RALEIGH — As policymakers in Raleigh continue to consider the implications of two recent revelations out of the N.C. Department of Commerce — a study showing that tax incentives don’t create many jobs and a survey showing that they play a relatively small role in business-location decisions — it might be worthwhile to take a step back and examine the issue of economic-development policy from a different angle.
Assume, for the sake of argument, that North Carolina should play the incentive game. That is, assume that state government should attempt to create jobs and steer economic investments by offering targeted tax incentives to companies. What should be in the state’s toolbox?
In the past, most of North Carolina’s incentive efforts have involved tax credits. Yes, former Gov. Jim Hunt also pioneered the use of cash grants as “sweeteners” and “deal closers” for particular corporate relocations or expansions, but his “Competitiveness Fund” was never funded by more than a few million dollars a year. We’ve devoted several times that amount each year, in the form of foregone revenue, to our various tax-credit programs — including a credit for certain venture-capital investments and the much-larger William S. Lee package of tax credits for job creation, investment, research, and corporate-headquarters investment.
Now, however, the pendulum may be swinging in the other direction. While Easley administration officials continue to defend the Lee Act credits, others in Raleigh and beyond are obviously considering the option of reining in the tax incentives while putting more emphasis on cash grants. Once you buy the assumption that government should be playing this game at all, however, it’s not at all clear which direction is the best one.
In some ways, cash grants are clearly superior to tax credits. For one thing, it is at least conceivable that they will wreak less havoc on the state budget. The annual budget for grants is out in the open, part of the normal budgeting process. Tax credits, on the other hand, don’t receive the same level of attention. And plenty of companies get tax credits for actions they will do, anyway. With cash, the argument goes, there is more control by government officials, who can limit the benefits to a smaller number of companies for which the incentives are significant.
Also, companies that receive cash grants are necessarily known to the public. That’s part of the process of awarding such grants — though not early enough in the process for my liking. Companies’ tax filings aren’t public information, at least according to the legal opinion prevailing in state government right now, so it’s harder for outside analysts or the media to keep track of who’s getting what. Finally, many advocates of the cash-grant program argue that it can assist start-up and rapidly expanded companies more effectively than credits because it is of value to those who have no tax liability and are unlikely to have a tax liability in the near future.
Of course, the flip side of that argument, and one in favor of tax credits, is that they can’t be claimed by companies that appeared impressive at first but turn out to be dogs. Similarly, the idea that cash grants can be more successfully “targeted” to companies likely to succeed presumes that the government officials giving them out can guess which businesses will succeed and which will fail. That’s a fool’s errand, as economists have been observing for literally hundreds of years now. At least with credits, a wider array of companies might be able to access them, thus increasing the odds that some will prosper over time.
And perhaps the most persuasive argument in favor of tax credits is that the potential for political corruption is lessened. With large cash grants awarded to only a few companies a year, the temptations are great for applicants to play politics and for those in charge to pay attention. On the other hand, modest tax credits available on “autopilot” to a larger number of companies, regardless of their political contributions or connections, would seem to reduce the risk of serious ethical transgressions.
Basically, you can choose your poison on economic-development incentives. Tax credits or cash grants? I’d rather North Carolina not drink either potion.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.