Critics of tax incentives don’t necessarily think the practice should be done away with altogether. Rather, they say, the incentives should be used to solidify a company’s decision to locate in a particular place over another for more relevant reasons.

“Usually, they get interested in incentives only after they are fairly sure where they want to locate; thus, my belief is that states and localities providing incentives really end up providing a premium to companies to locate where they intended to locate all along,” says Dennis A. Rondinelli, Glaxo distinguished professor of management at the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School.

“In some cases when local assets are very similar in more than one state or area, the incentives may tip the decision in favor of the place that offers the most. But it is clear from our research and other studies that I have seen that incentives cannot offset weak location assets. Companies will not go to places that do not provide the other assets just to get a subsidy or tax break.”

Furthermore, critics say tax incentives are closely tied to politics, where officials have a different motive at stake. They say politicians simply want to be able to announce large deals…a major relocation creating 1,000 jobs versus 100 smaller moves of 10 jobs each.

“Residents don’t care much how the economy grows…if it’s big or small business creating jobs or selling products…they’re just looking for the best products or the best jobs,” says John Hood, president of the John Locke Foundation. “–Economically, it’s the same result; politically, it’s an entirely different result. It’s impossible for a politician to go to 100 different places.”

Hood adds that incentives not only cater to large projects that are negotiated with state and local governments, but also to economic developers who get a cut of the deal. He argues that this method leaves taxpayers in the dark.

“Investors and those who trust money to them are willing to take risks, but with tax incentives and cash grants, politicians are risking our money on inherently uncertain enterprises,” says Hood. “So I’m not surprised that it doesn’t boost economic growth. It creates a disturbance in the economy … moving money from better to worse investments because of political connections. You cannot divide politics from incentive deals.”

While critics concede that there are individual cases where tax incentives do help greatly in luring a large company to a state, as South Carolina did with BMW several years ago, these deals don’t make or break the state’s economy. Nor do they say anything about the strength of a state’s economy.

“With companies that shun North Carolina because of a lack of incentives, that doesn’t prove anything … we didn’t have incentives for a long time, and companies still came,” Hood notes. “States that do offer incentives have worse economies; but that’s why they’re offering incentives … because they’re desperate.”

Rondinelli concludes that the problem with tax incentives is that states and localities simply up the ante when their neighbors do. Therefore, he says it is not clear what the advantages really are in most location decisions.

“I would rather see the state put the $10 million it set aside for incentives to helping localities strengthen their assets through investments in education, transportation facilities and improving the quality of life,” Rondinelli says, referring to North Carolina. “The problem, of course, is that no state wants to take the risk of being the first (or only) one to shift from incentives to investment in the factors that we know companies value highly in their location decisions.”