Editor’s note: This column is reprinted with permission of NC Policy Watch, a publication of the A.J. Fletcher Foundation. Other opinions are welcome. Send them to: rsmith@wral.com.

RALEIGH – Quick Take

• State and local officials have once again plunged headlong into the corporate incentives game to lure the internet search giant Google to Caldwell County at a cumulative cost of around $260 million.

• The renewed use of the controversial practice of corporate incentives has spurred prominent lawmakers to promise a reexamination of the practice.

• This edition of The Weekly Briefing offers 10 key “results” that ought to be a part of any “search” for sane state policies in this area.

Incentives Deals Shrouded in Mystery: Practical, Ethical Questions Raised

As with other past “buffalo hunts” like the one in which Dell Computers was lured to Forsyth County, the plan to bestow hundreds of millions of dollars on Google was not arrived at by way of a thorough and open public debate. Rather, state and local officials engaged in highly secret negotiations. As noted by the Raleigh News & Observer and many others, such a practice raises a number of questions – both practical and ethical.

From a practical standpoint, secrecy acts to prevent government officials from knowing the details of other such public offers. In effect, such a practice allows the incentives-seeking company to solicit a revolving series of secret bids in which government officials have little or no idea of whether they’re giving away the store.

Secrecy also raises the more fundamental ethical issue of whether government officials ought to be dispensing decades-long commitments of this kind and magnitude to private corporations. While no one has ever suggested that the Dell or Google deals featured any corrupt intent or results, at a minimum, such arrangements reinforce the notion that government benefits are not dispensed in fair or open way. In so doing, they undermine public faith in government.

State Needs a Trusted and Agreed Upon Model to Assess Incentives

No single question goes more directly to the heart of the incentives debate than that of how to measure their real impact. State Commerce Department officials confidently assert that the $260 million/30-year Google deal will produce a net benefit to the state in jobs and tax revenues for years to come. Many outside experts, however, believe the Commerce analysis includes a large measure of wishful thinking –especially at the current price tag of more than $1.2 million per Google job. As far back as 2003, the nationally recognized economic development think tank, CFED, put it this way:

“[M]ost economists and policy analysts agree that incentives are not good development policy. In using them to attract businesses, cities and states: (1) waste scarce public dollars without creating net new jobs in the vast majority of cases; (2) subsidize the shareholders of these companies for the economic actions they would have taken anyway; (3) foster unfair competition by helping some firms and industries and not others; and (4) divert the attention of policymakers from other issues that could lead to additional job creation and a better business climate.”

With such pointed and credible questions about the worth of incentives, North Carolina needs, at a minimum, significant reforms and better tools by which incentives deals can be assessed.

Targeted Incentives Raise Questions of Fairness: What are We, Chopped Liver?

The hope with corporate incentives is that the businesses selected for special treatment will generate enough economic activity to benefit the rest of the community. Such an approach, however, can leave many existing businesses (and unselected new or relocating businesses) asking why they were not afforded similar treatment. Unlike, for instance, public benefit programs that aid people in need and thus help correct inequities in the market, business incentives are often designed to specifically aid companies that very large and successful. This reality, in turn, encourages the incentives game to become a mad scramble in which private interest of all kinds use whatever means are at their disposal to get “in on the action.”

Incentives of Questionable Impact in the Big Picture: Other Factors More Important

Despite the huge sums dispensed, most experts agree that incentives and, indeed, corporate taxes themselves, are far down on the list of what go into making a healthy business climate. An educated workforce, good transportation infrastructure, access to markets, and quality of life all rank higher. Even in the oft-cited Site Selection magazine (a pro-business, pro-incentives magazine which has repeatedly named North Carolina the most business-friendly state) lists several other factors in its November 2006 article – most notably the state’s “winning workforce.”

Little Hard Evidence that Incentives Work: Government by Anecdote Prevails

Given the enormous variety of incentives packages and the long periods of time over which many are spread, there is precious little concrete evidence that they actually work. Instead of data, supporters must rely upon assurances of those directly affected by the incentives that company X or Y would have opted for another state absent special treatment. As with the omnipresent threat voiced by those who would cut income taxes to avoid a threatened exodus of their wealthiest friends and acquaintances, this approach amounts to what can only be described as “government by anecdote.”

North Carolina’s Overall Business Tax Burden is Low

Some incentives proponents argue that North Carolina must play the incentives game because its supposedly high corporate tax rate discourages business development. This argument is without merit. While North Carolina’s 6.9% corporate profits tax rate is higher than the rates of many southeastern neighbors, it is actually in the middle of the pack on a national basis. Moreover, when one looks at total state and local business tax burden – not just the income tax rate – North Carolina fares even better because of its low property and unemployment insurance taxes and many generous loopholes.

Wages Suffer: Incentives Recipients Reject Meaningful Standards

Several years ago, when North Carolina first began dispensing corporate incentives, state policymakers attempted to assure that recipients would, at least, abide by some minimal standards when it came to the wages that recipients provided to the workers. In recent years, however, this commitment has waned as businesses have complained. Standards that once applied to a large proportion of the state’s counties now only apply to a few. Though the wages reported by some media outlets in the Google deal are relatively high, thus far it has been hard to determine whether those figures are truly representative of the jobs to be created or simply reflect an average that is generated by mixing some very high wage jobs with some low wage jobs.

Government Revenues Squeezed: Tax Unfairness Rises with Increased Incentives

One of the most pernicious impacts of corporate incentives is that they are “off budget.” This means that they simply recur every year without any action by state lawmakers. As a result, those who craft the state budget each year have no opportunity to weigh the comparative value of each year’s incentives expenditures versus some other worthy state appropriation. This factor, in turn, narrows the state’s tax base and leaves state and local officials increasingly dependent on proven, but highly regressive, revenue streams like the sales tax.

Race to the Bottom: A National Competition That Can’t Be Won

Over time, the proliferation of incentives has led states throughout the country to participate in a vicious competition that harms all involved. In recent years, some citizens and advocates have mounted state and federal court challenges to various incentives on constitutional grounds. Unfortunately, many of these challenges have foundered on technical grounds such as the “standing” of taxpayers to bring such suits. This failure, combined with the absence of any Congressional action to rein incentives, seems to assure that, for now, states are consigned to a hopeless race to the bottom unless one or more finds the courage to resist the tide.

A Better Way: Invest in People and Good Government

According to the experts at CFED, “States and local governments interested in improving the business climate should focus on the following five key components of a positive business climate: education, physical infrastructure, regulation, taxation and modernization…. In short, good economic development is all about good government. In seeking to create a favorable and profitable environment in which to do business, state and local governments should adopt a longer-term perspective, ensure that public benefits accrue from public investments, and behave with economic, social, and fiscal responsibility.”