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Boondoggle When Sony came to Springfield in 1994, state and local governments lavished more than $12 million of tax breaks and subsidies on the corporation. "Oregon couldn't be more proud or be more excited than to welcome Sony," then Gov. Barbara Roberts gushed. But nine years later, Oregon isn't so proud. The high tech industry the state paid untold hundreds of millions of dollars to recruit is in the dumps. Sony and many other companies have shut down, scaled back or moved away for cheaper labor. With thousands of high tech jobs lost, Oregon now leads the nation in unemployment and government red ink. "We became the cartoon poster child for a failed state," Tim Nesbitt, director of the Oregon AFL-CIO, told the Portland City Club last month. Besides Sony, the local economic development landscape is littered with failures: Hynix received more than $60 million in subsidies and tax breaks but recently laid off its chip plant workers for six months and continues to teeter on bankruptcy. HMT laid off 400 workers at its Eugene hard drive plant after receiving $2 million in tax breaks. Eugene lured Symantec downtown with $1 million in subsidies and built the corporation a $13 million parking garage. But Symantec left Eugene for more tax breaks in Springfield. Local officials launched the Riverfront Research Park in 1994 with promises of 3,000 high paying jobs. But today, taxpayers have few if any jobs to show for at least $13 million in subsidies. Over the past three decades, Eugene has spent tens of millions of dollars on subsidized parking garages and infrastructure for downtown businesses in failed efforts to revitalize the city core. Calls for jobs, jobs, jobs have intensified with the current economic slump. Given past failures, what should state and local government do? New Gov. Ted Kulongoski and industry and business recruiters have called for even more of the same old tax break and deregulation strategies. But there's a growing chorus of critics that say we should learn from our past mistakes and employ a new economic development strategy focused more on the public good than corporate profits.
Broken Record Kulongoski has declared aggressively recruiting new industry with tax breaks is his "highest priority." Even before he took office, he left for Silicon Valley to schmooze corporate CEOs. Last month the governor was at Intel wearing a clean room "bunny suit." Kulongoski's newly appointed point man on economic development, Marty Brantley, says the state hasn't given away money fast enough to lure corporations. "Part of the reason our unemployment rate is so high is we have not had the tools," says the director of the Oregon Economic and Community Development Department. "We are in a very competitive environment and without some of these incentives for people to come, they won't come." Brantley's agency is backing legislation to expand the state's strategic investment and enterprise zone programs to give more property tax breaks to corporations. The two programs have already cost state and local government hundreds of millions of dollars over the past decade in forgone taxes with the tab increasing by about $80 million a year. Kulongoski has signed an executive order to create an "Office of Regulatory Streamlining" to cut state regulations that stand in the way of business. Another executive order aims to expand city urban growth boundaries (UGBs) to create more "shovel ready" industrial sites. The sprawl prospect has local land speculators drooling and strong backing from Jack Roberts, the new head of business recruiting for the Eugene/Springfield Metropolitan Partnership. "The biggest problem we have right now is a shortage of good industrial lands," says Roberts. "We have to talk about expanding the urban growth boundary." Roberts also sees no mistakes in past give-aways to Sony, Hynix and others and wants to continue the hand-outs to corporations. The incentives to lure the companies were "worthwhile," he says. "We need to get in the game." The Eugene City Council recently voted to give Hynix $2 million more in tax breaks, even though the corporation was cutting and not adding jobs. The council also has moved to triple the size of the city's urban renewal district downtown and keep the Riverfront Research Park district going another 20 years. Several councilors recently used an unscientific survey of some local businesses' anti-government attitudes to call for more deregulation and subsidies.
