Setting the Record Straight

Well-Meaning Bill Creates Yet Another Business Incentives Program 

By Rob Schofield

It’s getting down to the wee hours of the 2007 legislative session and, as usual, a lot of sausage is getting rapidly and coarsely ground. As of Thursday afternoon, it appeared that lawmakers were dotting the i’s and crossing the t’s on the final budget agreement and could pass it into law by this weekend. At the same time, committees in both houses were rushing to pass bills on myriad topics in hopes of sending them on to the Governor prior to final adjournment.

In some instances, the lawmakers’ fast work was producing good results and bringing months of effort on some important topics (mortgage foreclosures, expunction of juvenile records, repeal of the in-state university tuition break for booster clubs, and maybe even ethics reform – among others) to fruition. In other instances, however, the quick moving assembly line was producing some real lemons.

A particularly sour example that raced through the House of Representatives this week involved yet another effort to enlarge the state’s ever-expanding and ever-more-expensive corporate incentives effort. Under a proposal passed by the House and sent to the Senate, North Carolina will establish a new program known as the “Job Maintenance and Capital Development Fund.” The new program would join a growing list of incentives initiatives (the “Job Development Investment Grant” program, the “One North Carolina Fund,” the “William S. Lee Act” and countless other specific business tax breaks) that provide targeted infusions (some would say “handouts”) of public money to private businesses in the hopes of creating new economic activity.

The New Proposal

Though drafted with neutral language that would allow (at least theoretically) up to five grants per year to any businesses that meet a specific list of investment and employment criteria, the new “Job Maintenance” proposal is clearly – at least at this point – about one company: Goodyear Tire and Rubber. Under the terms of the bill, Goodyear would receive up to $3.5 million in 2008-‘09 (and could receive as much as $40 million over the next decade) as an incentive to keep its large tire production facility in Cumberland County. According to news reports, Goodyear is the largest private employer in Cumberland County. It currently employs around 2,500 workers and, thanks to the presence of a vibrant labor union, pays extremely well – with average wages and benefits amounting to around $90,000 per employee per year. According to the bill sponsors, the legislation is an attempt to help assure that the tire maker stays put for years to come.

Given that the lead sponsor of the bill, Rep. Rick Glazier is one of the General Assembly’s smartest and most dedicated members, it’s not surprising that, at least as incentives bills go, the proposal does a good job of attempting to assure that Goodyear continues to act as a responsible employer. It requires the provision of health insurance for full-time employees, mandates safety and health and environmental standards and seeks to give the Department tools that it can use to monitor and enforce the terms of any grants it makes.  In this regard, the proposal may well be superior to some of the existing laws.

A New and Dangerous Precedent?

The problems with the proposal have less to do with its specifics and more to do with its implications for the big picture. North Carolina is currently spending more than ever before on initiatives designed to recruit new and relocating businesses. As was noted in this space back in March:

“A quick check of the state Department of Commerce website reveals a menu of eight different programs under the heading “Financial Assistance to Business” and there are others. Moreover, as the recent deal to lure the internet search giant Google to Caldwell County highlighted, local governments are also lining up to provide their own subsidies as they battle to recruit employers to their corners of the state.”

Ironically, the explosive growth in incentives spending comes at the very time that such programs are under sustained attack from critics on all sides of the political spectrum. Progressives and conservatives alike have attacked the programs as corporate giveaways in which favored businesses are able to secure an unfair advantage over less well-connected competitors. Even the most ardent defenders of incentives usually preface their remarks on the subject by acknowledging the distastefulness of the practice and describing it as a necessary evil to promote development.”

Now with the move to enact the new “Job Maintenance” program, North Carolina is on the verge of expanding the incentives business again in a new and troubling way. Rather than merely providing tax breaks and direct subsidies in order to lure to new and relocating businesses, the state proposes to commence providing large and direct cash handouts to existing North Carolina corporations. While perhaps superficially appealing at first blush to those who have disparaged traditional incentives for their unfairness to in-state businesses, a moment’s reflection reveals the inherent flaw in such an approach – namely, the lack of any logical dividing line between worthy and unworthy recipients.

While Goodyear appears to be a solid employer in a part of the state that has struggled, there are obviously many, many such businesses. How, as it goes forward, will the state possibly be able to avoid expanding the program to other such companies?  The answer, of course, is that it probably won’t.

As the Insider newsletter noted in its Thursday afternoon update:

“The House has approved a measure that would provide tire maker Goodyear with $40 million over 10 years to keep a tire plant in Fayetteville. In exchange, the company plans to invest $200 million in new equipment. With the 105-5 vote in favor of the bill, can there any doubt that 105 more existing plants in the state will soon need incentives in order to remain viable?”

Once North Carolina goes down this road, it invites a new, lobbying free-for-all in which – more than ever before – businesses will compete in a vicious competition to win special treatment from state legislators and agencies. This, in turn, will assure an increasingly unfair and illogical patchwork of subsidies that undermine government revenue streams and provide a tremendous incentive for businesses to expand vast sums on cutthroat lobbying efforts. These efforts will almost certainly give rise to new kinds of corruption and influence peddling.

Going Forward

Rejection of the approach contained in the “Job Maintenance” proposal does not mean that North Carolina should do nothing to help promote its local businesses like Goodyear. William Schweke, an economic development expert at the Durham office of the national think tank, CFED, has written extensively on the need for rethinking our state incentives policy. His conclusion is that the key to continuing economic development is promoting “our homegrown economy.”

But by “promoting,” Schweke means something more sophisticated and strategic than simple cash handouts. Instead, he advocates adoption of a strategy called “Business Retention, Expansion and Modernization” that involves a much more regular and subtle provision of attention to the needs of the state’s businesses – workforce needs, transportation and communication needs, and many others. Though less splashy than a direct cash subsidy program, the “Business Retention” model offers better long term prospects and far less opportunity for corruption and waste.

Before rushing to add yet another simplistic giveaway program in the waning days of the session, lawmakers should take the time to examine Schweke’s suggestions carefully. In so doing, they may find a way to turn sausage into filet mignon. 

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This entry was posted on Friday, July 27th, 2007 at 9:08 am and is filed under Setting the Record Straight. You can follow any responses to this entry through the RSS 2.0 feed.