Shedding light on South Carolina's murky corporate-welfare system

South Carolina might be conservative, but is it a free-market state? It's an open question after the S.C. Legislature this year used $1.3 billion in public funds to recruit a single company, Scout Motors, to Richland County.

The move is part of a broader state government plan, formalized in 2022 by executive order, to transform South Carolina into an electric vehicle (EV) manufacturing hub. Recent industry developments, however, are not inspiring confidence, including a new report showing that EVs suffer far more problems than gas-powered vehicles.

Worst of all, the deal occurred without any real public input. Our investigative news site, The Nerve, revealed in an October story that state and local officials negotiated with Scout for months behind closed doors, announcing the project less than two weeks before the $1.3 billion incentives package passed.

South Carolinians deserve far better. To facilitate transparency and public input in the incentives process, as well as bring accountability to projects once approved, several changes are needed. 

Our recommendations:

1. Hold public hearings on proposed incentives prior to their approval.
   
   
2. Conduct third-party reviews (not overseen by the Department of Commerce) of proposed incentives deals to determine their true costs and benefits.
   
   
3. Require counties to publish annual incentives reports detailing fee-in-lieu-of tax (FILOT) agreements and other benefits.

Our recommendations relate specifically to discretionary incentives, which require state or local approval in addition to meeting eligibility standards. Such incentives can give elected officials tremendous control over the direction of business and the state’s economy, which demands greater public scrutiny and input from taxpayers.

Public hearings

The public deserves to know in advance when incentives are being considered, especially those directly funded by taxpayers in the form of grants or legislative appropriations. We recommend holding at least one public hearing before discretionary incentives can be finalized, so that citizens can give input on proposed deals. High-dollar projects, similar to the Scout Motors deal, should have multiple hearings.

Incentives that deserve a public hearing:

• Direct appropriations by the General Assembly, such as the $1.3 billion Scout Motors resolution
• Grants awarded by the state Coordinating Council for Economic Development (Coordinating Council), such as from the Set-Aside Fund, Closing Fund and Rural Infrastructure Fund
• Job development credits approved by the Coordinating Council (effectively rebates of a portion of employee wage withholdings)
• Fee-in-lieu-of tax (FILOT) agreements offered by counties (a negotiated, reduced fee paid instead of normal property taxes)

Public bodies would be responsible for holding hearings on specific benefits they plan to award. For example, the Coordinating Council, made up of the directors or board chairpersons of Commerce and 10 other state agencies, would hold hearings on requested grants and job development credits, while counties would hold hearings on FILOT agreements.

While many incentives currently are given final approval in open meetings, this would hardly qualify as adequate advance public notice. If project details are provided, they are often vague or incomplete; and the public is not always given time to speak.

A proper, advance hearing on each project should give clarity on:

• All proposed incentives;
• The immediate and long-term taxpayer costs;
• The number of full-time jobs to be created, specifying whether they’re direct or indirect, and the minimum number of jobs required to receive incentives;
• The total planned private investment and minimum investment required to receive incentives;
• A summary of pending “requests for proposal” (RFPs) – a written “wish list” commonly submitted by companies seeking incentives, as The Nerve found;
• A project completion timeline;
• The exact location of the project; whether public funds are being used to purchase or subsidize the acquisition of land; and if so, where; and
• What “clawback,” or repayment, requirements would be in the deal should the company not live up to its end.

Most importantly, the public should have an opportunity to comment on all proposed deals.

It is not necessary, however, to mention the names of companies seeking incentives or details that could identify them before projects are formally announced. We are sensitive to concerns that this could turn them away from South Carolina, and that many companies do not want to be associated with local debates over incentives.

But under our proposal, the public would have time to learn about economic development projects before they are approved. It would also let concerned citizens question, challenge and demand accountability for deals that could potentially cost taxpayers millions – and sometimes billions of – dollars.

Third-party review of proposed incentives deals

South Carolinians aren't given reliable information when it comes to incentives deals. Records showing the supposed cost-benefit breakdown of projects typically are obtained through Freedom of Information Act requests to Commerce (and usually only after incentives deals are “finalized”). Worse, the documents often omit details or make assumptions in ways that obscure their true cost or value.

This makes it hard to trust or verify the job and investment figures touted by public officials, or the reported price tags for projects. Therefore, we recommend that economic development projects supported by discretionary incentives undergo a thorough, fact-based analysis by an independent third party to determine their true costs and benefits for taxpayers.

Because of their financial knowledge and relative impartiality when it comes to incentives, the analysis could be performed by the S.C. Treasurer's Office or Comptroller General’s Office, or a firm hired on their behalf.

Each project analysis should be able to answer basic questions: What will the state and local costs be for taxpayers? How many new jobs and how much investment will result? Do the costs outweigh the benefits, or vice versa? The questions are largely the same ones that Commerce’s cost-benefit breakdowns claim to answer, but would be from a more objective source, and with more detail.

Other relevant project factors should include:

• How many of the reported new jobs come directly from the company;
• Economic risks that could prevent job and investment targets from being met;
• An evaluation of the project timeline and whether deadlines are realistic;
• How the subsidies might shift the tax burden to other residents or impact funding; and
• Whether similar projects have been successful or met job/investment targets.

Each third-party analysis should be completed before a project is approved and posted online well in advance of public hearings so that South Carolinians could easily and conveniently review the findings. The analysis would be an especially helpful resource for citizens during public hearings.

Improved local reporting

Once state and local incentives deals are approved, details about the costs and their impact on the state’s economy should be easy to find online. Taxpayers should know on a regular basis how deals are performing, whether job and investment targets are being met, how state and local revenues are being affected, and perhaps most importantly, how the tax burden has shifted.

South Carolina can make a key improvement at the county level in this regard. Presently, S.C. counties are not required to disclose their current number of FILOT agreements (effectively property tax breaks), nor do they report on their performance. The S.C. Department of Revenue told the Policy Council that it tracks 2,306 FILOT schedules for tax year 2023, but could not offer county-specific data.

At a minimum, counties should publish annual incentives reports detailing all FILOT benefits and other incentives in effect. The reports should: 1) list all companies receiving incentives; 2) explain the terms of each deal, including specifics on types and amounts of each incentive; 3) track job and investment performance (actual versus projected); 4) list the number and value of all “clawed back,” or repaid, incentives; and 5) show the impact on revenues and funding. Under these changes, taxpayers would have a fuller picture of the cost of public handouts.

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South Carolina’s heavy reliance on incentives to attract business does not reflect well on the competitiveness of our state. A better path forward, we contend, is through a reduced and simplified tax code that encourages natural job growth and investment, and one that better serves our vital small-business community.

If public officials insist on providing incentives, however, South Carolina taxpayers cannot be left in the dark. Our recommendations would ensure the public is given key details about economic development projects before their approval, allowing for much-needed citizen input and accountability when it comes to handouts.