Broken Breaks "Jack Roberts doesn't have a clue," says Ed Whitelaw, a UO professor and one of the Northwest's leading economists. Study after study has shown that corporate incentives do little to improve local economies, he says. "I can give you chapter and verse." Sony was a "classic mistake," Whitelaw says. "We've know [that incentives don't work] for decades, yet people keep getting suckered into it," he says. "It's a chronic persistent disease that we've contracted here. It's just mindless." A long list of studies has shown corporate incentives don't create jobs, but rather pay companies for decisions they would have made anyway. Here's a sampling: In 1998, two-time Pulitzer-Prize winning reporters Donald Barlett and James Steele reported on tax incentive "corporate welfare" in a four-part Time magazine series. "It has turned politicians into bribery specialists, and smart business people into con artists. And most surprisingly of all, it has rarely created any new jobs." A 2000 study commissioned by Oregon's largest business lobby, Associated Oregon Industries, shows tax breaks don't work. Tax breaks aren't a big factor in location decisions by corporate headquarters, the study found. The corporations tend to choose states with large populations and big economies. California and New York have high taxes but do the best at luring corporate headquarters. Each new job recruited to the state adds to the population by about 2.3 people and is therefore unlikely to result in reduced unemployment, according to studies by Oregon Employment Department economist Art Ayre. The Oregon economic development department itself conducted a study in 1993 that concluded "analysis of tax incentive programs finds little evidence that they are effective in promoting economic development." The research indicated that labor costs, transportation, materials, quality of city services and other considerations outweigh tax incentives in deciding where a corporation locates. With so many studies questioning tax breaks, Eugene City Councilor Bonny Bettman says any new breaks should closely weigh costs vs. benefits. The city should do such detailed analysis "in a responsible way, the way a business would do," Bettman says. But "we don't do that at the city," she says. "It's all basically politically motivated." Bettman is far from alone in speaking out against corporate giveaways. A broad range of business and government leaders have recognized the tax break problem. Here's another sampling: "As a businessman, I never made an investment decision based on the Tax Code. … [If] you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it," Paul O'Neill, former CEO of Alcoa and current U.S. Treasury Secretary, said in 2001. "Any company that makes a decision as to where they are going to be based on the tax rate is a company that won't be around very long," businessman and New York City Mayor Michael Bloomberg told The New York Times in 2001. "The handout game, whether it involves steel mills or baseball teams or high-tech R&D, stops when politicians fathom or are made to learn that it doesn't pay off in most cases. ... They ought to attend to competitiveness by maximizing the appeal of their jurisdiction to every kind of enterprise, not just those with a big snout," said a 1994 Wall Street Journal editorial. "There is a belief that they [corporate tax breaks] work," David Brunori, a George Washington University Law School professor and contributing editor of State Tax Notes told the Seattle Times last month. "There is virtually no evidence that is the case." "Oregon is demure and lovely, and it ought to play a little hard to get. And I think you'll all be just as sick as I am if you find it is nothing but a hungry hussy, throwing herself at every stinking smokestack that's offered," former Oregon Gov. Tom McCall said decades ago. Even without any breaks, taxes in Oregon are already very competitive. Oregon now has the lowest business taxes among 11 Western states. Last year, more than 80 percent of Oregon's corporations used income tax loopholes and dodges to qualify for the minimum payment of $10. "Having cities all over the country recruiting and clamoring for the same business with incentives and tax breaks is really a lose, lose game," says Councilor Bettman. "We have been doing that statewide and locally for at least a decade and a half, and it has created a situation where we don't have enough money to operate." It's also unclear how deregulation is the economic answer. Kulongoski hasn't provided any evidence that the state is actually enforcing unnecessary regulations. In fact, Oregon already appears to have some of the weakest regulation in the nation. The state has the worst record in the U.S. for regulating water pollution, with more than half of all wastewater permits out of date. Nor has the governor provided solid evidence that the state lacks sufficient industrial land for new businesses. Cities are already required by law to provide an "adequate" supply of industrial land within their growth boundaries. The state hasn't inventoried what's already available. Locally, Eugene City Councilor David Kelly says the city should assemble and rehabilitate brownfield and little used industrial land before allowing more sprawl. "Before we expand the urban growth boundary 500 acres, let's study seriously all the vacant and underused industrial land we already have." "Look at the facts," Bob Stacey, director of the land use watchdog group 1000 Friends of Oregon, said recently. "Do not assume land use planning is a problem because we're in an economic crisis," Stacey said. "That's just not the case."
