Saturday, March 14, 2015

Corporate Giveaways Are Not a Good Deal for North Carolina

The state lured Chiquita Brands headquarters to Charlotte with $20 million. After a buyout last fall, the new owners plan to move.  By MITCH KOKAI  March 13, 2015 6:42 p.m. ET

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Raleigh, N.C. Republican Gov. Pat McCrory is making the case for one of the few policies that unite progressives and tea partiers in anger: corporate tax incentives.

 

For years, North Carolina, like many states, has had a system under which the governor can dangle targeted tax breaks and cash grants in front of companies considering relocating to the state. The current pot of money available for these corporate incentives, $30 million authorized in mid-2013, is about to run dry. Mr. McCrory is urging state legislators to authorize more funding, and to that end the state House passed the N.C. Competes Act 88-29 on March 5. The bill is now up for debate in the Senate.

 

The most controversial section of the bill would increase the amount available for the governor to award this year by $15 million. If that sum sounds relatively modest by government standards, consider two points.

 

First, each new grant can last up to 12 years, meaning the extra $15 million could increase the program’s payout by $180 million.

 

Second, North Carolina has already issued more than 200 grants since 2002 that will deprive state coffers of an estimated $157 million in the next two budget years alone. The legislature’s fiscal researchers say total outstanding liabilities for corporate incentives approach $1 billion.

 

If the Senate doesn’t act, the governor would no longer be able to offer grants effective Jan. 1, 2016. The bill that cleared the House would extend the program for four years. That is a long-term commitment—and a lot of money.


Proponents argue that other states are playing the corporate

incentives game, and businesses have become accustomed to trading tax cuts for jobs. “There is no question that incentives are the first box that is checked by anyone looking at North Carolina,” the state’s commerce secretary, John Skvarla, testified. Lawmakers, even ones lukewarm to the proposal, seem to have bought into this message. “A lot of us don’t care for incentives,” one of the bill’s primary sponsors, Rep. Susan Martin, said during committee debate. But, she added, “we’re not in a position where we can just say, ‘We’re not going to play that game, period.’ ”

 

That claim deserves a closer look. The John Locke Foundation released a report in April summarizing the results of more than 680 peer-reviewed journal articles that studied how state and local policy affects economic growth. Fifty-five of the articles addressed the impact of targeted tax incentives, and the results are not encouraging. More than 70% of studies found that incentives either did not substantially contribute to economic performance or produced mixed results.

 

The McCrory administration has pledged nearly $300 million to companies that promise to create 15,356 jobs by 2026. If the past is predictive, those promises will fall short. The left-of-center policy group the North Carolina Justice Center reported last month that from 2002-13 the state canceled 60% of grants “after recipient firms failed to honor their promises, with even higher rates of failed projects in the rural and most economically distressed areas.”

 

In 2011, $20 million of state money helped lure Chiquita Brands headquarters from Cincinnati to Charlotte. But after a buyout completed last fall, Chiquita’s new owners plan to close the headquarters, and community leaders are now working to recover as much money as possible.

 

There are other steps lawmakers can take that are much more likely to boost the economy: Ensure the delivery of high-quality services such as schools and roads while lowering costs, flattening taxes and repealing unnecessary regulations.

 

North Carolina has moved in this direction since the GOP took control of the state legislature in 2011. Reformers replaced a three-tiered personal income tax with a 5.75% flat tax. They cut the corporate income tax over two years to 5% from 6.9%. The legislature passed a law that will soon legalize hydraulic fracturing for oil and gas, and it enacted a sunset provision that requires periodic review of existing regulations.

 

The state economy will reap the benefits of these changes for years to come. The results are already promising: North Carolina has added roughly 200,000 net new jobs over the past two years, according to federal data. That translates into a growth rate of 5%, much better than averages for the Southeast (3.4%) and the nation as a whole (3.9%). In December 2012, the month before Mr. McCrory took office,

North Carolina’s unemployment rate was 8.9%, a full percentage point higher than the national average. By December 2014 it had dropped to 5.5%, one-tenth of a point below the national average.

 

Corporate incentives have a lousy record of boosting economic growth. Instead of getting distracted by the clamor, Mr. McCrory and state leaders should focus on making North Carolina the best place in the country to do business—and the jobs will follow.

 

Mr. Kokai is director of communications at the John Locke Foundation, a free-market public policy think tank based in Raleigh.

 

Source:http://www.wsj.com/articles/mitch-kokai-corporate-giveaways-are-not-a-good-deal-for-north-carolina-1426286563#livefyre-comment

 

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