Fine Print - March 2010

How to end the incentives war
By G.D. Gearino

There are certain words and phrases which, when spoken out loud, tend to provoke expressions of regret as bad memories cascade. “Leisure suit,” for one. Does anyone long for the days of cheaply made, badly tailored polyester ensembles? Or maybe that unhappy echo of the Clinton administration’s low point — “genetic matter” — does it for you. In any event, it is my wager that future generations of politicians will experience a similar shudder of revulsion when these two words enter the conversation: “tax incentives.”

Thanks to some recent exemplary reporting by the Winston-Salem Journal, it is now undeniably evident how much and how often North Carolinians are played for chumps when tax giveaways to business are being bartered. With the approval (and sometimes participation) of state officials, local leaders — with ever-increasing frequency — routinely negotiate with corporations over their tax obligations. Fairness was abandoned a long time ago. Nowadays, the relationship between municipal officials and corporate executives resembles nothing so much as that of a seller and buyer haggling prices at a Middle Eastern rug bazaar. Good luck trying that with your income taxes.

The Journal, using the soon-to-be-closed Dell Inc. computer plant as its starting point — a plant the paper described as “the local and statewide poster child for over-the-top incentives hype and unfulfilled job pledges” — analyzed 70 incentives packages handed out by local leaders in recent years. It found that of the 13,000 jobs the recipient companies pledged to create, more than 40% “either were never created or no longer exist.” What naive soul thinks the situation is different anywhere else in the state?

If ever there were a slippery slope, the practice of throwing public money at private business in the name of economic development is it. Once it begins, it’s hard to stop. Local leaders may start out with large ambitions and noble intent, but in short order they find themselves offering six-figure bribes to companies to move just a few miles. (That’s not a theoretical example, by the way. Three years ago, Durham County officials pledged $100,000 to a business as enticement to relocate from neighboring Wake County.) But the problem, of course, is that if everyone else is doing it, any local official also feels compelled to get in the game. No one has the option of pushing away from the table.

In light of that, I don’t understand why local and state leaders so vigorously oppose legal efforts to derail the system of tax incentives. My only guess is that they haven’t grasped how, in the long term, a successful challenge will benefit them — not to mention taxpayers. Let’s see if I can help out.

The two main problems with tax incentives and public handouts are 1) they’re a race to the bottom, with the result being (to paraphrase Margaret Thatcher) that politicians eventually will run out of our money to give away; and 2) they tend to be awarded to the least needy. Google Inc., for instance, is fabulously wealthy and doesn’t need money from the citizens of North Carolina. But because it’s fabulously wealthy, Google could hire whatever lobbyists and lawyers it needed to negotiate a $200-plus million incentive package in return for locating a server farm here. When you further consider the basic unfairness of awarding public money only to certain business enterprises, as well as the unfulfilled promises of jobs revealed by the Winston-Salem Journal, you’ve got a system no one but the corporate beneficiaries can love. So what to do? Sue.

The North Carolina Institute for Constitutional Law has done exactly that. It’s still waiting for its first clear victory, however. It lost its challenge to the Dell incentive package but has four other cases in the court system. Organizations in other states have undertaken similar crusades. In late January, the Arizona Supreme Court upheld a challenge to a deal in which $97 million in public money was awarded by the city of Phoenix to a mall developer. The only tangible benefit the city received in return was 200 parking spaces, the court determined. (At $485,000 per space, I hope they were in the shade.)

It’s possible the widespread practice of awarding incentives could die a death of a thousand such cuts, but that’s unlikely. Instead, here’s an idea: The General Assembly should rewrite statutes to eliminate targeted incentives, announcing that as a basic matter of equal treatment under the law any benefit available to one business should be available to all. Then at the first opportunity — when, for instance, a neighboring state uses a targeted incentive to lure a company away from North Carolina — we should sue the other state in federal court under the Commerce Clause. Let the U.S. Supreme Court end the practice permanently. My guess is that every local and state official in America, given the chance to end the handout game, will line up to file amicus briefs in favor of the brave men and women of North Carolina who pushed away from the table first.