Beyond Corporate Welfare There are better ways to a strong economy than tax breaks and deregulation, critics say. The best way to create jobs is to invest in public services, especially good schools that attract people and employers to the state, according to a growing reform movement. "We can't expect to compete in a full-time world with part-time schools and substandard services," says Nesbitt, state AFL-CIO director and a leader in the Oregon Revenue Coalition. The coalition, made up of a long list of labor and civic groups, is calling for cutting tax breaks to protect Oregon's livability and jobs. "Please ask your lobbyists not to support education in one hearing room of the state Capitol and then show up with their hands out for more tax cuts in another. You can't have it both ways," says Nesbitt. A million dollars in tax breaks given to a corporation could have kept school open for another day for 51,000 children, according to the Revenue Coalition. Intel and other high tech employers have already expressed concern that with the state's underfunded school system, they will have trouble attracting and retaining good employees. Economist Joseph Cortright, recently told The Oregonian that when it comes to high tech, the quality of schools "is a big factor in their decision to come here and stay here." The National Education Association recently produced a detailed report on the damage an estimated $50 billion in corporate tax breaks and diverted urban renewal money is doing to schools nationwide. "These subsidies can harm public education by diverting funding that local schools badly need to sustain their educational mission," the NEA reported. In addition, "Today's development subsidies may be enriching corporations at the cost of the education of tomorrow's work force." "Despite the enormous injections of public funding they have received, subsidized corporate development schemes have not really delivered on the promises of public benefits," according to the NEA report. By damaging schools, the breaks "may be undermining the attractiveness of an area to the highly skilled work forces that businesses increasingly seek," the NEA reported. "Educated, skilled workers want to give their children good educations as well." If underfunded schools produce more high school dropouts, that will have a big impact on the Oregon economy. Dropouts earn 30 percent less in wages, are twice as likely to be unemployed and four times more likely to need state health insurance, according to the Oregon School Boards Association. The American Federation of Teachers has joined in calling for reform of tax breaks that take money from schools. "Businesses and organizations that receive public subsidies often provide little measurable benefit to the public in return and often cost the taxpayer up to $100,000 for each job they create," the group said in a recent resolution. Funding other government services would also give the economy a boost. A million dollars in tax breaks could have provided in-home care for nearly 200 seniors for one year or crisis services for 1,637 people suffering mental illness, according to the Revenue Coalition. Besides giving people good jobs helping other people, social service funding also brings in millions of federal matching dollars into the Oregon economy. For example, a recent study by ECONorthwest economists showed that a state expenditure of $300,000 in food stamp outreach would attract between $700,000 and $3.8 million in federal funds. Each $1 million in federal spending would add 22 jobs to the state economy and help reduce the state's federal ranking as worst in fighting hunger, the study found. Unlike corporate profits that are sent out of state, poor people quickly spend their subsidies in state, giving an added boost to the state economy, welfare advocates point out. To adequately fund state services, the Revenue Coalition is calling for a crackdown on tax breaks for big business and the rich, and an increase in existing business taxes. "Back in 1990, businesses paid more than 40 percent of the operating costs of schools statewide, mostly by means of the property tax; now their contributions have declined to less than 30 percent. That difference alone accounts for the shortfall in our school budgets today," Nesbitt of the AFL-CIO says. With the legislature pushing even more corporate welfare, the Coalition says it will pass a ballot initiative if necessary.
