Halfway through his term as governor, Missouri’s Jay Nixon has compiled a record of spending cuts that would make him the darling of conservative policymakers everywhere—even if they didn’t know he was a Democrat. In each of his two years in office, Nixon has been forced to hack well over $400 million out of the state’s spending plans, including money for college scholarships, transportation, state retiree benefits, bio-diesel subsidies, social services and much more.

Now he’s turning to the other side of the budget equation: Revenues. He’s rolled out twin initiatives that he hopes will refocus and update the state’s economic development strategies. Last month, the 40 members of a steering committee working on economic development strategies met for the first time to begin a complicated process for producing at least half a dozen broad goals, perhaps more, to boost vital industries in the state.

Nixon also has created a 25-member committee to review the state’s tax-incentive programs—61 of them, which doled out more than $600 million in tax breaks to business interests last year. Put that number into perspective: That’s easily enough to have offset the budget cuts Nixon has made since taking office. Billed by their advocates as foundational elements of economic growth, those very incentives are a big part of what’s wrong with economic-development efforts in Missouri and throughout the region, free-market advocates say.

Any review of state-directed economic development efforts will have special meaning to business interests on the Missouri side of the Kansas City area. They have watched the Kansas side land one mega-project after another with an incentives package that some say demonstrates better strategic thinking for attracting new businesses.

“It would be healthier for the metro area if the same incentives were available in Kansas and Missouri, so that decisions on business location are made on the basis of business needs and climate, rather than direct economic incentives from either state,” said Kristi Smith Wyatt, senior vice president for government relations and public policy with the Greater Kansas City Chamber of Commerce. “If that occurs, the region could properly focus upon growing the region’s overall economy, rather than expending public funds to move existing jobs from one side of state line to the other.”

The Nixon Vision

Nixon’s goal of focusing the state’s economic development is being built on two pillars. One is called the Strategic Initiative for Economic Growth, which will eventually involve hundreds of participants focused on producing a five-year vision for updating economic development policies. The other is a sleeker, 25-member panel tasked with reviewing the business tax incentives.

The governor wants the larger panel to formulate strategic and tactical plans to produce a more modern, sustainable growth economy. He has asked it to develop at least half a dozen data-driven strategies that balance a statewide focus with differing regional characteristics of the state. Concentrating on primary business sectors such as biosciences, financial services, transportation and logistics, the process would create a five-year strategic vision for the state.

Led by a four-member executive committee, including Bill Downey of Kansas City Power and Light as representative for the 17-county Kansas City region, the 40-member steering committee would coordinate the work of an additional layer of regional planning teams, with as many as 250 members each.

The larger group’s recommendations are due to the governor by March 31, 2011.

It’s a wide-ranging mission that will involve state economic development planners, local agencies, utilities, labor interests, universities, business and professional organizations and more. Enormous and complex, their task is made more so by the way economic development programs nationwide have evolved over the decades. Too often, critics say, state policy has focused more on job creation by importing existing businesses from other states, rather than on improving business fundamentals to yield organic growth.

The Existing Landscape

Here’s just a quick peek behind the job-recruiting curtain:

• Bolstered by a package of more than $475,000 in incentives, Trinity Architectural Products of Lenexa announces in mid-July that it will set up it custom wood-making shop at Swope Industrial Park on the Missouri side.

• Two weeks later, the Kansas Commerce Department announces that it will provide $4 million in incentives for Hoefer Wysocki Architects to leave its base on the Country Club Plaza for a new home across the state line in Lenexa.

• Jet Midwest announces that it’s moving from its base in Kansas City, Kan., to the site being vacated by American Airlines’ overhaul base at Kansas City International Airport. An incentive package worth more than $7 million, Missouri officials said, would eventually create 750 jobs.

And so it goes. Week after week, month after month, Missouri and Kansas take shots at each others’ business operations, each hoping to land a bigger fish than the one it lost. The net new job gain for Kansas City as a region, in most cases: Zero.

Recruiting efforts are turned outside the regional boundaries, as well, with efforts to pull companies in from other Midwestern states or a major
relocation from the coasts.

