Columns » Bob Burtman

Incentives: Down the slippery slope

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The state's delusional economic development policy headed for the rubber room recently, as the legislature and Gov. Mike Easley clashed, then compromised, over a bill to give Goodyear Tire & Rubber Co. up to $40 million to keep its Fayetteville plant open and stay in North Carolina. Easley vetoed the giveaway bill, aimed exclusively at Goodyear, substituting his own broader-based incentives proposal that would further expand the ever-growing list of corporate giveaway programs the state already offers. The legislature has convened a special session this week to consider overriding the veto.

The battle over the bill was like two dogs fighting over a scrap of poisoned meat: Whatever the outcome, North Carolina's long-term economic prospects would be undermined, if not seriously damaged. Of particular concern was that Goodyear wouldn't have to create any new jobs under the proposals to qualify for the cash, thereby establishing an unfortunate precedent: Job creation is often cited as a primary rationale for corporate incentives and has been an inviolable provision in many previous deals.

In the end, Easley and the legislators reached a compromise that will give Goodyear $25 million over 10 years. Goodyear's in-state competition, Bridgestone/Firestone, complained about the original bill and will receive a similar wad to remain in Wilson. Additional cash for the few big companies that might qualify under the bill could push the measure's bounty to around $60 million.

While previous incentives plans were designed to lure companies to North Carolina or help existing companies expand rather than move elsewhere, Goodyear offers a new and disturbing wrinkle: the prospect of paying a company to stay based on the mere threat of abandoning ship. It's not hard to see where this will lead: Any company seeking improvements to its bottom line—and which ones don't?—will see Goodyear's gain as an opportunity to ask for equal treatment.

Details of incentive agreements appear almost weekly in the media, with the inevitable guarantees by state and local boosters that revenues from the projects will ultimately exceed the costs. But those bland justifications are based on models that make debatable assumptions. If any of them prove incorrect, the giveaway can be a net loser. "There's so many places where the model can go wrong, in design or application," says Elaine Mejia, who directs the N.C. Budget and Tax Center. Mejia co-authored a study challenging many of the assumptions behind the $242 million Dell incentive package and other deals.

The amount of money North Carolina has given to businesses in tax breaks, cash grants and other incentives has escalated to a staggering level. Using N.C. Department of Revenue data, the Triangle Business Journal calculated that, between 1996 and 2004, tax credits taken or available in the future under the William S. Lee Act (just one of the state's many incentives programs) totaled well over $2 billion. Companies claimed $93.8 million in Lee Act credits in 2006, with huge corporations receiving the biggest breaks. Don't ask anyone at Commerce for the total incentives tab from all the state's programs, though. No one has bothered to add it up.

County and municipal governments have jumped headlong into the incentives swamp, supplementing state funds with their own largesse. In June, the N.C. Institute for Constitutional Law issued a report that calculated the total amount of incentives given to corporations by local governments between 2004 and 2006; the tally, which didn't include incentives from counties and municipalities that failed to respond to the Institute's queries, exceeded $400 million. Many of those grants also went to Fortune 500 companies, including Dell, Delta Airlines, Goodyear, Lowe's, ALCOA, Google and General Electric.

Largely forgotten is one of the chief purposes of incentives programs that, at least back in the day, was cited by state officials to warrant them initially: to attract business to poor communities with high unemployment rates. Instead, the state bestowed the bulk of incentives upon companies in the largest and most prosperous metropolitan areas, including the Triangle. This inspired Easley and the legislature to tweak the Lee Act in 2005, but the overall imbalance remains virtually unchanged.

That's really no surprise, since studies and surveys consistently rank government incentives at the bottom on their list of reasons to locate in a particular state and community. Far more important are access to markets, labor quality and availability, multi-modal transportation options, quality of life, and the general business climate.

Such truths don't seem to influence the thinking of the economic development crowd. State models used to determine the benefits of incentives assume that the jobs and revenues from each deal wouldn't materialize without them. Known in some circles as the "but-for" element (but for the incentives, the benefits would not exist), the idea has been challenged in a number of studies, including one that estimated 90 percent of corporate relocations and expansions would occur regardless of incentives.

If this is the case, then the state is unnecessarily throwing hundreds of millions at profitable companies, money that could be used for other public purposes. "The question of the but-for is a big one," says former Commerce Department Assistant Secretary Charles Beacham, who oversaw the crafting of the enormous and controversial Dell and Google incentives offers before taking a job in the private sector. "You never really know. You're guessing."

