Sunk: Mercury Marine fiasco casts light on costs of state subsidy wars

Over the past several months, we have blogged several times on state tax incentives, in particular on the need to strengthen transparency and evaluation of tax credit programs (see our posts here,  here, here and here). The issue  seems to be quickly gaining critical mass.  In September, a Joint Legislative Task Force chaired by Senator Mike Mazzei and Representative Jeff Hickman began examining transferable tax credits (the Task Force meets again November 5th in Tulsa). Earlier this month, Representative Mike Reynolds called for an investigation into possible abuses associated specifically with two transferable tax credit programs, the Small Business Capital Companies credit and the Rural Small Business Capital Companies credit.  The Oklahoman has taken note, arguing in this editorial that, “while we remain convinced that some incentive programs are justified, the potential for abuse makes the scrutiny vital and timely.”

One common argument for tax incentives is that in the competitive world of state economic development, states that fail to offer tax breaks to entice companies to invest or stay put will see investment and jobs shift elsewhere. Critics, such as Good Jobs First, view this “economic war among the states” as precisely the problem, amounting to a “ruinous zero-sum race to the bottom that benefits only footloose corporations while undermining state and local budgets, especially schools and infrastructure.”  Good Jobs First has blogged recently on two prominent examples where costly tax credit deals intended to lure jobs and investment have instead ended up leading to a major plant shutdown (Dell in North Carolina) and a criminal probe (film tax credits in Iowa).

Readers interested in a close-to-home example of the costs and drawbacks of state subsidy wars should check out a spirited new paper [PDF] by Jack Norman and Karen Royster, researchers at the Institute for Wisconsin’s Future, titled “The Twisted Saga of Mercury Marine”. Oklahomans may remember Mercury Marine as the marine engine manufacturing company that persuaded the Oklahoma Legislature to pass a bill this past session, SB 929, that made the company eligible for tax credits in return for keeping open  its plant in Stillwater. Mercury Marine then used this leverage to wrest concessions for its plant in Fond du Lac, Wisconsin, and promptly announced the closure of its Stillwater operations.

In addition to winning wage and benefit concessions from the union in Wisconsin to keep their jobs from moving to Oklahoma, the taxpayers of Fond du Lac and Wisconsin were persuaded to cough up as well. According to Norman and Royster:

• Fond du Lac is giving Mercury Marine a $50 million, low-interest publicly financed loan;
• To pay for the loan, Fond du Lac County Board imposed a countywide one-half percent sales tax;
• The Fond du Lac City Council approved a $3 million package of taxpayer-funded incentives;
• The state of Wisconsin is offering additional incentive package that has not yet been divulged.

This is a hefty price for a division of a larger company (Brunswick Corporation) which, Norman and Royster reveal, has seen its stock price fall 71 percent since 2005, laid off 5,300 North American workers,  forced pay freezes for current employees, and imposed steep pay cuts for new hires and employees back from layoffs – all the while continuing to  pay its CEO  in excess of $3 million in 2008.

At least in this instance, the Oklahoma Legislature prudently included a “clawback” provision in its subsidy bill which required Mercury Marine to return over $1 million in payments once it pulled up stakes for Wisconsin.  But while clawback clauses can provide some protection against being shaken down by a few businesses, might it not be time instead for Oklahoma to withdraw from the subsidies war? Oklahoma offers businesses a productive, hard-working labor force, a central location, a low cost-of-living, and among the lowest state and local taxes in the nation. Rather than further erode our tax base through deals that offer questionable returns, the dollars may be more productive if invested in the things that will make Oklahoma more broadly appealing to all businesses – for example, improving teacher quality, workforce development system, transportation infrastructure, and public health. That way we can stop allowing businesses to grab a slice of the pie before agreeing to sit down at the table.