When they were out of power, North Carolina Republicans rightly attacked Democratic Gov. Bev Perdue’s wanton use of economic incentives. Since winning control of state government, however, some GOP leaders have regrettably changed their tune. Gov. Pat McCrory last year urged a reluctant legislature to adopt a more aggressive incentives program to entice corporations to locate in the state.
Though incentives in the form of tax abatements and cash grants have been part of North Carolina’s economic development policy at the state and local level for years, there are sound reasons for abandoning this misguided policy.
Incentives are rarely the deciding factor in a business’ development decision. The most important factor generally is geography. North Carolina is well-situated on the Eastern seaboard in a fast-growing region. Incentives can’t change that.
Incentives also don’t change a state’s 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 can influence. North Carolina consistently ranks high among states as an attractive place to do business because of its good infrastructure and educational resources, business-friendly regulatory environment, relatively low taxes and high quality of life – not because of its incentive program.
Once geography and overall economic quality are addressed, only then do special incentives come into play. These incentive negotiations are often merely bargaining chips for the company to extract as much as possible from governments in the actual desired location.
For as much attention as economic incentive programs receive, however, they are miniscule relative to our state’s total economy. In 2013, North Carolina’s gross domestic product totaled more than $471 billion, which would have ranked it as the 28th largest economy in the world. Compare that with the $266 million in incentives handed out by North Carolina in 2012-13 (latest available figures). In an economy of $471 billion, that sum barely amounts to a rounding error.
Yet politicians and bureaucrats clamor that without incentives, our state will wither and die. Plainly that isn’t true.
Moreover, the dollar figures underplay the damage that results when incentives lure a company into a move that is of value more to politicos and central planners than to markets and customers. Those misallocated resources are no longer available for true value creation.
It makes far more economic sense for governments 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 favored businesses.
The job creation benefits of incentives have been consistently overstated. While politicians are all smiles at incentives and job announcements, sightings of our elected leaders are scarce 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 others that don’t materialize, pack up and leave or close down that never 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 actually materialized, In fact, 127 incentivized projects failed to create even a single job out of the more than 17,000 promised. Those failures represent wasted resources that could have been directed better by the market and business people than by politicians and bureaucrats.
These failures are funded by hundreds of millions of dollars taken out of the pockets of North Carolina families and businesses. That’s money not available for the real needs of people and for true value creation in the economy.
Gov. Pat McCrory should rethink his quest for corporate incentives. If North Carolina takes the bold step and ends incentives, it will remain one of the largest economies in the world and will continue to grow. Companies could return to focusing on the real sources of value creation. Ending these corporate welfare schemes frees up taxpayer money to do things like build infrastructure, improve education and maybe cut taxes. Now those are 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. Francis X. De Luca is the president of the Civitas Institute.