RALEIGH – If you watching the policy debate about economic incentives, you are bound to hear many stories like the following.
A few weeks ago, as High Point officials began to fashion their 2007-08 budget, it became apparent that something had to give. The city manager gave the council a budget that included a four percent tax hike, increases in water and sewer rates, and a 6 percent growth rate for city government. One councilman, Latimer Alexander, proposed a series of small-dollar changes to attempt to alleviate the tax pressure. They included cuts in city funding for nonprofits and, most controversially, a reduction of $100,000 in a $344,000 budget for purchasing materials for the local library. Alexander argued that because the library was to be renovated, limiting public access for a while, the city could afford to reduce purchases now and then pushing spending back up in a later budget.
At a public hearing on the budget, one local resident stood up to argue against Alexander’s proposed cut in library funds. He noted High Point’s repeated approval of economic-incentive deals for employers, including a recent package for a jet manufacturer. Referring to the library-funds item, he said, “It sounds like the same $100,000 you gave to HondaJet. If you can give it to HondaJet and the airport authority, you certainly should be able to give [it] to the citizens of High Point.”
Now, regardless of what you think of the idea of reducing library purchases as a budget-balancing device (Alexander’s proposal perished for lack of a second), it’s worth considering the argument that local governments who approve incentives shouldn’t turn around and complain about not having enough tax money for basic services.
Incentive defenders attempt to shoot it down by insisting that there is really no choice to be made here. If a company fails to locate a plant in your community because you refuse them the incentives they’re asking for, they insist, there won’t be the extra $100,000 in tax revenue to pay for library purchases in the first place. And it’s fair to complain that some incentive opponents wrongly portray all incentive deals as equivalent to up-front cash grants. In the case of recent large-dollar deals, for example, some of the incentives are back-loaded – a company can’t take the full value unless they’ve been in operation for many years – and some programs have “clawback” provisions that allow governments to recover incentive money from firms that don’t deliver on their job-creation promises.
But while the fiscal effects of incentives may be subtle and hard to follow, that doesn’t mean they are insubstantial. For one thing, some costs associated with government incentives to corporate relocations and expansions – subsidized land, site improvements, below-cost water and sewer connections, etc. – are difficult if not impossible to recover later. Second, as explained in previous columns, a tax-incentive program that foregoes the collection of revenue from a favored firm does, over time, come to bear a striking resemblance to a cash grant. If the workers at a new, soon-to-be-subsidized plant already live in the community, then they are mostly moving from employers from which the government collects a full slate of taxes and fees to employers from which the government collects less revenue per worker to pay for ongoing costs associated with those residents, such as roads and schools. On the other hand, if the workers at incentive-laded employers are transplants from other communities, then they represent an increase in demand for such services – road widenings, new schools, and so forth – but not a proportional increase in tax collections to fund the services. Either way, you end up with the cost of public services being borne disproportionately by existing workers, business owners, and customers in the community. Assuming that they won’t just accept an ever-increasing tax burden to finance the services, that means that governments must decide what stays and what goes.
In that sense, then, it really can be true that a $100,000 incentive for a big corporation means $100,000 less to spend on basic city or county services. Perhaps High Point should add an additional $100,000 to its library budget, spend it on economics and public-finance texts, and then give each public official a summer-reading assignment.
Hood is president of the John Locke Foundation.