Economic development incentives have once again become front page news in light of several significant new economic development announcements that impact North Carolina. While incentives are often misunderstood and sometimes unfairly characterized by partisans on both sides of the aisle, their use warrants continued public and media scrutiny. While in most cases incentives are “self-funded” by the beneficiaries and paid in arrears for prior performance out of the tax revenues generated by the company, they nonetheless result in the transfer of public funds to private enterprises, which public funds would otherwise be available to fund public services if incentives were disallowed.
Those who support the use of incentives argue persuasively that without incentives the companies would not come, and the net benefits to the public in tax revenues, jobs and payrolls would not be realized. But what if economic development incentives were legally prohibited? With advocates on the right maintaining that incentives disrupt free markets by unfairly “picking winners” and those on the left and right claiming that incentives are “corporate welfare,” opposition to economic development incentives represents one of the few areas where factions on both ends of the political spectrum agree.
This agreement represents a unique window of opportunity for bipartisan legislation at the federal level to eliminate or restrict economic development incentives, or at least those paid directly to companies. Action must be taken at the federal level because no state, including North Carolina, can afford to withdraw from the competition for new jobs and investment. As much as we would like to believe that North Carolina can compete for major economic development projects on the basis of low taxes and workforce alone, that is not true in most cases. Incentives often are the deciding factor when companies choose a state and locality after narrowing the competitors to a short list of candidates. Most of us would do the same thing if we were a CEO with a fiduciary responsibility to shareholders to get the best deal possible.
As much as elected leaders may decry the use of incentives to attract new jobs and capital investments, when a community is competing for an economic development project, its elected representatives – regardless of political party – generally support the use of incentives. The political benefits of a successful new company announcement almost always prevail over ideological opposition to economic development incentives. Incentives become a necessary evil in a contest where no state or local government can unilaterally disarm. That is why this issue can only be addressed at the federal level.
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The “Commerce Clause” of the U.S. Constitution (Article 1, Section 8, Clause 3) grants Congress the power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” While I am not a Constitutional expert, I would argue that the use of state and local incentives impacts interstate commerce. One only has to look at the frenzied competition among states and local governments for the Amazon headquarters or almost any major manufacturing project.
The recent tax bill passed by Congress significantly reduces federal corporate and business tax rates in the United States. What better time than now to consider bipartisan legislation that would disallow incentives paid directly to companies and provide additional revenues for state and local governments to invest in education, worker training and infrastructure that benefits all businesses and citizens?
Instead of nationally funded social media and other marketing campaigns directed at elected state and local leaders who support the use of incentives, perhaps lobbying groups from all political parties could direct their resources toward a permanent federal fix to the problem. What would a federal prohibition on state and local incentives look like? I do not have the answer, but I suspect if the think tanks on the right and left put their lawyers and lobbyists behind this effort, they would come up with federal legislation that would be both effective and pass Constitutional muster.
With partisan gridlock paralyzing action by Congress on many important matters, perhaps economic development incentives can be the breakthrough issue that brings the two parties together. Imagine an economic development playing field where states competed based on their education systems, infrastructure and tax structures rather than the size of their incentive packages. Imagine CEO’s “picking winners” based on workforce quality, infrastructure, operating costs and quality of life. North Carolina would not be successful every time, but I’d like our chances.
Don Kirkman is the Carteret County economic development director.