It appears Gov. Roy Cooper might not be alone when it comes to conflating across-the-board tax cuts with “corporate giveaways.”
One sentence in a recent newspaper article about targeted incentives in North Carolina suggests that same misunderstanding might afflict reporters and editors at the state’s largest print media outlet.
To correct the record, let’s define “corporate giveaway.” Starting with Merriam-Webster, a “giveaway” is “something given away free.” We can surmise that the corporate version involves something given away free to a business or businesses.
That definition has nothing to do with setting general corporate tax rates. When the General Assembly sets the corporate income tax rate, it determines how much of a corporation’s income must be turned over to the state treasury each year to help operate the government.
Since 2013, the Republican-led General Assembly has reduced that annual rate from 6.9% to 2.5%. The change affects every business paying corporate income taxes in North Carolina. Lawmakers singled out no particular business or industry for a special favor.
Similar circumstances surround an as-yet-unsuccessful effort to reduce the business franchise tax. Both last year’s vetoed state budget bill and a proposed mini-budget would have cut one-third of the franchise tax by 2021. The change would apply to every business subject to the franchise tax. No particular business or group of businesses would benefit from a “freebie.”
Contrast these general changes In corporate income and franchise taxes to the state’s ongoing use of targeted tax incentives. Through Job Development Investment Grants, the One North Carolina Fund, and other programs, state government rewards selected businesses with millions of dollars in tax relief.
Individual taxpayers and other businesses — including the targeted companies’ competitors —foot the bill for this targeted relief. The government-endorsed corporations benefit from a “giveaway.”
Cooper doesn’t get it. He has labeled general rate cuts as giveaways while touting the use of targeted tax breaks instead. During his first year in the Executive Mansion, the state nearly tripled its commitment to targeted incentives. Cooper’s team committed up to $185 million in giveaways to 54 favored companies.
Donald Bryson, now president of the Civitas Institute, described the governor’s approach in a 2018 radio interview. “The problem is that the governor is using when we cut the rate evenly for all corporations — when we treat Bill’s Plumbing the same as we treat Bank of America — with the same corporate tax rate, he says that’s a corporate tax giveaway,” Bryson said. “However, he’ll go off and give these special incentive deals to specific companies, usually politically connected companies.”
Unfortunately for Cooper, more evidence is emerging that the commitment to targeted incentives offers little benefit to the state.
A Jan. 8 article in the Raleigh News and Observer carried the headline “New study says large incentive deals don’t spur growth at state and local level.” The story documented new research from professors at Columbia and Princeton universities.
“They found that while incentive deals increase employment in the industry that received the incentive, there is no strong evidence that those deals lead to job growth in other industries or positively affect countywide employment, a factor that is often used to justify the deals to the public,” reported Zachary Eanes.
While the study focused on use of targeted incentives nationwide, Eanes highlighted Princeton University economist Owen Zidar’s assessment of North Carolina’s specific incentive strategy. “North Carolina seems to be overly optimistic about the outcomes of companies taking their incentive offerings,” Eanes reports.
“One thing that was striking about North Carolina,” Zidar said, “is that the estimated spillover, [gross domestic product], and tax revenue effects of these deals seem quite optimistic and much larger than some estimates implied by the economic literature on fiscal multipliers. I’d encourage folks to re-evaluate their assumptions in those assessments and reform incentive provision[s] accordingly.”
The article provides an excellent summary of the latest academic research. Yet Eanes’ report featured one potential flaw.
Under the subheadline “N.C. has lowered corporate tax rates,” Eanes or his editors inserted the following line: “North Carolina, which has repeatedly lowered its corporate tax rate over the last decade, has been aggressive in using incentives to lure new companies to the state.”
It’s possible that the corporate tax rate reference follows up an earlier sentence in which Eanes mentions the research finding that “states offer more incentives if they have higher corporate tax rates.” But it’s also possible that the N&O meant to link corporate tax rate cuts to use of targeted incentives.
If so, that would be a mistake.
Rate cuts and incentives both involve taxes. But they reflect two different, somewhat contradictory approaches to boosting the economy.
The lower the corporate tax rate, the less likely any company should be to seek — let alone benefit from — a targeted incentive “giveaway.” We should not be surprised that researchers found a link between higher tax rates and greater use of incentives.
A lower corporate rate helps every corporation — and, by extension, all of their customers, workers, and shareholders — operating in North Carolina. It makes no distinction among existing or new companies. There is no element of government officials and bureaucrats choosing to serve as benefactors for a particular favored company. There is no “corporate giveaway.”
Policymakers, pundits, and reporters should be careful to distinguish between across-the-board rate cuts and “corporate giveaways.”
Actual targeted giveaways do little to help this state’s economy. The governor has yet to grasp that concept. Let’s hope it’s clearer to others, including those reading about the latest academic research on the topic in the News and Observer.
Mitch Kokai is senior political analyst for the John Locke Foundation.