Spend Incentive Money More Wisely

October 17th, 2005 by

Hickory, NC

To the North Carolina Leauge of Municipalities

It is politically correct in some circles to argue that the granting of tax and other targeted incentives to attract new business will create net benefits to the communities where the facility is located. However there are many studies that demonstrate this premise is false. Writing in the Southern Economic Journal in 2004, economists from the University of Tennessee found that tax incentives limit revenue gains and that concessions such as site acquisition and infrastructure development require expenditure of public funds. The foregone tax revenue, combined with the higher public expenditures, means that state and local governments must either provide fewer public services or impose higher taxes on existing industry and residents to maintain balanced budgets.

The authors of the Tennessee study also found that the new company can crowd out other economic activity by shifting sales from existing firms, lead to congestion of schools and highways, and raise labor costs. These perverse consequences punish the firms who had already located or expanded through higher taxes and restricted services.

Since 1996 North Carolina has jumped to the forefront in offering these giveaways by spending over $350 million every year through the Bill Lee Act, Job Development Incentive Grants (JDIG) and the One North Carolina Fund (Governor’s discretionary fund to “close the deal”). In addition, local communities have been active in making property tax concessions through the back door by using “economic development grants”.

Some notable examples of State incentives include $161 million given to Nucor for its Hertford County facility, $115 million granted to Dupont for its Bladen County operations, and the whopping $267 million offered and accepted by Dell to locate in Forsyth County. The Nucor incentives amounted to $411,765 per job; those at Dupont cost $440,000 per position and the low wage ($28,000/year) jobs at Dell will cost the state $205,000 per job. No one knows for sure whether these companies would have located in North Carolina in the absence of the incentives but in the case of Dell, media reports indicate that we were only bidding against ourselves. In many other cases we know for a fact that the incentives did not actually induce the company to locate here. In fact, one of the triggers for the 1996 change in North Carolina’s philosophy, the loss of a Motorola manufacturing plant to Virginia, turned out to be a non-event due to the company’s change in plans.

I offer the following suggestion: Instead of wasting that $350 million on giveaways the state’s public policy should treat all taxpayers and companies uniformly. Invest in key state services that assist all companies including as highways and water and sewer facilities by an additional $50 million per year. Improve worker training at community Colleges and high schools by the same amount. Raise state employee pay an extra an $50 million annually to ensure better services by retaining trained professionals.

The Medicaid program injects a large amount of cash each year into every community and the overall public health is improved. Most importantly, the Federal government would match an additional state expenditure of $100 million by giving North Carolina $200 million. Purely as an economic development tool that beats the return on any tax incentive. Finally, give $100 million/year of this back to the taxpayers so we don’t continue to have the highest income tax rate in the Southeast.

We spend way too much money chasing foreign companies, to the detriment of the businesses and taxpayers who are already here. It’s time we used public money for the benefit of all North Carolinians.

In The Wealth of Nations Adam Smith said a “statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.” As a state representative I call on my colleagues to abandon the “folly and presumption” of trying to pick the winners (and thereby creating losers) in the business world. Let’s get back to creating a climate where all businesses can thrive.

I hope you will read the attached article which includes the economic case against incentives, facts and figures on their cost, and the recent report on the costs of the Bill Lee Act.

View Attachment

The writer represents Southern Wake County in the North Carolina House of Representatives.
Stam for House/Blue Ribbon Transer Tax-Point of View