August 22, 2007 — Entertaining Retail

South Carolina showers "destination" retailers with subsidies
By Betty Joyce Nash

There's nothing new about public subsidies for factories or research parks. But some states employ the same tactics to pull in large retailers, a twist that's raising eyebrows. In 2007, the South Carolina Legislature expanded an incentive program for certain retailers over the objections of Gov. Mark Sanford.

Retail typically expands in response to growth in jobs and income, not the other way around. But some stores have become destinations that draw customers from other states, especially those situated along main arteries such as Interstate 95. Some say that extra business warrants the use of economic carrots to attract these "destination" retailers.

South Carolina is trying to steer destination retailers to the state by offering rebates of up to 50 cents on each dollar generated in sales tax. The incentives apply to "extraordinary" establishments within two miles of an interstate. They must attract at least 2 million visitors a year — 35 percent of whom have traveled at least 50 miles — as well as invest at least $25 million and offer at least one hotel to service the establishment. The retailers also must collect and remit at least $2 million in annual sales taxes. They also can receive credits against income taxes for every full-time job or two part-time positions created.

The incentive program was tailored for Cabela's and Bass Pro Shops, two mega-sellers of outdoor sporting goods. Both companies offer unusual attractions such as waterfalls and aquariums designed to entice shoppers.

These retail incentives reflect the decline of the manufacturing sector in South Carolina and elsewhere, according to Doug Woodward, an economist at the University of South Carolina. "States are looking for other kinds of economic activities [such as] distribution and retail," Woodward says. "That's where the jobs are."

But Woodward notes two downsides. First, retail jobs may not be worth the forgone tax revenue if wages and benefits are too low to raise incomes. "We're trying to create jobs that will help us compensate for our losses in manufacturing jobs," he explains.

Second, more retailers may jump on the incentive bandwagon. "If you keep spreading these incentives into sectors of the economy that haven't received them, then others are going to want them," Woodward says. (Other retailers in South Carolina may receive jobs tax credits and local subsidies to locate in the state's poorest counties.)

Cabela's, based in Sidney, Neb., draws customers with museum-quality displays of wildlife and antique sports equipment. Each store is unique, says spokesman Joe Arterburn, with the biggest ones offering mountain and trout streams. "We found out early when we built our store near the interstate that it drew people from distances; they'd schedule or plan vacations around stops here," he notes.

Cabela's is definitely interested in South Carolina, Arterburn says. So far, though, the firm remains mum on timing and location.

Even if the Palmetto State manages to net another destination retailer, retail subsidies may not generate new income and spending. University of Missouri economists Georgeanne Artz and Judith Stallmann raise this concern in a recent paper. Retail development that is not driven by increased incomes or population may just redistribute income between communities or within the community rather than contributing much to economic growth, according to the authors.

In South Carolina, for instance, Bass Pro already has one location in Myrtle Beach — and one just across the border in Charlotte, N.C. Another Bass Pro or Cabela's may simply displace current spending rather than bring in new money.

Gov. Sanford, who has been on the stump advocating the law's repeal, objects to the law in principle and practice, according to spokesman Joel Sawyer. Retail grows in response to higher incomes, the governor maintains. And taxpayers, who include local merchants, shouldn't need to subsidize retail development.

What happens if a destination retailer doesn't meet its economic development goals? In Texas, Cabela's is returning about $158,000 to the state, county, and city governments because the company's store failed to meet employment goals. Arterburn says that's the only store where estimates exceeded expectations, and they are "willingly paying back that money."

Artz, Georgeanne and Judith Stallmann. "Recruiting Big-Box Retailers as an Economic Development Strategy." Paper Presented at National Public Policy Conference in Fayetteville, Ark., September 2006.