Local Jobs What's good for the state will also work locally. Economist Whitelaw says the region should focus on attracting high quality workers and companies with well funded local services such as roads, parks, sewers and schools. Rather than focusing on corporate incentives, "Eugene/Springfield can do best for its economic prospects by asking its public sector to do well what they do best," Whitelaw says. City Councilor Bonny Bettman agrees. "The best investment is for the city to invest in excellent services," she says. "It makes an excellent place to do business and an excellent place to live." But Bettman, on the losing end of recent council votes to give more tax breaks to Hynix and to dramatically expand urban renewal, has had a hard time convincing her fellow councilors. "We're starving services and losing jobs so we can take the money and give it to private industry to create jobs. It just seems like a big contradiction to me," she says, pointing to a proposal to cut 23 city positions to close this year's budget gap. Bettman says the Riverfront urban renewal area will cost the city $160,000 next year and much more in later years. "We're going around to taxpayers saying the sky is falling, then we're diverting money that could be used for schools and other services." City Councilor David Kelly says the city should focus on helping existing local small businesses. "The majority of your jobs is going to come from local, already established small businesses," he says. Last year Citizens for Public Accountability and Friends of Eugene called for a similar approach in a "Citizens State of the City." Supporters of focusing on small business say such employers can provide more and more stable jobs than a single large corporation. Small employers don't all go under at once and, rooted locally, are less likely to pick up and move abroad for cheap labor. With studies showing that as much as 80 percent of the nation's manufacturing jobs may be headed overseas, Kelly says, "if you're looking to hang your economy on new large manufacturing companies, you're in big trouble." For the last five years, the city's official Growth Management Policies have called for an economic development "focus on small, local and environmentally sensitive business." But little has been done. Last year, the council rejected a proposal for funding an assistance program for local small business and instead used the money to give Hynix another $2 million in tax breaks. Jack Roberts, the head of the Metro Partnership, says his agency's efforts target both small and large businesses. If big volatile industries are "the end all and be all of your economic development strategy, it will fail," he says. But when Hynix (then called Hyundai) came to town in 1995, Roberts was a major booster and dismissed the small businesses at Saturday Market. At a pro-Hynix rally, Roberts jeered tax break opponents, saying "How much more do they think they'll be making working at the Saturday Market?" Saturday Market supporters pointed out that, in fact, the market has employed far more local people for far more years than Hynix and is a major incubator of spin-off local businesses and a major tourist attraction, even without millions of dollars in public subsidies. Kelly, who serves on the Metro Partnership board, says he's urged more work for small business but corporate "recruitment seems to be getting most of the focus."
Targeted Recruiting "There is a place for very targeted recruiting," Kelly says. But he says it shouldn't be of low-paid, unstable jobs stamping chips at "cookie cutter" factories. Companies that design products or do other knowledge-based work depend on local skilled workers, provide higher paid jobs and are less likely to leave, according to Kelly. Kelly, himself a computer programmer, says one high-wage, low-impact industry that could work for Eugene is software development. "We've got a lot of very talented software developers locally," he says. But the local industry may need some help to take off. Local companies are having trouble attracting skilled workers who worry that there aren't many other local software firms to switch to if a new employer folds. "There isn't enough of a critical mass," Kelly says. Councilor Betty Taylor says the city should "try to discourage the big box stores coming in" and driving small, local downtown stores out of business. The city spends millions trying to revive downtown while helping Wal-Mart and others build big new stores on the edge, she says, "I think it's so stupid." Kelly says the city could change its purchasing rules to give preferences to local suppliers. The city could also help educate consumers to buy from locally owned businesses and show the local impact, "when they go to Wal-Mart instead of Jerry's," he says. "There's no magic economic bullet," Kelly says. He says the Metro Partnership should involve citizens in a "very broad community conversation" about what economic strategy people want. Talking now will help avoid surprises and backlash at subsidies later, according to Kelly. To design Oregon's economic development strategy, Kulongoski has been conversing mostly with big business leaders. Part of his strategy does involve investing in some government services to create jobs. He wants new taxes and fees to support increased tourism marketing and road and bridge repair work. But Kulongoski and his development director Brantley's focus is on recruiting big industry to come to Oregon. If schools are in a funding crisis, "The way you grow the revenue is to grow the tax base," says Brantley. Oregon must keep taxes low and expand tax breaks to lure the big companies that will expand the tax base, according to Brantley. "If the cost of business goes up, that appeal to go somewhere else becomes very strong." That somewhere else could be a state like South Carolina. That state has some of the lowest taxes and biggest corporate breaks in the nation. South Carolina also has some of the lowest SAT scores in the U.S. and 40 percent of homes are unconnected to sewers. A recent report from the Oregon Center for Public Policy shows Kulongoski's strategy of funding schools through business growth won't work. Oregon will have to grow far faster than most economists predict to make up enough revenue in the next five years to get back to government funding levels before the recession. Economist Whitelaw says giving more tax breaks to get more tax revenue doesn't make sense. Logically, "it starts to unravel." But if you spend more on schools and other key government services, research shows "unequivocally, it improves economic growth," Whitelaw says. On the other hand, "if you decrease it [spending], it has a negative effect," he says. "Low taxes with low services are going to screw you over the long run."
