You Decide: How Does North Carolina Compare on Incentives?
By Dr. Mike Walden
The use of financial incentives to attract new businesses is a controversial topic in most states, including North Carolina. The debates might get more heated with the prospects of Apple and/or Amazon coming to our state.
Most states do use business incentives. In this column I won’t address the pros and cons of incentives. I’ve done this in past columns and will likely revisit the question in the future.
Instead, here I want to compare North Carolina’s use of incentive to other states. I do this by making use of a newly released data set compiled by the Upjohn Institute for Employment Research. Upjohn was able to collect extensive information on business incentives for 33 states over three decades, spanning the 1990s to 2010s.
The first question is whether North Carolina uses incentives more or less than other states. In 1990, North Carolina had virtually no incentives on the books. Measured by the percentage of the state economy devoted to business incentives, North Carolina’s rate was a mere 0.01 percent, compared 0.5 percent for the average of the 33 states.
Over the next three decades our state’s use of incentives grew, so that by 2015 they accounted for one percent of the state economy. Yet this was still less than the 33-state average of 1.4 percent. And, in fact, North Carolina had the tenth lowest incentives rate (annual cost of incentives as a percentage of the value of the state economy) among the 33 states in the Upjohn survey.
What does North Carolina’s incentives picture look like compared to our neighboring states of Virginia, Tennessee, Georgia, South Carolina and Florida? In 1990, only Florida had a lower incentives rate than North Carolina. By 2015 all of our neighboring states had upped their incentives rate. North Carolina was now in the middle of the pack, with Florida, South Carolina and Tennessee having higher incentives rates and Georgia and Virginia having lower rates.
States can focus their business incentives on various objectives. States can target specific industries like manufacturing or tech firms. Alternatively they can go after companies that have a high tax base. Or, states can zero in on businesses with high levels of employment or wages.
One of the great things the Upjohn study did was identify which of these objectives or combination of objectives were most important to each state. Compared to other states, North Carolina has most often used incentives to attract two kinds of companies: those bringing high numbers of jobs, and those paying high wages.
Interestingly, for several of our neighbors, the goal for using incentives has been different. South Carolina has focused on wages but also on the tax base. Florida has gone after the tax base, and Georgia has targeted employment and tech firms.
The Upjohn study also addressed a question often overlooked in other analyses of incentives. Although the benefits to companies from incentives are usually spread over several years, the level of benefits can vary from year to year. So-called “front-loaded” incentives packages are those where the size of the benefits are largest in the early years. Firms prefer front-loaded packages because they get more benefits earlier.
The downside to front-loaded incentives packages is the fear companies will “take the money and run”. If a company receiving incentives leaves, downsizes or goes out-of-business in the early years of the incentives contract, there is the possibility the state would have paid a lot and received very little in return.
Upjohn was able to analyze the incentives packages of the 33 states and evaluate to what degree they were front-loaded. The good news for North Carolina – and North Carolina taxpayers – is that among the 33 states in the Upjohn study, North Carolina’s incentives packages were the eighth least front-loaded.
Now what about the multi-billion dollar question – do incentives work? Unfortunately, the Upjohn study did not give a definitive answer. The study did not find a high correlation between a state’s use of incentives and a state’s economic growth rate. However, the Upjohn folks said this result should only be considered preliminary because they were not able to include in the analysis all the other factors affecting a state’s economic growth.
Financial incentives to attract businesses to a state are a big deal. Their use has tripled since 1990, and their value is now between $40 and $50 billion annually nationwide. North Carolina was relatively late to the incentives game, and our state still doesn’t play the game as much as most other states. We’re also ranked in the middle of our region’s states in the relative costs of incentives, and our objectives with incentives are gaining jobs and good wages – things most workers want.
Still, is this good enough? Are incentives a productive economy-building tactic? The Upjohn study couldn’t say, but maybe you want to decide!
Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and personal finance.