Targeted Business Incentives are Not Good Public Policy

February 19th, 2003 by

Targeted Business Incentives are Not Good Public Policy

by Paul Stam and Tom Vass

February 19, 2003

SUMMARY

Targeted state incentives do not provide a net economic gain. Incentives merely redistribute jobs and investment from one business to another and from one region to another.  Price adjustments in free competitive markets lead to maximum efficiency in the use of resources and maximum benefit for all. Targeted incentives destroy the efficiency of the free market by favoring inefficient businesses while disfavoring efficient ones.  Once this process of incentive price subsidy begins a number of perverse market consequences result:

One, the subsidy distorts the rate of return that businesses use to judge the profitability of investment alternatives.

Two, the subsidy is designed to create “more jobs”; however, the subsidy will act to squeeze more socially beneficial investments out of the market if incentives are continued into periods of relatively full employment.

Three, this type of public intervention in the economy is self-defeating for creating the conditions of self-renewing profit reinvestment into the local economy. Rather than creating private capital market mechanisms for investing, the public dollars become the mechanism for making capital investments.

Four, political favoritism is an inherent byproduct of targeted incentives. The power to give the incentive is the same as the power to deny a similar incentive to someone else.

Fifth, tax incentives given to outside companies place North Carolina companies at a competitive disadvantage, both in terms of selling goods, and gaining access to capital. Read Full Article