Opinion: Daily Journal

Counting On Economic Incentives

RALEIGH – The Little Conqueror struggled mightily with his math homework the other night.

Now, one might assume that such a distinguished monarch could simply order someone else to count for him. Indeed, the conqueror in question assumed precisely that, briefly, and was disabused of the notion by his servant-father. There was the further irony that, just a couple of hours before the arithmetic struggle began, Alex was overheard proclaiming to his friend Thomas that he “loved math” and “loved his math homework.” (Thomas, fittingly, doubted it.)

The disconnect between mathematical rhetoric and reality seems to be catching, because the following day I read about Durham County awarding $400,000 in incentives to the American Institute of Certified Public Accountants, which announced last year that it was moving its headquarters to the Bull City. The project, estimated at $5.3 million and 120 jobs, also received state grants and credits worth nearly $7 million.

As befitting an association of 350,000 accountants, AICPA certainly managed its own financial situation with aplomb. The $400,000 in county incentives includes a reimbursement for relocation expenses and training subsidies for each Durham-based employee (up to a cap). But on the government side, sound accounting and clear thinking appear to be lacking. County Commissioner Chairwoman Ellen Reckow insisted that the incentives grant reflected a “hard-nosed business decision” that is guaranteed to make the county more than it cost. “We don’t just give our money away,” she stressed.

Well, let’s break this word problem into its constituent elements to test her assertion. First, the local incentives were granted this week – almost a year after AICPA announced its new Durham location. Temporally, could those incentives have determined the location decision? County officials and senior AICPA executives insisted that Durham’s package was promised last year, and thus played a decisive role. The latter had emphatically to put that cat back in the bag this week because back in July, an AICPA spokesman had first let it out by saying that the local incentives were not a major factor in the relocation.

Longtime students of the economic-development business will recognize the pattern. Repeatedly in the past, reporters have called company executives and spokesmen after an incentives announcement, been told that the decision was really made on business fundamentals, and then later the record has been “corrected” to emphasize the incentives’ role. Economic-development professionals train on how to word these statements to meet legal tests and avoid embarrassing disclosures. Unfortunately for them, the training doesn’t also encompass everyone, allowing certain inconvenient truths to leak out.

Still, for the sake of argument, let’s give them a pass on this question. Then the math problem becomes: do the incentives add to or subtract from the county’s bottom line?

Proponents seem to believe that estimating property or sales tax flows directly from the AICPA project is sufficient to answer this question, but that’s not correct. When businesses “pay” taxes, what they really do is collect and transmit taxes paid by individuals – be they owners, customers, workers, or vendors. With a corporate relocation, there are two groups of taxpaying workers to think about: those moving to the community from outside and those already living there and simply changing jobs.

The first group brings property and sales tax money, yes, but also service costs such as road improvements, public-school enrollment, and increased park and library usage. One hopes that the increased revenue offsets the increased spending, at least on average and over time. The second group is already imposing service costs, but if those local workers move from an employer previously transmitting a few spread of county taxes to an employer that, because of incentives, sends a lower net contribution to county coffers, the result is a fiscal hole of some size. That can either be filled by lowering spending or increasing taxes, but it cannot be reduced to zero by political proclamations.

The Little Conqueror eventually vanquished his multiplying foes the other night. Local governments are losing the battle against corporate welfare, with the consequences likely to be dire for taxpayers and for the broader business community who will eventually suffer the blowback.

Hood is president of the John Locke Foundation.