A taxpayer-friendly way to offer business incentives in NC

Inducing businesses and their jobs to settle in North Carolina is a nonpartisan, high-priority goal for state government. But the way our state is forced to compete for businesses requires inducements that are expensive and risky and uses taxpayer money badly needed elsewhere in the state – like education and infrastructure.

Companies select a business location for market proximity, labor and raw material availability, and competitive state taxes. Company selections also factor in the quality of the community, largely defined by public amenities such as parks, good roads and good public schools and colleges. Unfortunately, however, state efforts to attract businesses today must also offer public money in the form of cash or tax credit incentives.

An informative report in the New York Times in 2012 reviewed the national tax credit market for attracting businesses: billions of dollars offered by states to companies as location incentives each year. Some examples: Incentives for auto manufacturing locations had grown $13.9 billion between 1985 and 2012. Incentives offered by New York State to movie filming companies every year equaled the salaries of 5,000 urgently needed public school teachers. In North Carolina, $61 million had been issued as tax refunds to companies over the 21 months previous to the Times’ report. An investigation by the Stamford Advocate newspaper reported over $500 million per year in tax credits to filming companies across the country.

State tax subsidies for company location represent a substantial yearly redistribution of public money to private enterprise. This market for tax subsidies has generated specialized brokerages. When a company can’t legally use tax credit inducements, it can sell them for 80-90 cents on the dollar to brokers who bundle the tax obligations and sell them to investors.

In these times of insufficient American jobs and state governments struggling just to keep up traditional services, does private enterprise need this help? The Federal Reserve reports historic highs in U.S. corporate profits since 2009, much of it from investment in foreign markets where most profits are kept abroad, away from U.S. taxes. The National Priorities Project reports that in 1945 income taxes from corporations contributed 35 percent of total federal revenues. That share dropped to 11 percent in 2014.

Still, business entrepreneurs have a legitimate interest in seeking locations that best serve their business models and the community needs of their employees. So, until a much-needed federal law prohibits private companies from extracting subsidies from states, North Carolina must also compete. Location subsidies, however, could be offered that would not simply add to a company’s bottom line but provide community support for both prospective companies and North Carolina communities. Incentive packages of state money could be specifically directed to improvement of the community in which a company settles.

In such a scheme, the amount of incentive money still would be negotiated over the number and quality of jobs and long-term company prospects. If a company accepted the package, it would be used to improve community schools, public recreational facilities, supportive businesses or perhaps jobs given to local people. Wherever the incentive money was used, the company would be entitled to enhance its business name and brand by that use. If an incoming company selected a small struggling N.C. town, the state might increase the state inducement to help spread incoming business and jobs more broadly throughout the state.

And where would the money come from? The incoming company, like other resident companies, would pay state tax on state profits. The state, however, would immediately implement the negotiated upgrades using the current state account established for the purpose. Because the new company would be paying state taxes, the revenue would eventually return the incentive loan to the state account. For small, emerging companies with need for up-front investment, financial aid might be offered under special conditions.

Such a program would help businesses become better-known partners and stake-holders in their communities. State-financed improvements would be more permanent, whether or not the new company made it big, moved or failed. It would be N.C. public money loaned to help companies get settled in N.C. communities and generally improve state business environments. North Carolina leadership in this and adoption by other states would put pressure on Congress to enact the necessary legislation to stop to this unregulated location market bribery.

Robert Merriam, Ph.D., of Chapel Hill retired as a science professor from Stony Brook University in New York.