But there is one problem with that approach, as well, say free-market purists: In the long run, it’s not only a failed strategy, but a self-defeating one. Drawing existing jobs across a state line is not the same thing as creating jobs, they point out. The bigger issue is that every tax dollar directed toward one company through an incentive program invariably comes from taxpayers in general, or must be made up through deep program spending cuts like those in both Kansas and Missouri in recent years.

Even when there is a net job creation in a recruiting venture, the incentives involved can offset much of the perceived gain. In early August, Missouri officials announced that the on-line travel site Expedia.com would take advantage of state incentives to expand its operations in Springfield. They touted the 500 new jobs that could be added to that market, at an average salary of $35,000. That would be a $17 million payroll addition for the local economy.

But critics of the existing incentives structure say a harder look at the underlying math is needed. Based on a 6 percent state income tax rate, those new employees could yield $1.09 million in additional revenues for the state each year. If so, it would take 6.7 years for the state to recoup its incentive investment. A big problem, critics say, is that suitors from another state might intervene within that time to sweep Expedia out of the Ozarks—or touch off a bidding war to keep it in Springfield.

And that, says state Sen. Chuck Purgason, is where we start “the race to the bottom.”

Hard-Luck Chuck

It’s been a tough few weeks for Purgason. First came the famous Ford Filibuster in the General Assembly’s special session in July; steadfast opposition to $100 million in tax breaks for the vehicle maker cost him a committee chairmanship. Now, after a few hours of sack time following a brutal beating in the Aug. 3 primary for a U.S. Senate seat, he’s on the highway home from St. Louis. He glances out the window of his 2000 Ford pickup—only a little irony there—at 295 sprawling acres of vacant industrial property adorned with a “For Sale” sign out front.

It’s the shuttered Chrysler plant in Fenton, Mo. Fresh off that 5–1 margin of defeat at the hands of Roy Blount in the Republican primary, the larger irony of the scene before him is not lost on Purgason, a free-market true believer.

“This plant is gone,” Purgason says. “It employed a lot of people, but we didn’t learn anything. How we kept it, when we did, was by throwing tax incentives at one individual company. And it’s gone.

“We did a lousy job,” he says. “The Hazelwood plant? Now that’s gone. The whole idea on Ford, of doing the same thing and expecting different results—it’s not going to work. We have to wake up; our job as government officials is not to reward special interests, but to create a level playing field, so that all businesses have a chance to succeed.”

Purgason’s 20-hour filibuster against the Ford incentives drew support from a handful of legislators who say it’s time the Republican Party reclaimed a true pro-business mantle for all business, rather than for those with the most influence and access to policymakers. They believe that the party has sold out, leading us on a path to economic perdition.

Look no further, they say, than the enormous budget deficits facing both Missouri and Kansas in recent years. Sure, the economy has hurt tax receipts in most states, they acknowledge, but long-term, structural damage to state budgets is being inflicted by short-term thinking. And economic incentive programs play a big part in that, they say.

Their argument against Ford’s incentive package—$100 million over 10 years, plus another $50 million for the company’s suppliers—is grounded in the belief that government can’t effectively, and in any case shouldn’t, pick economic winners and losers.

“The last I checked, Ford was the seventh-largest employer in Kansas City,” Sen. Matt Bartle of Lee’s Summit argued during the special session. “What do we tell the other six when they come looking for their state bail-out? What do we tell other employers in the state that are larger than Ford? Why are we choosing them?”

Purgason’s opposition to the Ford bill led to his removal as committee chair by Senate President Pro-Tem Charlie Shields. Originally cast as a temporary move to allow the legislation to advance out of committee, it became permanent when Purgason said he wouldn’t accept a reinstatement. Doing so, he said, would have left him, in effect, neutered.

The whole episode was a sign, he said, that the Republican Party “has basically been taken over by corporatists. Now, business comes to government to get special favors at the expense of other businesses.” The net effect is what he calls a public policy race to the bottom, with programs that pit one state against another, at the expense of state receipts.

