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Researcher: Incentives Don’t Boost Competitiveness

Scholar attacks miconceptions surrounding targeted tax incentives

Targeted tax incentives do not boost North Carolina’s competitiveness, and no one should be surprised that businesses in larger, wealthier counties collect the most incentives. That’s the assessment of a university researcher who hopes to study incentives for the state.

“I think the catch here is: The more competitive we are, the less we’ll actually need to use incentives,” said Jason Jolley, research director for the University of North Carolina at Chapel Hill’s Center for Competitive Economies, during a recent presentation to the General Assembly’s Joint Select Committee on Economic Development Incentives. “It doesn’t mean that they’ll go away, because there’s always going to be pressure to use them. But I think the more competitive we are, the less we’ll have to use incentives.”

Jolley outlined for the select committee a proposal to spend 18 months and $350,000 studying North Carolina’s existing incentives programs. As he unveiled his proposal, Jolley also attacked some misconceptions about the impact of tax breaks tailored for individual companies.

One misconception involves the state’s system of economic development “tiers.” The N.C. Department of Commerce groups the state’s wealthiest counties together in one tier, while more economically “distressed” areas are assigned another tier. North Carolina’s current incentives program aims to give the “distressed” counties the most benefit from targeted tax breaks.

Businesses in those targeted tiers actually collect the least amount of incentives, Jolley said. “It’s not all that surprising, because we would expect that a little more profitable companies that would actually be able to take the [tax] credits would most likely be in areas that are doing well and are prospering,” he said during his Dec. 11 presentation. “But that is an important thing to keep in mind as you think about how to measure incentives and what the goals are. Are you benefiting distressed areas? What share of jobs [is] going to distressed areas?”

North Carolina entered new territory this year when it approved a $60 million incentives package targeting tire manufacturers Goodyear and Bridgestone Firestone. Unlike previous incentives deals that focused on creating new jobs, the package was designed to help Cumberland and Wilson counties maintain jobs.

Jolley urged lawmakers to use caution in targeting incentives toward businesses that promise to preserve existing jobs. “Is it a priority to use incentives to create jobs, or do we want to use incentives now to try and maintain or retain jobs?” he asked the joint select committee. “I think that’s new territory not just for North Carolina, but for a lot of other states.”

“It’s challenging to assess whether or not a company might really need those incentives to stay,” Jolley said. “You’re playing poker a bit, I think, in some cases.”

Jolley’s critique sounded good to Chad Adams, director of the John Locke Foundation’s Center for Local Innovation. “The state has no proof that the jobs are going anywhere,” Adams said in an interview after Jolley’s presentation. “The state has no idea if jobs are really being created. If someone creates a job and doesn’t fill it, how do you count it as a job for incentives? I agree completely that we are gambling with these incentives, and more and more people are starting to ask the tough questions.”

“If it’s about keeping jobs, then which jobs do you discriminate against?” Adams asked. “Which jobs do you say don’t deserve incentives when you say some jobs do deserve incentives? What kind of discrimination are we setting ourselves up for there?”

Lawmakers should hear the argument that incentives do not help North Carolina compete with other states, Adams said. “If you’re doing well, why do you need to use them?” he asked. “And if you don’t need to use them, why are they there? [Jolley] said it best. If I had the opportunity to talk to every legislator in the world, I would ask why we’re doing this. There’s really no data to say that incentives are actually working.”

Tax breaks targeted toward individual companies are less effective than broad-based tax reforms, Adams said. “What incentives say is that lower taxes work,” he said. “It is saying that if we offer companies lower taxes — which is what incentives are — then they will come. Maybe we should learn from that lesson and focus on lowering taxes to help all segments of the economy.”

Mitch Kokai is an associate editor of Carolina Journal.