Categories: Economic News

You decide: should we use incentives to attract companies?

By Mike Walden

North Carolina received some notable economic news recently. Our state was named “America’s Best State for Business” by a major national media organization. This is indeed a great honor. Recognizes North Carolina’s attractiveness to domestic and international businesses. Experts say the state’s labor supply, education systems, especially universities and community colleges, a competitive cost of living, and attractive climate and natural amenities are some of the reasons. of our high business ranking.

However, there may be another factor at work: incentives. Incentives are a type of financial discount to businesses located in North Carolina. They usually take the form of a tax reduction that the company pays over several years. The company still pays state taxes, but just less. The stimulus packages can be large, even more than $1 billion, if the tax cuts last for several decades. Local governments in North Carolina may also offer incentives, but they tend to be much smaller in dollar terms compared to state programs.

I recently spoke to a group of local citizens about incentives. Several questions were raised, including why incentives are used, whether incentives should be banned and whether North Carolina is losing money on incentives — money that could be used for crucial state programs. Let me give the same answers in this column that I gave to the group.

Incentives are used because they work. Business incentives were first offered by some states in the 1930s, but have expanded significantly in the past thirty years. In particular, large companies known to contribute thousands of jobs and billions of dollars in economic activity will rarely consider locating in a state without incentives.

Does this mean that only incentives matter? Not entirely. A business will have specific labor requirements, skills, access to suppliers, access to buyers, transportation and other factors. Research shows that a company looking for a site will look at numerous locations around the country, and possibly even the world, and then settle on a handful of sites that meet their requirements. The Company will consider each of these two, three, four or five locations equal. It is then the size of the incentive package offered that will create the winner.

Some may say that companies are using states to provide them with more financial benefits. If so, why don’t states just agree not to use incentives? There have been efforts to do this, but so far they have failed. Because? Because while incentives can be costly to states in terms of lost tax revenue, they can still generate net benefits.

Consider this example. Let’s say the “Big Deal Company” is offered $250 million in incentives over twenty years to come to North Carolina, and they accept. Is North Carolina’s treasury in the $250 million hole over the next twenty years?

Not necessarily. If the new economic activity generated by the Big Deal Company creates $350 million in new potential state revenue over the next twenty years, even including the incentives, North Carolina’s public revenue would be $100 million ahead.

The gain could be even greater if North Carolina is able to reduce spending on unemployment compensation and other economic support programs as employment increases and unemployment falls.

But how do we know if the Big Deal Company will be prosperous enough to pay 350 million dollars to the State over twenty years? Based on the company’s hiring and production plans, we could estimate its income, payroll and other key factors to generate forecasts of what it would pay to the State, before incentives. We could then compare these forecasts with the costs of the incentives. If the forecasts of new revenue and cost savings are greater than the incentives, the use of the incentives could bring a net gain to the state.

In fact, that’s exactly what North Carolina does before offering incentives. For twenty years, the State has used an economic model that predicts the benefits and costs of incentive packages.

But some of you might be thinking: what if the model is wrong? What happens if, after receiving the incentives, the company does not hire as many workers, produce as much output and pay as much tax revenue to the State?

Fortunately, North Carolina has thought of this possibility and includes “catchback” provisions in the incentive contract. If the company doesn’t meet the number of hires they said they would have, the size of the incentives is reduced – “recovered” – in proportion to the number of jobs lost. North Carolina has used this clawback provision several times.

Of course, there’s always the possibility that a company came to North Carolina without incentives. However, experience suggests that this possibility may be slim. For example, recent filings revealed that North Carolina was on the verge of losing a large company worth hundreds of millions of dollars to another state because North Carolina’s incentive package was too small. The state increased the amount and the company announced they were going to North Carolina.

There’s a lot not to like about incentives, and most people wish they weren’t used. However, as North Carolina’s economy has transformed in recent decades, with traditional industries such as tobacco, textiles and furniture shrinking and new sectors such as technology and pharmaceuticals on the rise, the The state has tried to attract new companies so that well-paid jobs can be offered. to our workforce. Is it worth using incentives to achieve this goal? you decide

Walden is the William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.


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