And the proof, free-marketers say, is in the numbers: After staving off a nine-figure state budget deficit in the 2010 legislative session, lawmakers will return to Jefferson City in January to confront another, bigger shortfall—on the order of $1 billion.

Two Approaches

On the other side of the state line, Kansas offers a streamlined set of about a dozen incentives programs through its Department of Commerce. They have combined to make a dramatic impact on some parts of the state, and nowhere is that more evident than in Wyandotte County. The Village West retail development in western Kansas City, Kan., financed in large part with STAR bond revenues that capture sales taxes on the site and use them for additional development, has touched off a commercial-development feeding frenzy over the past decade and changed the fortunes of what had long been the region’s poorest county.

But even that, critics say, has come at a cost to taxpayers across Kansas who will never set foot in Village West. The retail development, they argue, is withholding sales taxes that, instead of producing services throughout Kansas, are stoking the economic engines of Wyandotte County.

Missouri’s Department of Economic Development lists a much broader menu of nearly 50 business-incentive programs. Many involve tax credits for everything from safety-net initiatives like work-force training and low-income housing to more esoteric ventures like historic preservation and film production. Those don’t even begin to address incentives offered through other state agencies’ programs.

Which is where the Kansas City region finds itself caught up in forces beyond its control, said the Chamber’s Smith Wyatt: “In an ideal world, no state or local government would offer incentives to attract business, and all businesses would make decisions on location for business reasons such as work force quality, quality of life and overall business climate,” she said. “But, the reality is that other states and regions offer incentives, and those incentives generally focus on large employers and desirable industries. We obviously have to compete for those jobs.”

State Sen. Brad Lager, one of the General Assembly’s most consistent free-market voices, says he has been pleasantly surprised by Jay Nixon’s center-right governing style. But he doesn’t believe that the problems confronting Missouri’s economy are likely to yield to comprehensive planning efforts.

“I’m a guy who fundamentally believes that best thing for economic development is to get government out of the way,” Lager said. “If you lower regulatory burdens and the barriers to entry, make it easier to start, operate and run a business, take less of its money by lowering the tax burden for everyone, that’s your best opportunity for true economic stimulus.”

Moving the Deck Chairs

Others who specialize in economic development issues and public policy say a better approach would be focusing less on existing industries and business sectors—buildings, if you will—and turning the attention more toward people.

One of those voices belongs to Robert Litan, vice president of research and policy at the Kauffman Institute. He believes efforts to keep existing industries afloat are focused on the wrong end of the job-creation spectrum.

“We call it smokestack chasing,” Litan said. “We’re not wildly enthusiastic about this strategy. It’s what states do, we understand. It’s a Rob Peter/Pay Paul exercise, an arms race you never win. For every firm you attract, somebody steals one from you, and they can’t stay bought—eventually, they’ll leave.”

Is there a better strategy?

“I think we ought to focus on eliminating regulatory barriers, tax impediments and things like that,” he said. “Now, if I had the money to hand out and a limited budget, I would rather do it for young firms that are hiring and apply it to that, rather than try to induce people to come here,” Litan said.

“But that,” he said, “doesn’t lend itself to ribbon-cutting,” or to politicians’ desires to position themselves as saviors of jobs. Focusing on efforts that are more entrepreneurial, though, “does generate sustainable growth, as opposed to trying to recruit existing businesses,” Litan said.

In the end, though, Missouri’s best efforts at upgrading its economic strategies are likely to be overwhelmed by larger forces now at work, said Susan Feigenbaum, an economics professor at the University of Missouri-St. Louis and a fellow with the conservative Show-Me Institute.

“Whenever a local government or state or federal government initiates incentives to support a particular producer or industry, it’s equivalent to putting a finger in the dike, where the dike is competitive forces of the market,” Feigenbaum said.

“We can, in the short term, shore up certain sectors for employment reasons, for tax receipt reasons,” she said, “but in the long run, if that industry is not competitive not only nationally, but globally, we’re going to see relocations.”

Return to Ingram's August 2010