Jobs Creation Act flops in S.C.

By BEN WERNER

bwerner@thestate.com

Most of South Carolina’s largest manufacturers turned up their noses to massive tax breaks billed as ways to spur job growth.

Corporate leaders said the tax breaks, in most cases, would have required too much work, dismantled complicated tax shelters or just were not applicable.

Yet along the campaign trail, in stump speeches and on political advertisements starting to appear at Labor Day two years ago, job creation was all the rage.

In the middle of this campaign bluster, Congress passed by overwhelming margins the tax break law — dubbed the American Jobs Creation Act of 2004. President Bush signed it into law just weeks before Election Day.

The only problem — few, if any South Carolina jobs were created by this legislation.

Based on an analysis of Securities and Exchange Commission filings this year, most of South Carolina’s industrial employers responded to the tax breaks with footnotes in their financial reports explaining their decisions to keep cash invested in facilities and jobs overseas.

SELLING THE BREAK

Politicians believed — perhaps naively — that jobs would naturally be created by offering U.S. companies tax incentives to bring home cash earned overseas.

That is the crux of the 143-page law’s most popular section, a part dealing with what is called repatriating funds — a massive tax break in place for all of 2005.

But John McDermott, a USC professor of economics, says tax breaks typically spur job growth only if such breaks target a specific corporate behavior.

For example, economic incentive packages offered by states often include tax breaks tied directly to hiring.

But the purpose of the Jobs Creation Act really had nothing to do with creating jobs, McDermott says. The law was written in response to a World Trade Organization ruling against the United States.

A trade spat with the European Union over other tax breaks U.S. firms could claim had been brewing for years.

U.S. companies had been allowed to take the cost of goods they sold overseas off their books at tax time. The E.U. claimed this was a rebate, and the World Trade Organization agreed.

U.S. firms were hit with stiff import tariffs in Europe, and by 2004 those tariffs had grown to more than 10 percent.

After the World Trade Organization action, McDermott suspects the one-time tax break for repatriating foreign earnings in 2005 was born out of a desire to swap a new tax break for the old one being lost.

“You don’t want to tax companies to death,” McDermott says. “Our corporate tax rates are not low.”

Depending on how much income a company reports, federal corporate tax rates are as high as 35 percent. In contrast, the average corporate tax rate in Asia is about 30 percent and 25 percent in the European Union, according to KPMG’s 2006 Corporate Tax Rate Survey.

But try selling something called the Corporate Tax Benefit Act of 2004 to voters back home at a time when the nation was experiencing a “jobless recovery.”

POLITICAL FIX

Instead, the idea caught on that offering industrial employers with global operations huge tax breaks could somehow spur job growth in the U.S.

That was the story sold to voters just weeks before the 2004 presidential and congressional elections.

Politicians claimed — correctly — that massive amounts of cash were invested in the overseas operations of U.S.-based companies.

In 2003, more than half of the S&P 500 companies reported foreign earnings permanently invested overseas, according to a Bank of America report.

American firms kept an estimated $700 billion permanently invested overseas. That money fueled plant expansions and paid for hiring in places such as China and Mexico.

South Carolina companies for years have expanded across the nation and around the globe.

For instance, as of this Labor Day, South Carolina’s publicly traded companies operate 41 facilities in Canada — nearly double the 21 facilities, including headquarters, that are located in South Carolina.

These public companies even operate more plants in North Carolina — 26 total — than in their home state.

WHY NO JOBS

Banc of America Securities predicted between $300 billion and $400 billion of overseas investment would be repatriated in 2005.

Last year, Sonoco, the Hartsville-based packaging company, used the tax break to bring $124.7 millionback to the U.S.

But Sonoco is a rarity. With revenues of $3.5 billion, Sonoco is the second-largest publicly traded company in South Carolina. The company reported a profit of $161.9 million last year.

Most of the state’s public companies do not even have foreign operations.

The company’s global employment, though, has remained essentially flat at about 17,000 workers.

What the law’s proponents did not seem to grasp was the structure of small and medium-size firms — such as most of South Carolina’s companies.

Most of these firms are arranged in ways to exploit globalization while finding the best income tax deals in the U.S., according to a December 2004 report, critical of the law, released by the Urban-Brookings Tax Policy Center.

“Companies have an incentive to move their operations to low-tax locations abroad,” the report said. “They also have an incentive to shift paper profits to low-tax locations, even if they do not have a large physical presence there.”

In recent years, several South Carolina companies have done just that — move their operations overseas.

By losing money in the U.S., a company can avoid paying taxes, thus negating any benefit from claiming a tax break.

For Polymer Group, formerly based in North Charleston and now based in Charlotte, the company’s tax structure made taking advantage of the tax credit impossible.

“The way Polymer Group is structured, the U.S. entities post losses,” says Dennis Norman, vice president for strategic planning and communication.

Since domestic operations lose money each year, the company can avoid a lot of taxes. Most of the Polymer Group’s manufacturing occurs overseas, while the administration and sales operations are based in the U.S.

Polymer Group reported revenues of $948.8 million in 2005, and posted a $21 million loss.

Polymer Group is by no means alone when it comes to such a structure.

Other companies, such as Kemet Corp., the Greenville-based electronics components maker, has for several years been moving jobs overseas.

When the tax break was offered, Kemet was not in a position to hire U.S. workers, says Dean Dimke a company spokesman. “We’ve used these programs in the past and hope to in the future.”

In 2001, Kemet employed 3,600 workers in the U.S. By the end of last year, the company had pared 72 percent of its domestic work force, reporting about 1,000 U.S. employees.

The reason few jobs were seemingly created in South Carolina, though, is not because companies greedily pocketed earnings. Instead, the tax break is essentially meaningless to the operations of most of South Carolina’s employers.

This is why McDermott says, “It benefits larger corporations at the expense of smaller ones.”

BILLIONS AT STAKE

So, was the law a failure?

Its detractors immediately jumped on the point that the Jobs Creation Act was destined to cause federal revenues to decrease.

At stake is an estimated $21 billion in lost tax income. Some opponents predict during the next decade the law ultimately will add as much as $80 billion to the national deficit, according to the Urban-Brookings Tax Policy Center.

But McDermott says the law did what it was designed to do — stave off a brewing trade war.

The World Trade Organization ruling was really starting to put the squeeze on U.S. companies trying to sell goods overseas.

At a time the nation was still coming out of a recession, McDermott says, it would not be unreasonable to give companies a one-time break.

Plus, jobs might not have been created by the law, but McDermott suspects some U.S. positions probably were saved by easing the financial pressure caused by European tariffs.

“The bill was not a bad law,” McDermott says. “Just poorly named.”

Reach Werner at (803) 771-8509.