for incentives but that he knows otherwise.
"As a parent, would I rather this money be spent on schools? Probably," he said. "New York and New Jersey called a moratorium [on incentives]. It lasted about 12 minutes before somebody crossed the line. It's a very competitive world."