RALEIGH – There are fresh questions – and rightly so – about the state’s lavish $242 million package of incentives for a planned Dell Computers facility in the Triad region of North Carolina. On Sunday, the Raleigh News & Observer reported that despite all the talk during a hasty post-election legislative session that the state had to act quickly to forestall competing offers to Dell, the only other known suitor was Virginia and its incentive offer was a small fraction of North Carolina’s. Also on Sunday, The Fayetteville Observer published a lengthy piece examining the increasingly precarious legal basis for tax credits such as those offered to Dell, with the very real prospect of litigation in either state or federal court (a prospect that will be examined in significant detail later this week at a forum hosted by the North Carolina Institute for Constitutional Law, itself a potential litigator).
One common theme is the notion that tax credits are not really government subsidies akin to free worker training, land grants, or cash handouts. Defenders of incentives argue that because tax credits are afforded to companies that would not otherwise be in North Carolina, paying income or franchise taxes, these policies are essentially self-financing.
That is, they say, there are important conceptual and practical differences between handing cash or assets directly to a company and allowing that company merely to keep a portion or perhaps all of the money it would have paid in taxes in the absence of incentives. Without the incentive there would have been nothing to tax in the first place, so nothing of value is changing hands. There is no subsidy.
This argument is wrong but clever. Among other things, it plays to a sentiment often expressed within free-market, conservative circles who usually oppose incentives: that letting people keep more of their own money is not a gift. Those who opposed President Bush’s series of federal tax cuts often called them “giveaways to the wealthy” or “income redistribution from the poor to the rich,” which in addition to being factually inaccurate was also a gross misuse of political rhetoric. Ameliorating a past harm – in this case the decades-long use of federal power to attempt to take money from the people who earn it to benefit the people who don’t – does not constitute a new harm. It is an effort at remediation, at restoring just and limited government.
But this concept does not apply to selective tax breaks for industrial recruiting. To understand why, it’s important to remember what business taxation actually means. It’s a way to collect tax revenue not from a business per se, which is really just an inanimate bundle of contracts, but from individuals engaged in related commercial activity. The theory is that if you live, work, shop, or invest in a particular state or locality, you ought to help to pay for the governmental services that facilitate or enhance your ability to do so: the courts and law enforcement that protect property and enforce contracts, the publicly owned streets and infrastructure employed, etc. By taxing a business enterprise, the government collects revenue from a mix of 1) business owners or shareholders in the form of lower investment returns; 2) executives, workers, and vendors in the form of lower compensation; and 3) consumers in the form of higher prices. In theory, at least, this revenue covers the cost of delivering public services to these groups.
In the case of selective tax credits, the linkage is broken. Some workers and vendors at the new Dell plant will previously have been employed by North Carolina firms that paid state and local taxes on their behalf. Others will move into the area from elsewhere, thus raising the demand for public services without a commensurate rise in tax revenue. Similarly, some investors and customers will no longer pay indirect taxes for the North Carolina services from which they benefit.
These services will still be delivered. The Dell facility will receive police, fire, and legal protection. It will use public highways. Its workers and their families will use taxpayer-funded schools, colleges, perhaps even health and welfare programs. Who pays? Everyone who invests, works for, sells goods and services to, or receives goods and services from the other North Carolina companies who don’t enjoy special tax breaks. They will either pay higher taxes or receive less value for the taxes they already pay.
That’s the subsidy – and it is indefensible.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.