Design
It & They Will Come The ring of fallen big business is still echoing here in Lane county, but Eugene could be a Northwest hotspot for small business success based on art, design and media. Several such businesses are surviving, even flourishing, here. Carolyn and Rick Fierro own and run Fierro Designs, a company that caters to a niche market — fresh produce suppliers. Fierro Designs creates graphics for produce containers — boxes, crates, etc. Fierro Designs began in the San Francisco Bay area. At the height of the dot-com madness, the Fierros found that they kept losing employees to "the next big thing." "After our last designer left," says Carolyn Fierro, "We said, 'Do we really want to be here?'" The decision to move to Eugene was based on quality of life. Fierro says, "We were looking for a community where we could really set down roots and we had always loved Oregon." The Fierros have found the lifestyle and community they were looking for. As for the business end, Fierro says, "The way it works, we aren't really dependent on the local economy." Fierro Designs has clients in California, Arizona, even Kansas. Their niche market and the ability to work via the Internet allows the Fierros to enjoy life away from the big city, with the ability to grow a business one might find there. Steve Christiansen is one of two owners of InterVision, a company of designers, producers and publishers of video and interactive media. Again, lifestyle is a factor in deciding to start a small, creative business in a small town full of creative people. Christiansen says, "One develops a niche. We feel the environment here is supportive in that a small town allows you to build a network and make connections with some ease." InterVision has been so successful in that networking process that they now house a number of related businesses and even client businesses in their downtown building. Joy Archer and Harry Pattison own Volcano, Inc., a group of writers who create film, video and audio materials, largely marketing related. They work directly with clients such as Oregon Medical Group, Silk Soy Milk, Oregon Chai, and indirectly with companies such as 3Com, Comedy Central, Nordstrom and Mutual of Omaha. Of the difficulties in running a small, creative business venture in this town, Archer says, "Eugene can be very difficult to work in successfully as a creative professional … It seems that often the standard of 'quality work' is relaxed here, which isn't at all helpful. The key to our success has been to define ourselves as 'working from Eugene,' that is to say, living and working in Eugene, but focusing on clients and projects that are out of market — ranging from the entire West Coast to as far east as New York and Boston." In terms of whether the city supports small businesses, Archer says, "Eugene doesn't deliberately support small business. Few towns do. But we'd be very surprised if small businesses aren't responsible for the vast majority of jobs in town … It's interesting that Eugene tends to view small business with such benign neglect, since it's most likely the key to revitalizing downtown … Goofy choices like parking meters make it harder for small businesses to survive downtown. Like most towns, misguided as they may be, Eugene tends to put its eggs in the occasional big basket like a Hynix or a PeaceHealth, instead of into the more vigorous and rugged small businesses that have made us kind of a cool town in the first place." Archer is hopeful, however, and Volcano is thriving. She says, "The broader focus has paid off, we believe, for the clients that we work with locally. And their recognition of the quality of our work is very heartening for the future."
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