Welcome to Carolina Journal Online’s Friday Interview. Today John Locke Foundation President John Hood discusses economic incentives with Greg LeRoy, author of the recently released book The Great American Jobs Scam: Corporate Tax-Dodging and the Myth of Job Creation. The interview aired on Carolina Journal Radio (click here to find the station near you).
Hood: What led you to write this book? What’s the motivating factor?
LeRoy: Well, I run a nonprofit group called Good Jobs First, and we promote accountability in economic development, and although we’re making progress — some states and cities are beginning to tighten up the ship — we think a lot more needs to happen sooner (rather) than later.
Hood: When you say that a lot more governments are tightening up the ship, it’s not that they’re foregoing the offer of incentives, but perhaps they are putting more conditions on them, or thinking them through more in the long run?
LeRoy: Yes. More states are enacting disclosure. Thanks to you all and the Justice Center, for instance, North Carolina has a good disclosure system. You actually disclose quite a few of your deals on the Web, which only three other states do. Some states are using claw-backs or money-back-guarantee language. A lot of states are beginning to attach wage and healthcare rules to keep some of the real bottom-feeders out of the public trough. That’s progress, but we’ve still got a long way to go.
Hood: I guess disclosure is the first step if you want to have an informed debate that might lead to change in policy—at least to know what these deals are, how they’re structured.
LeRoy: Right. We believe that the experience in states that have disclosure says to us, once people know what’s going on, a lot of the bad deals go away.
Hood: Something that you may not be aware of is that the lawsuit that was initially filed by the John Locke Foundation and the Press Association — there were several attempts to settle. And, there is a new attempt to settle, and the new attempt to settle involves promise of legislation that would require that the details of incentives happen, that they are immediately released within 15 days of being noted to the General Assembly. Not even 15 days of passage, but 15 days of being offered to the General Assembly, because there had been a lot of foot-dragging well after the deal had been made — well, we haven’t gone through the file, we’re not sure what’s a trade secret — which is kind of a phony excuse. So now there appears to be not only disclosure, but somewhat more speedy disclosure. However, I must say that there are still a lot of people who are very upset about the use of the taxing authority to subsidize business, for whom disclosure is just not all that exciting, and many of them are dispirited. You sound optimistic, but they sound pessimistic. They think this is a game that North Carolina can’t afford to get out of.
LeRoy: Oh, I think North Carolina can afford to get out of this. I point out in the book that until 1996, when the state lost — and I put the word “lost” in quotes — the Mercedes competition in ’93 and the BMW competition in ’96, and passed the William S. Lee Act, before then, the state had a very stingy, even-handed regimen. And the state economy was doing great. You had a high job-growth rate, low unemployment rate. I don’t see any reason the state couldn’t go back to that model to work.
Hood: It’s worth noting that after the incentive policies were enacted, yes, North Carolina’s economy grew, but not appreciably any different than before.
LeRoy: Right. And you showered enormous amounts of money through small numbers of big companies that are experts at gaming the system.
Hood: Well, for the sake of listeners who aren’t quite as up to speed on the incentive debate as perhaps you and I are, we should define our terms. When we say incentives offered to attract business, or help businesses expand in the community, what are the range of policies that term encompasses?
LeRoy: The average state now does it more than 30 different ways — corporate income tax credits for capital investment or job creation or research and development; long-term property tax abatements or property tax diversions in what’s called tax increment financing, which the state just recently enacted; low-interest loans or loan guarantees; training grants; enterprise zones, which often include inventory as well as sales tax exemption and property tax abatements; land write-downs and land parceling grants. All these are state-enabled and often locally administered, so when we try to fix these things, it usually has to happen at the state level.
Hood: There are lots of people, and I’d be one of them, who are skeptical about all these different kinds of policies, just on the basis of inappropriate governmental function. But for the sake of the public interest, can one distinguish between loan or grant programs on the budget — cash is changing hands — versus tax credit or tax deduction abatement types of programs? Are there pros and cons? Is one preferable to the other? If you’re going to choose a devil, which one of these has blunter horns?
LeRoy: Good question. I think tax spending, which is to say uncollected property taxes or uncollected income taxes because of income tax credits, is very problematic and corrosive. And you haven’t had a good tax expenditure budget, I understand, since 1991. You’re flying in the dark. You don’t know how big the bottom of that iceberg is, of the uncollected taxes. The last time somebody looked at the ratio of tax spending versus appropriations for economic development in this state, it was already four dollars tax spending for every one dollar of appropriations. And, the tax spending was growing faster than anything besides Medicaid, so that’s really the problem—that’s the corrosive part about the spending.
Hood: What makes it worse? Is it simply that there is more of it? That doesn’t seem to be enough of a decision rule. Is it because there’s less public information available about tax return as opposed to an expenditure?
LeRoy: Yes. There’s less information because your state, like many others, doesn’t produce a good tax expenditure budget, so taxpayers and legislators can’t see the bottom of the iceberg. It also means at a time of budget stress — if there’s a recession and revenues go down — appropriations become the big political football and they may get whacked, but the tax expenditures don’t get debated because they’re under the radar screen. They are automatic corporate entitlements based on just filing your tax return, so unless they’re sufficiently out in the sunshine, they get a free pass.
Hood: Sometimes it’s hard to get common agreement as to what a tax expenditure is, particularly in the area of economic development. An example that always bothered me was, people argued that North Carolina was giving a special break to companies by exempting their inputs from sales taxes. For example, there was a bill some years ago to let — I think it was airlines or air cargo, which was basically FedEx — to not have to pay sales taxes on the items they purchase in order to produce their service. Now if you’re producing a good for retail sale, then actually I think your sales tax rate ought to be zero. That’s just basic, good tax policy, so there seems to be some disagreement. Maybe that’s the reason why it’s easier to smuggle tax expenditures in, because there’s all this fog about what they are.
LeRoy: Yes, but I think if it was enacted in the name of jobs — and I agree, sales tax on inputs is an ambiguous place.
Hood: It’s not at retail.
LeRoy: But if you’re claiming an investment tax credit for capital investment, or an investment tax credit for job creation, I think those are clear.
Hood: Politicians can be very slippery talkers, but I don’t think they could talk their way out of that. So fundamentally, are you optimistic or pessimistic about getting control of the incentive game?
LeRoy: Oh, I’m very optimistic. I think a lot more people are getting hip to the costs. The other point we stress in the book is that this is not benign. This is why schools are overcrowded, this is why highways are congested, this is why we’ve got bad land-use policy. If we get this stuff fixed, it can go a long way to making neighborhoods safer and schools better.