The newly struck deal between Dell computers and the state of North Carolina should give us pause before celebration. As it stands, the North Carolina General Assembly approved $242.5 million in state tax breaks to Dell. The winner of the local beauty contest for the new site is Winston-Salem. Together with Forsyth County, Winston-Salem will add $37.2 million to the state’s offer, for a total of $279.7 million in “incentives.” This is the largest special interest financial package ever offered to a private business by the state of North Carolina. It is not a zero-cost package for the state, however, despite claims to the contrary.
The state asserts that the tax breaks offered to Dell are virtually costless. According to this argument, the $279.7 million in tax breaks represent taxes that would never be generated otherwise, so there is no lost state revenue going into the deal. In return for the state and local tax breaks, North Carolina officials estimate that the plant will generate 8,086 new jobs, and bring $743 million in benefits to the state. But there are several reasons why the Dell deal will be costly to North Carolina consumers as well as taxpayers. To get a better picture, taxpayers should consider tradeoffs as well as potential benefits.
Even if it is true that the tax breaks going to Dell would not have been generated anywhere else in the state economy, the Dell plant is still going to cost taxpayers and require tradeoffs. Winston-Salem taxpayers will be responsible for $7 million in bonds and $11.9 million general funds to be spent in connection with the Dell deal. Forsyth County obligations amount to $18.26 million, mostly from the County’s general fund.
Regardless of whether the Dell package costs the state any tax revenues, local residents will pay additional taxes in the future, and forego some projects now that might have been funded instead. Dell will increase demands on existing resources in the Triad, including roads, utilities, and other public infrastructure. But since Dell will not be paying the taxes needed to upgrade or maintain these services, other taxpayers must foot the bill.
We should also consider the labor market. In December 2004, the Employment Security Commission of North Carolina reported that the unemployment rate in 49 of 100 counties in North Carolina was below five percent; the remaining 51 North Carolina counties were at five percent. As employment statistics go, this is full employment. The November unemployment rate in Forsyth County was 4.2 percent. Full employment means there are no significant quantities of resources, especially labor resources, unemployed and available in the Triad area.
Given a fully employed work force, where will Dell get workers for its 8,086 anticipated new jobs? Dell will have to offer them a better deal; it will fill most of those jobs by bidding workers away from a current job. In a very tight labor market, the new employer competes with the existing employer for scarce resources by raising the price of labor. The existing employer “competes back” by also raising price. This back and forth process almost certainly results in higher wage costs all around. Given a fully-employed work force, the net employment effects from the Dell plant could be practically zero.
Labor and other resource costs in the Triad will be affected, then, even if total employment is not. Dell may be able to offer higher wages to attract labor, but other employers, those without special tax breaks, will find it harder to compete for those workers. Paradoxically, the hardest positions to fill could be those for low-skill, entry-level, and part-time work. Part-time and seasonal positions will make up 83 percent of Dell’s hiring. Only 17 percent are planned as full-time slots. We should count higher wage costs, along with shrinking outside opportunities among the tradeoffs associated with Dell’s move.
How do predictions and expectations compare? First, it is likely that the Dell jobs estimate is overstated, perhaps vastly overstated (News&Observer, State took rosier view of Dell jobs, 19 Dec. 2004; 1A, 23A).
Virginia, a serious competitor for Dell, used the same econometric model North Carolina officials are using; but, under similar assumptions, showed potential employment about half as large as the North Carolina projections (N&O, Bids in, Dell set to choose a site, 22 Dec. 2004).
The discrepancies have not been explained by forecasters, but North Carolina is using the rosiest picture. This is an overestimate, if past experience with Dell in Tennessee is any guide. Tennessee realized about 1,600 direct jobs in a similar plant opened five years ago, with another 1,600 or so in related businesses—nothing like the hoped-for 8,000 jobs when the deal was originally struck.
Even before Dell hits the ground, it is clear that there is no “free lunch” associated with this state-sponsored move. Taxpayers will shoulder a burden they would not otherwise bear, and Triad residents will do without $37 million dollars worth of spending on other needs and projects that have now been committed to attract Dell.
When entrepreneurs invest their own resources, they have a powerful incentive to tread carefully, avoid undue risk, and choose investments based on their potential risks and returns. Publicly funded (or “incentivized”) ventures are different. If they go awry, or simply underperform relative to predictions, a mistaken judgment can impose costs on every state resident. Wasted public resources obviously reduce public opportunities to pursue other policy alternatives. And tax collections automatically reduce private investment opportunities by taking funds out of the hands of private entrepreneurs. The result: publicly funded mistakes compound private loss because they also fail to deliver value in return.
North Carolina’s ultra-rosy predictions, along with the fact that there will be tradeoffs and costs to taxpayers, should be weighed against any possible benefits to enticing Dell. Finally, we should be asking ourselves whether a mostly part-time jobs program is the best program for state government to pursue, or whether some other avenue, including a reduction of corporate taxes across the board, would create more growth and long-term employment opportunities statewide.