Getting Fat on the Government Dole

With the amount of money that North Carolina has been throwing at companies these days to invest or upgrade facilities in the state, it's surprising that the state's governor vetoed a bill that would have allowed tire maker Goodyear (NYSE: GT  ) to revamp its plant.

Dell (Nasdaq: DELL  ) , Google (Nasdaq: GOOG  ) , Lenovo, and others have all been able to wrangle hundreds of millions of tax dollars from the state government to get them to locate there. The Goodyear bill, while not specifically mentioning the company -- though few others would actually qualify -- would have provided a package of incentives worth as much as $40 million over the course of 10 years to modernize its plant.

While the incentive package was vetoed, there's a good chance the legislature will override it. Though temporarily disappointed, Goodyear might still win the largesse.

For decades, financial incentive packages have been a common way for states to woo business. The benefits for the business are easy to see. Whether it's a good deal for taxpayers, though, is another matter. Like the Baltimore Colts football team sneaking out of town under the cover of night to relocate in Indianapolis, a number of businesses have collected their cash, then fled the states anyway.

Yet states are becoming more circumspect in the deals they sign, realizing that they might just be giving away the store in their zeal to say they landed a big-name company. Many have begun adding "clawback" clauses which allow them to recoup some or all of the money given to a company if it reneges on its pledge to stay put. Instinet, for example, was required to pay back New Jersey the half-million dollars it had been awarded when the company was acquired by the Nasdaq (Nasdaq: NDAQ  ) in 2005 and took its jobs out of the state.

Some companies, though, make it a part of their business plan to expand in a locale only if they can first win concessions. Sporting-goods retailer Cabela's (NYSE: CAB  ) will only put up one of its theme-park stores after it has negotiated with a locale to issue economic development bonds to pay for the construction. For example, it will recoup all but about $1 million of the $34 million it costs to build one of its superstores as a result of the bonds sold by one Kansas county. It was able to lease the land it built the store on for just $1 a year, but lease it back to the local government for $14 million -- plus interest -- for the next two decades!

Cabela's justifies its receipt of handouts by saying its stores are tourist destinations. Aside from selling sporting goods merchandise, Cabela's 200,000 square foot stores feature near-life-size mountains, aquariums, and museums of stuffed animals that people drive for miles to visit. Cabela's, a Motley Fool Hidden Gems recommendation, has been fairly successful at generating profits from this model. Again, whether the government should be financing private enterprise is another matter, though it's a practice I personally dislike. Should companies get a helping hand from public funds to grow, or should they have to fight the battle for capital just like everyone else?

While there's the threat that Goodyear could always move its tire operations overseas if it doesn't get the incentives it seeks, that's not something a company can do too quickly. Nor has Goodyear shown a willingness to do so. But if it can lower its own costs at the expense of taxpayers, it will certainly try.

Even with states realizing they're playing a bit of a zero-sum game by competing against one another with incentives, grants, and bonds, it's not one they're likely to quit playing anytime soon.

Dell is a recommendation of Motley Fool Stock Advisor and Motley Fool Inside Value. A 30-day free trial subscription will give you complete access to all of the Fool's investment services.

Fool contributor Rich Duprey owns shares of Goodyear but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. Nasdaq is an Inside Value selection. The Motley Fool has a disclosure policy.


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