Costco deal unfair to other Spanish Fork businesses

 

How would you like to pay no sales taxes for 18 months and no utility bills for four years? Sounds like a sweetheart deal, doesn’t it? Well, it is for Costco in Spanish Fork. The city has offered Costco, a multibillion-dollar corporation, these special privileges and more for building a store within city limits (see here and here).[pullquote]Favoring one company over another…is bad public policy.[/pullquote]

I wonder what Costco’s competitors in Spanish Fork think about this deal, especially the smaller, home-grown companies that have operated there for years or decades without receiving any special treatment. 

As a retailer, Costco sells nearly every basic product a family could need, which means it will compete with smaller local companies like Macey’s, Monkey Bunky and Furniture, and Rocky’s Tire Pros. A deal like Costco’s, worth as much as $2.2 million, would obviously be a huge boon to these smaller companies – and yet, for some reason, retail giant Costco gets the deal and they get nothing. What gives?

City officials assert the city will eventually recover the costs of the deal (they estimate within three years) and that Costco will attract consumers from neighboring cities to help boost overall tax revenue. But the city’s deal, and this general strategy called “economic hunting,” is more of a gamble than a guarantee. Many studies have shown that economic development incentives often fail to perform as promised.

Additionally, economic hunting is not a free market policy. The free market would dictate that if enough people in the Spanish Fork area demanded the products and services Costco provides, then Costco would open a store in the area to fulfill those needs.

That Costco is accepting these government subsidies is evidence of one of two scenarios – either demand is too low for Costco to make adequate profit in Spanish Fork on its own merits, which would mean that Costco competitors will suffer from lower sales as customers go to Costco; or that Costco can earn enough profit but is trying to milk taxpayers for all it can.

Sadly, special deals like these happen in Utah all the time. For instance, just this week Draper approved a deal to provide $11.7 million in subsidies to The Living Planet Aquarium to help it expand, along with $2 million from the state.

Favoring one company over another, despite government planners’ good intentions or the economic activity that might result, is bad public policy. Government should treat all companies alike so the playing field is level for any legitimate company that chooses to do business in the state.

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  • R Johnson

    From the article: “Favoring one company over another…is bad public policy”. If a landscaping company putting Americans on payroll – and paying all taxes, ss, medical & liability insurance, worker’s comp and other expenses – has to compete against a contractor paying day labor at menial rates… who has the financial advantage? Does Sutherland Institute – by being a proponent of illegals in our economy – not encourage favoring one company over another? That to me, is BAD public policy. And, by the way, hypocritical

    • Derek H Monson

      Actually, by supporting legislation that requires employers to treat undocumented individuals the same way that they treat other employees, we are putting all Utah businesses on a level playing field.

      Derek Monson

  • stormy

    R Johnson – did you even read the article? It doesn’t even mention illegals.

  • Steve P

    I understand what you’re saying from an idealistic perspective, but another factor is that SF was surely competing with neighboring cities to get the deal. CostCo saw the demand but then also used the free market to find the highest bidder. SF city leaders believed that the citizens of their city would benefit in the long run by having the store closer and having the tax revenue that would come later. It’s also one of those things where if one city plays the game, every city has to do it or else they’ll end up like Lehi where people have to drive 15 minutes to get to a grocery store. Some of the small businesses will be affected, but probably only those that provide poorer services and products or higher prices than CostCo.

    • Matthew Piccolo

      Thanks for your comment, Steve.

      I don’t see this as an idealistic perspective vs. a practical one but as competing values or trade offs. It’s possible that the SF economy and tax revenue stream will eventually be better off because of the deal (although, as I wrote in the post, research shows that these kind of deals fail often), but is a little more potential economic activity worth favoring some companies over others and creating a culture of corporate dependency on government (once you give out one deal everybody else wants one)? If these smaller companies do go out of business, is that something government should actively participate in? This kind of government intervention certainly isn’t a free market policy.

      Also, a free market has nothing to do with one or two or multiple governments competing with one another (i.e. a market of governments), a free market, also called “free enterprise” or “private enterprise,” is made of private entities competing with one another freely without extensive government intervention. I understand why city leaders feel the need to compete and to cut special deals like these, but I would hope they’d trust in the free market rather than their own abilities to manage the economy.

  • Bus

    I agree that it is bad capitalism to use the public’s money to bet on a company and the sad fact is that while other cities are doing it S.F. might feel it needs to. What should really rankle the local competition is that their tax money is being spent to give their new competition a leg up against them.
    When Walmart came to Orem they got a similar sweetheart deal but within 10 years a walmart sprang up at nearly every freeway exit, so with a little patience Orem would have gotten their walmart without pandering to the company.

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