RALEIGH – It was only a matter of time.
Two owners of a Wal-Mart in Wilson have filed suit in federal court to challenge $2 million in local-government incentives for a planned Target store in the county. "This is a very peculiar thing to have the government decide it wants a particular brand of store, and it’s willing to pay it $2 million to come to town," said the plaintiffs’ attorney.
North Carolina’s escalating use of tax subsidies to "close deals" with potential private employers was destined to provoke the state’s existing businesses. While there are many different arguments, both legal and economic, against such targeted incentives, among the most persuasive is that "targeting" incentives to some firms inevitably means targeting other firms not for benefits but for costs.
When state or local government gives a subsidy to Company A, it may make Company B better off, too (if it is a supplier or customer to Company A, for example) but it is far more likely to make Company B worse off. Here are some of the potential harms to Company B:
· Company A may use the subsidy to bid against Company B for a piece of the land that both wanted to use for a facility. Even if Company B prevails, its final purchase price might be pushed up because of government intrusion.
· Similarly, Company A may be in competition with Company B for other inputs, such as workers. While the resulting upward pressure on wages might be attractive in some ways, it will raise the cost of doing business for Company B, perhaps so high that Company B can no longer afford to add or retain the personnel.
· Another possibility is that Company A and Company B will be competing for customers. That’s one of the claims that the local businessmen are making about the incentives arrangement in Wilson: why should taxpayers assist Target in competing against Wal-Mart or other retailers in the area?
· There may be adverse consequences for Company B in the area of public finance, as well. Taxes on business property are really a means to tax individuals who benefit from local public services. These include the owners and shareholders of the firm, who may see their investment returns grow due to better policing, more street access, or improvements in the education level of the workforce. Beneficiaries also include executives and employees, who consume a variety of local city and county services ranging from police and the courts to schools and parks, as well as customers, whether near or faraway, who use local infrastructure. If subsidies push Company A's effective tax rate lower than Company B’s (and sometimes all the way to zero), that doesn’t mean that its various constituencies – shareholders, employees, customers, etc. – don’t continue to benefit from public services. It just means that they aren’t paying as much of the cost anymore, so someone else has to – frequently the shareholders, employees, and customers of Company B.
These are real harms, and actionable ones as far as I’m concerned. With the new federal lawsuit in Wilson, and likely litigation coming soon elsewhere in North Carolina, we’ll find out what the judiciary has to say.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.