Opinion: Daily Journal

Take the Full Measure of State Economic Incentives

Local media consumers may have picked up a bit of trivia lately: North Carolina’s new governor isn’t a Democrat. This break from The Way Things Are Done ‘Round Here has led to the humor of news stories written with apparent surprise and upset that the Republican Gov. Pat McCrory is doing things differently from his Democratic predecessors.

One area in which McCrory is not doing things differently, however, is in using economic incentives. Granted, his approach is different. McCrory has this idea of a public/private partnership, which amounts to admitting a few private-sector businessmen into the circle of All-Wise Economic Lever Pullers, which means that on top of the other concerns with state incentives programs he would add concerns over transparency. His belief in the power of incentives and their importance to growing the state’s economy, however, is the same as the previous governor’s. Witness the MetLife deal.

A measure before the House, House Bill 791, proposed by Rep. Rick Catlin, R-New Hanover, would create a joint legislative committee to study the state’s economic incentive programs to evaluate their “cost, need, benefit, and efficacy.” Such an evaluation would be a welcome.

Too often the discussion of economic incentives amounts to being pleasantly surprised that dogs like dog food. It shouldn’t be the end of the story that giving free money and tax credits for Industry X draws positive feedback from members of Industry X. What are its effects on consumers, taxpayers, the other industries, etc., from whom resources are taken to give goodies to Industry X?

It certainly isn’t surprising that, for example, the solar industry in North Carolina, which exists almost entirely because of state incentives and purchasing mandates, is trying to convince lawmakers of its vitality because of those state supports. Logically, the case makes no sense. Real successful industries don’t need permanent life support. The usefulness of the argument is determined by whether it succeeds in impressing any gullible legislator when a single vote could make the difference in the question of solar’s continued existence upon the backs of poor North Carolinians.

This is not to pick on the solar industry. After all, it’s doing what any industry favored with economic incentives does. There’s a well-rehearsed dance to these things. Policymakers institute incentives for a favored industry. The industry gratefully accepts. Policymakers and industry representatives smile for the cameras as they announce new jobs thanks to the incentives. Media dutifully report how politicians created jobs.

Eventually someone questions the charade and suggests that the money could be put to better uses. Industry lobbyists point to all the jobs in the industry and strongly suggest critics hate the industry and the jobs. Media follow their lead. The other half of the equation — jobs not created by the alternative uses of the resources confiscated and redirected by the state — is rarely discussed, and usually only by economists and free-market thinkers.

Isn’t that right, North Carolina film industry?

A Fiscal Research Division memo this month from researcher Patrick McHugh to Sen. Bob Rucho, R-Mecklenburg, did look at both sides of the equation with respect to the state’s film incentives. The key findings of that analysis were that the state’s film credit “likely attracted 55 to 70 new jobs to North Carolina in 2011” and that it “created 290 to 350 fewer jobs than would have been created through an across-the-board tax reduction of the same magnitude.”

Such a finding incensed Wilmington Mayor Bill Saffo, who took with gusto the requisite next “all industry jobs exist because of the incentives” dance step. It was no surprise to yours truly, whose study on film incentives last year — N.C.’s Film Tax Incentives: Good Old-Fashioned Corporate Welfare — included the following:

The film incentives amount to a tacit admission by state officials that lower taxes and regulations would attract more industry. So why play favorites with industries? Why not just lower taxes and regulations altogether?

In May 2011 the Beacon Hill Institute at Suffolk University (BHI) modeled the effects of tax changes on the North Carolina economy. Using their N.C. State Tax Analysis Modeling Program — NC-STAMP — BHI calculated the impact of allowing North Carolina’s temporary 1-cent state sales tax and income tax surcharges to expire, lowering the state’s corporate tax rate by 2 percentage points, and changing the way the state calculates individual income taxes.

Cutting taxes would provide “powerful stimulus to the North Carolina economy,” BHI found. By leaving more financial resources in the hands of individuals and businesses, it would increase employment, creating thousands of new jobs. It would attract more investment from local as well as out-of-state businesses, leading to well over a billion dollars in new investment in two years. Though state revenue would initially drop, it would recover through greater growth of the state’s economy. This faster rate of growth would owe to new and permanent jobs created by the catchall incentive of lower taxes across the board, which would be unlike the film tax incentives’ temporary jobs and their shifts in production from other industries.

That study includes a chart based on various studies of state film incentives programs that look at both sides of the equation, benefits and costs. Those studies consistently found those programs returned mere pennies to the states for each dollar’s worth in incentives. Another way of putting that is to show how much revenue was lost per dollar of revenue spent on film incentives, as Figure 3 from my study did:

An across-the-board economic incentive program

Again, economic incentives programs are a tacit admission by state policymakers that lower taxes and regulations would attract more industry to North Carolina. The question then becomes: Why do it just for select industries? Why not lower taxes and regulations across the board?

Research shows that’s far more effective — but it also requires politicians, Democrats and Republicans, admitting who the real job creators are.

Jon Sanders (@jonpsanders) is director of regulatory studies for the John Locke Foundation.