The Hindu Business Line : Are tax lures to woo investment passé?

IF YOU push on a piece of putty it will assume a new shape, and when you remove your hand it will not return to its original shape, or at least not immediately and not entirely. This is an example of `hysteresis' that Wikipedia provides, after defining the word as "a property of systems (usually physical systems) that do not instantly follow the forces applied to them, but react slowly, or do not return completely to their original state: that is, systems whose states depend on their immediate history."

Using tax incentives, Ohio has created hysteresis effects in the labour market, writes Kala Seetharam Sridhar in Incentives for Regional Development from Palgrave (www.palgrave.com). Increased employment has also improved households' employability, by imparting training and new skills, writes Sridhar. Ohio has been doing this aggressively; too aggressively.

For instance, Ohio and Kentucky fought bitterly last year for DHL, the $25 billion-plus air cargo carrier, I learn from a September 28 story on The Cincinnati Post (http://news.cincypost.com). When Ohio offered $53 million in tax credits, DHL decided "to pack up all but 350 of the 1,200 jobs it provided in Northern Kentucky and move them to a hub Wilmington."

The expansion of the Wilmington Air & Ground Hub is the largest single capital investment project undertaken by DHL globally, said Governor Bob Taft's press release on October 29, 2004 (www.governor.ohio.gov). "The new Wilmington facility will have approximately 1.2 million square feet of additional sort space and 36 acres of additional aircraft ramp pavement," Taft described.

The release also spoke of "a competitive incentive package to DHL for this project, including a $66 million Job Retention Tax Credit, a $13 million Job Creation Tax Credit, a Business Development Account, an Ohio Investment in Training grant, roadwork funds and a Volume Cap."

DHL's press release of the same date on www.dhl-usa.com spoke of creating "600 new full-time jobs and 300 part-time jobs in addition to the 6,000 employees already based at the facility," but, quite understandably, there was no mention in the communiqué about either `tax' or `credit'. "DHL halted flights out of the Cincinnati/Northern Kentucky International Airport earlier this month," rues The Cincinnati Post report, cited earlier.

Sridhar's book is interesting because it studies how states in the US and India compete with one another in trying to woo investment by doling out tax and infrastructure incentives. There are lessons that the US can draw from India, and vice versa too, says the author. Call it serendipity, but the work is out just when the Supreme Court in the US is seized of the problem of states fighting with one another in the name of incentives.

"In 1998, the city of Toledo and the state of Ohio offered DaimlerChrysler Corp a $280 million tax break in exchange for a $1.2 billion plan to expand a Jeep factory that the company was considering closing down, The Wall Street Journal explained earlier this year," narrate Stephen Taub and Dave Cook in a September 28 article on www.CFO.com. "Consumer advocate Ralph Nader then spearheaded a group that filed a lawsuit challenging the tax plan as `corporate welfare'," they inform, when writing about the tussle that will decide the fate of tax incentive programmes in about 40 states of the US.

An AP story posted on http://news.enquirer.com, about the same subject, notes that Kentucky gained "more than $10.8 billion in investment and more than 200,000 jobs the past eight years" owing to incentives granted; and that in Ohio, companies have qualified for the state's tax credit more than 16,000 times through the purchase of $31.7 billion in new equipment, over the past decade.

To know more about the landmark decision in Cuno vs DaimlerChrysler, and also about the pros and cons of the law-in-the-works `The Economic Development Act' that Ohio Senator George Voinovich is trying to push through, read Michael Mazerov's 25-page analysis, dated June 30, and titled Should Congress authorise states to continue giving tax breaks to businesses? on www.cbpp.org, the site of Center on Budget and Policy Priorities.

"What is desirable is that states be given the incentives to compete with each other not necessarily in terms of taxes or infrastructure, but as overall places to reside and do business," is a loaded suggestion from Sridhar. "Only when Indian states become entrepreneurial in their quest for jobs, economic opportunity, public services, offer political and social stability, and a corrupt-free participatory environment for public, can they create a climate conducive for prospective households and businesses," is an optimistic suggestion that bets too much on the goodness of our politicians, especially in the light of l'affaire Volkswagen.

Useful read.

Rs 20,000 crore revenue!

FORGET the lottery, bet on yourself instead, advises Brian Koslow. "I figure you have the same chance of winning the lottery whether you play or not," says Fran Lebowitz, quite indifferently. The first argument against lotteries is that they are a form of gambling, but "so is speculation in the stock market, forward trading, and hedging in the forex market," reasons N. Sugalchand Jain in Lotteries: Beyond Fortunes, from Sugal & Damani (www.sugaldamani.com).

The author tracks instances of lottery earnings channelled towards development, as in the case of primary education in Karnataka supported by Pratham, an NGO that gets donation from the National Postcode Lottery of Netherlands. He also mentions the Sarana National Lottery launched in January 2005 in Sri Lanka to raise Rs 35 million for the rehabilitation of the tsunami affected.

Lotteries are ancient, though in forms such as games of dice (Mahabharata) and chariot races (Rome). Keno is the Chinese form of lottery, dating back to 195 BC, informs the book. It seems king Cheung Leung of Han dynasty introduced keno when he found that his appeals to his subjects to contribute more for the war went unheeded.

Jain estimates that India can raise revenues up to Rs 20,000 crore from lotteries. Shall we tell the FM?

Information you can bet on!

BooksOfAccount@TheHindu.co.in

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