This commentary by John Hood, chairman of the John Locke Foundation, appeared in the Carolina Journal’s August 2018 edition. Read it online here.
Case for Incentives Strikes Out
By John Hood
North Carolina politicians and policy analysts have been arguing for decades about targeted economic incentives. I have my own view on the subject, which I’ll share later in this column, but I think it would be helpful first to describe four very different takes on the issue.
The central question is whether North Carolina’s state and local governments ought to try to compete with other jurisdictions across the country in offering targeted tax or cash incentives, either to lure new businesses or to entice current employers to stay and expand.
I use the term “targeted” to distinguish incentives from other government policies that may have the same goal — faster or broader economic growth — but do not pick and choose among companies. This distinction is critical to understanding why there are more than two “sides” here.
For example, when the North Carolina General Assembly initiated a series of tax reforms in 2013, lawmakers reduced tax rates on personal and corporate income while also eliminating some tax credits and converting a previous and very generous tax credit for film and TV production into a smaller cash-grant program. Those choices actually reduced North Carolina’s use of targeted tax incentives while dramatically increasing our use of pro-growth tax policy to encourage investment and job creation in the state.
Another example of the distinction would be education subsidies. If the government offers to pay the full price of training employees for one highly desired corporate prospect, but doesn’t do so for other employers in the area, that’s a targeted incentive. However, if the government subsidizes job training or post-secondary education for everyone, regardless of the size or identity of current or prospective employers, that’s not a targeted incentive.
With these definitions in mind, here is a somewhat-whimsical model for classifying the competing arguments on incentives.
• The Ballplayers. Some of the strongest supporters of incentives can sound reluctant or even resentful about business subsidies, while also advocating more and more of them. “I don’t like incentives any more than you do,” they say, “but this is just the way things are. If we don’t compete, other communities will get the jobs and income. If we don’t play ball, we lose.”
• The Managers. Other incentive supporters argue that, if done correctly, these policies can do a lot of good. They want to offer incentives only to companies that pay a certain minimum wage, or offer generous non-wage benefits, or locate in needy areas as designated by government authorities. Essentially, they believe that government needs to play a more active role in managing the economy, and see incentives as a useful tool in designing and carrying out such central planning.
• The Umpires. These incentive opponents recognize there is a robust competition among states and localities for private investment, and that government tax and regulatory policies matter. But they argue for going broad, not narrow. They don’t believe targeted incentives work as intended. They observe that government officials have a poor track record of guessing which firms or sectors will make effective use of subsidies. They also argue that a willingness to offer targeted tax incentives is often an admission that the business climate stinks, in which case it would be far more effective to address the underlying problem rather than trying to offset it piecemeal with incentives.
• Soccer Fans. Finally, some incentive opponents think the entire business-recruitment game is pointless and corrupt. They don’t believe tax burdens, for example, have much effect on business decisions. They think higher taxes, spent on more and better government services, would produce faster and broader economic growth. Some are more radical still, and favor overturning the market economy altogether. Basically, this group wants to play an entirely different game.
As should come as no surprise to regular readers, I’m with the umpires. I want government to call to the equivalent of balls and strikes — to enforce contracts and provide basic services — rather than attempting active management of North Carolina’s economy, which isn’t fair and doesn’t work.
John Hood (@JohnHoodNC) is chairman of the John Locke Foundation of North Carolina.