Some guesses are better than others. Simple logic dictates that corporations with billion-dollar sales will be less interested in tax breaks that barely register on the ledger than in their long-term economic health. Goodyear's revenue for 2006 was $20.3 billion, and there's simply no way that $2 million in an annual incenties makes any difference in the company's business plan.

Here's another bit of logic: If jobs created by relocations or expansions are filled by out-of-staters, the costs associated with those jobs are higher than if the positions are filled by workers from the local community or region. The reason: "In-migrants" bring with them an increased demand for services, while existing residents create no additional demand. In the Dell case, the state figured that new residents would eventually secure 50 percent of the computer company's new jobs. Though the issue hasn't been extensively studied, one reputable economist pegs that number at 80 percent. Using the state's own model, the latter figure would have turned the Dell deal from dandy to dud. As to which figure is correct, one would have to go to Dell after the fact and ask pesky questions. That's not on the commerce department's agenda.

It may be no coincidence that the metropolitan areas which have benefited most from state and local incentives are now facing massive shortfalls in funding for schools, roads and other infrastructure needs—ironically, some of the determining factors that companies cite in relocation decisions. Wake County voters approved a $970 million school bond referendum last year, on top of $450 million in school bonds passed in 2003 and $550 million in 2000. Durham County voters face their own school bond decision this fall to the tune of almost $200 million. Johnston County school officials say they'll need $235 million over the next six years to keep up with growth. The bill to bring schools, parks and other public services up to speed in Charlotte, Greensboro, Winston-Salem and other large cities collectively eclipses $1 billion. Add another few billion for roads, health care, housing and law enforcement.

North Carolina's rapid population growth is the primary source of this stress on state and local budgets, and economists have long accepted the general premise that residential growth does not pay for itself. Industrial and commercial growth does, however, and governments have traditionally helped offset the cost of new residents with taxes and other revenues from business. The incentives mania has badly skewed that equation, leaving taxpayers as the only viable option to make up the difference. But getting legislators to connect those dots in the current climate is about as likely as getting company execs to admit that incentives didn't really make a significant difference in their location decisions.

Beacham compares incentives negotiations to a game of poker, in which the two sides jockey and bluff until someone calls the hand. A more accurate analogy might be a game of poker in which the company holds nothing but aces and kings, and the hopeful host must play with cards face-up. Companies play bidders off one other while insisting that competitors keep quiet about their offers. Companies provide some of the key figures that get plugged into the cost-benefit analyses. Companies know if the decision has already been made, and if they're just extracting more concessions to improve their bottom lines. "The negotiating position is unequal," Beacham allows.

The guesswork could be taken out of that question to some extent. But that would require putting it to the test, i.e. saying no when companies come knocking with palms extended. Officials are reluctant to do that; it's far easier to fall back on bromides about jobs or play on fears of losing a big fish than take a common-sense stand and show leadership.

So the Durham County Commissioners unanimously agreed to grant Raleigh-based semiconductor manufacturer Nitronex $100,000 after the company made noises about possibly choosing California instead of Durham for its new plant—even though Nitronex had already signed a long-term lease and was paying taxes on a custom-built facility near RTP, and even though it would have cost the company far more to abort its plans in favor of the West Coast.

Predictably, the state has reached new levels of incentives insanity. Neighboring communities are bidding against one other for companies that will locate in-state or are already here. Local governments are handing over cash to developers for malls and big-box retailers. Well-established companies with no intention of leaving have claimed millions in tax breaks on items that have little or nothing to do with job creation, including boats and planes, machinery and equipment, computers and software. Holly Springs had to beg for cash after town officials pledged $20.5 million in incentives to drug maker Novartis for a vaccine plant—$8.8 million more than the town had available in its coffers.

When pressed, most public officials will admit that the incentives gold rush is out of hand. But that doesn't inspire them to act in the public interest. Even such "progressive" local legislators as Ellie Kinnaird, Dan Blue and Verla Insko voted for the Goodyear deal. Local state Reps. Paul Luebke and Jennifer Weiss voted against it.

The situation will continue to deteriorate in the wake of the Goodyear debacle. As the state has repeatedly upped the incentives ante, corporations have been lining up to demand their due, and the line will get longer once the votes are cast. With Goodyear, Beacham says, "We're going down that slippery slope."

Correction (Sept. 13, 2007): Rep. Paul Luebke voted against the Goodyear deal.

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