By Garland S. Tucker III and Francis X. De Luca:
In previous years, Republicans rightly attacked then-Gov. Bev. Perdue’s use of economic incentives to promote growth in North Carolina. Since taking control of the state, however, they have regrettably changed their tune. Gov. Pat McCrory and then-Commerce Secretary Sharon Decker last year urged a reluctant legislature to adopt a more aggressive incentives program, reciting Perdue’s old plea of the importance of having “every tool in the toolbox” to entice major corporations to locate in the state.
Incentives in the form of tax abatements and cash grants have been a part of North Carolina’s economic development policy at the state and local level for years, but there are several sound reasons for abandoning this misguided policy.
First, contrary to popular thought, these incentives are rarely the deciding factor in development decisions. The most important factor in these decisions is generally geography. Based on the particular characteristics of the business, executives first pinpoint the area – i.e., the states – to which they will consider re-locating or investing. Clearly, this factor is not influenced by state policy but rather by the geographic requirements of each company.
Next, among the targeted states, there are several key aspects which will differentiate one state from another: quality of infrastructure, availability of skilled labor, educational system, tax levels, regulatory climate, and general quality of life – all of which state and local governments do control. Once these two factors – geography and overall economic quality of a state are addressed, then – and only then – do special economic incentives come into play. These incentive negotiations are often used merely as bargaining chips for the company to extract as much as possible from government in the actual desired location.
For as much attention as economic incentive programs receive, however, they are so small relative to the state’s total economy their impact barely amounts to a rounding error. In 2013, North Carolina’s Gross Domestic Product totaled more than $471 billion, which would have ranked as one of the top 30 economies in the world. Yet politicians and bureaucrats clamor that without incentives our state will wither and die. North Carolina consistently ranks high among states as an attractive place to do business when looking at the state’s quality of infrastructure and education, business-friendly regulatory environment, relatively low taxes and quality of life – not at its incentive program.
Government incentive programs result in the misallocation of economic resources. Value creation only occurs if the investment is aligned with what the market wants. Government is not good at understanding markets and therefore makes incentive decisions for political reasons. These misallocated resources, however minimal, are no longer available for true value creation.
It makes far more economic sense for state government to concentrate on providing superior infrastructure and education at the lowest possible tax rates to all businesses. Then the market will determine the relative economic success of companies, rather than relying on state bureaucrats to ladle out benefits to a small number of businesses.
And a happy by-product of terminating incentives would be the elimination of those government jobs required to administer the incentive programs. The number of state, regional and local “economic developers” on the taxpayer’s payroll is outsized compared to the infinitesimal impact incentives have on the state’s economy.
Studies show the job creation benefits of incentives have been consistently overstated. Yearly reports show the incentives reporting a “promise” of creating thousands of jobs. But these promised jobs are over the course of several years, not in the year announced. When you compare this to an overall state economy that employs over 4.3 million people, you can see that while every job is important, spending hundreds of millions to create so few jobs is like digging a hole in the ocean.
And these figures do not even take into account the failures. While everyone is smiles and handshakes at job announcements, these same politicians are scarcer when things don’t turn out so well. In addition to spectacular North Carolina failures like Dell Computer and the looming Chiquita Banana move out of Charlotte, there are many smaller companies that pack up and leave or close down which don’t make the news.
An investigation by WRAL-TV last fall found that only 38 percent of the nearly 40,000 promised jobs for incentivized investments between 2009 and 2012 have actually materialized, and that 127 incentivized projects in that time have failed to create even a single job out of more than 17,000 that were promised. Those failures represent misdirected and wasted resources which could have been directed better by the market than by politicians and bureaucrats.
While the overall impact of incentives is small on the state’s total economy, the $266 million in incentives which were handed out by North Carolina in 2012-13 (latest available figures) represents a sizable misuse of taxpayers’ hard-earned dollars. This money, of course, comes out of the pockets of North Carolina families and businesses and, as stated earlier, are misallocated and not in line with the market and true value creation.
We urge Gov. McCrory to re-think his request to the legislature for corporate incentives. If North Carolina takes the bold step to end incentives, it will remain one of the largest economies in the world and will continue to grow. In fact, ending corporate welfare schemes would free up taxpayer money to do things like build infrastructure, improve education and maybe cut taxes. Now those are all things we all agree successful businesses look for when re-locating and expanding.
Garland S. Tucker III is the CEO of Triangle Capital Corporation, a publicly traded company based in Raleigh, NC. Francis X. De Luca is the President of the Civitas Institute, a Raleigh, N.C.-based think tank.
A version of this essay appeared in the News & Observer.