An incentives policy for the people

by | Jul 13, 2020 | Features, Politics

Critics of Governor Cooper sometimes snarkily ask why, if he thinks corporate tax cuts are a mistake, he awards incentives to industrial prospects. Facially, it’s a clever point. If reducing a company’s tax liability sparks the creation of jobs, even a progressive governor is implicitly conceding that Republican tax policies are good for growth. In reality, it’s more complicated. Few issues are as vexing for North Carolina policymakers as the question of whether–and how generously–to provide incentives for economic development projects.

This dilemma has occupied North Carolina policymakers for decades. It began in 1994 when the state lost a Mercedes plant to Alabama, which had given the automaker a large package of corporate subsidies while North Carolina only offered sight assistance and job training. The North Carolina political class panicked, and soon afterward introduced a suite of economic development incentives. The first program was embedded in the corporate tax code. Later, direct subsidies in the form of Jobs Development Industrial Grants (JDIG) and the One North Carolina Fund were added to the mix.

The results of these policies have been uneven and frequently disappointing. Lawmakers scrapped the initial policy because studies had found that it did not contribute to job creation in the state. JDIG’s record has been more mixed; while some projects have created jobs, companies have often reneged on their promises, and studies show that most of its grants go to wealthy urban counties that need less help. One North Carolina–which provides grants to businesses that locate in distressed counties–is a worthy project, but the subsidies it provides are typically very small and unlikely to be the decisive factor. Overall, it’s fair to say that North Carolina’s experience with incentives has not been a smashing success.

Further, the economics literature is generally unkind to incentives. Academic economists are nearly united in their disdain for state and local “recruitment” policies oriented around corporate subsidies. Cynically–and perhaps unfairly–some economists argue that the main reason behind incentives is a desire by politicians to appear like they are actively working to create jobs. The empirical case for incentives is considered very weak.

But it still makes more sense to distribute incentives rather than bust the budget with across-the-board corporate tax cuts. As Michael Walden of NC State has observed, state-level tax cuts have not been proven to contribute to job creation at all. Other studies have found, by contrast, that “jobs incentives” can lead to tangible job creation at least when they are mediated through a broader economic development strategy. If North Carolina is going to have corporate tax relief as part of its economic policy portfolio, better to expand JDIG with strict accountability measures than to continue on the path of dramatic corporate tax cuts.

If that sounds like a less than ringing endorsement, reader, you’re right. Incentives are not only unseemly, they are an inefficient and often wasteful way of growing the economy. But there is a key exception. Berkeley economist Enrico Moretti has found that incentives for big manufacturing facilities (“Million Dollar Plants”) raise wages and property values in the communities receiving the investments. Thus, North Carolina’s long quest for an auto plant is worthwhile, especially if the plant we eventually land locates in a place like the Randolph County mega-site rather than in the Triangle.

In the coming decade, North Carolina policymakers need to retreat from the mania for pro-corporate policies of all kinds. From an economic development perspective, it is better to focus on education and innovation than scraping and bowing before international capital. But incentives are likely to remain part of the mix for the foreseeable future. To minimize the negative impact of this rather unsavory practice, the state should impose stricter accountability measures, rebalance incentives toward poor counties, increase spending on the One North Carolina Fund, and reserve our biggest offerings for transformational projects. That way, we can at least say we’re trying to make the business-recruitment “game” work for the people.


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