Chapter 2: Buying Industry After World War II
This chapter discusses the effects of Mississippi's BAWI program on interstate competition and the industrial location policies of other states.
Mississippi's BAWI program attracted a lot of attention even though some other Southern states had more incentive activity going on. For example, from 1935-1945 Tennessee had authorized bonds worth three times those authorized by Miss. (all of it in violation of the state constitution.) (p. 35) The reason BAWI attracted so much attention was that it was the first formal state policy.
Tenn and Ky adopted programs similar to BAWI, followed by Alabama. The program spread outside the South. By 1962, nine southern and twelve nonsouthern states had adopted similar programs. Six years later, every southern state except NC and all but three nonsouthern states had adopted similar bond programs as "defensive measures." (p. 36)
The bond programs had three advantages for the subsidized firms:
1) Interest earnings on the bonds were tax-exempt so interests rates were lower
2) Rental payments to the municipality were deductible as an operating expense [it's not clear to me how that is a benefit of subsidiation]
3) The municipality held title to the facility, so it was exempt from property taxes
Cobb claims that by attracting industry by lowering costs, southern states attracted cost-conscious firms in highly competitive industries. Firms not in highly competitive industries would tend to pass higher labor costs on to consumers, rather than move. [Thus, the firms that the South attracted were liable to require additional subsidies to stay competitive. Years later the SOuth has found that those firms were ready to move again elsewhere in search of even lower operating costs, i.e. overseas.]
The subsidies seem to have been "tie-breakers" to decide between locations that were close substitutes:
The proliferation of bonding plans enabled industries to narrow their location choices to a few that met critical requirements like labor, markets, or materials and then bargain among the competing communities for the best possible financing arrangements. (p. 40)
[I think this is even more true today, with so many more types of subsidies and incentives.]
Eventually (in the late 1960s), Congressmen from northen states, disgruntled about southern subsidies, got legislation through Congress that capped the size of tax-exempt issues of industrial revenue bonds (limit set at $5 million).
The cap succeeded in holding down the value of the issues of IRBs for about a decade. In the 1970s the limit was raised to $10 million. By the 1980s issues were up enough to stir cries to limit them again.
This chapter also recounts the spread of property tax abatement through the South, although that began before WWII.
By the mid-1960s five of the seven most active exemptors of taxes were in the South. Alabama, Mississippi, and Louisiana led the way by offering ten-year exemptions of both state and local taxes. South Carolina and Kentucky followed with five-year moratoriums on local taxes. (p. 48)
The 1950s saw the growth of private or semi-private industrial promotion efforts in the form of local industrial development corporations (LIDCs). They were made up of influential local business people. They raised funds by subscriptin or donation and used them to make loans or loan-guarantees for relocating businesses. (p. 52)
Another development during this period was the growth of industrial parks. The importance of industrial parks increased as production technology chnaged to horizontal-line assembly. Factories required more space and larger one-story buildings than were available in central cities. (p. 55-56)
Cobb, J.C. (1993). The Selling of the South: The Southern Crusade for Industrial Development, 1936-1990. (2nd Ed.). Urbana: University of Illinois Press.
Posted by Chip on June 22, 2004 at 07:36 PM | TrackBack