You Decide: Should we go for it?

Dr. Mike Walden

North Carolina Cooperative Extension

When I was a youngster in the 1950s, there were two things I eagerly awaited in the fall. One was the debut of the new TV shows, and the second was the announcement of the upcoming year’s auto lineup and styles. After a couple weeks of study, I could name every new brand and model from a football field’s length away!

Although alternative forms of commuting have seen increased interest in recent years, we’re still a vehicle-oriented society. The average household has two vehicles, and the auto industry still is a significant part of the economy.

This is why whenever an auto company announces it will be building a new assembly factory, most states scramble to get it. And guess what: There are well-founded rumors that one of the major auto manufacturers will be soon building a new plant. North Carolina doesn’t have one. The question is how hard should we try to get it?

In recent decades, most new auto-assembly plants in the United States have been built in the South. Lower labor costs, the lack of unions, affordable land prices and access to growing population centers in the region have been the major motivations for the shift from the Midwest to the South of the auto industry. In fact, in today’s global economy, our nation’s states vying for an auto factory are just as much in competition with other countries as with other states.

Besides the nostalgia and prestige we confer on auto factories, why are they considered to be such trophies for states to attract? One reason is what they pay: It’s reported that the recently opened VW plant in Tennessee pays $27 an hour in wages and benefits. This is without a four-year college degree!

A second benefit is the auto plant’s impact on jobs outside the factory – what some call the “supply-chain impact.” Auto-assembly plants use parts and other inputs made by other companies. North Carolina already has an active and significant auto-parts industry in the Charlotte region. An auto-assembly factory located in the state could provide further expansion for these firms. Indeed, research shows that for every job created in an auto-assembly factory, three to four additional jobs could be created in the state economy.

The last advantage from an auto factory derives from one of its core requirements – land, and lots of it. Large parcels of land at reasonable costs are best found in rural areas. Many rural areas in North Carolina have been lagging economically. So an auto-assembly plant located in our state could help ease the urban-rural divide in economic growth.

Thus, it seems like courting an auto assembly factory for North Carolina is a “no-brainer.” So what’s the issue? The issue is the “I” word – incentives. In today’s competitive economic environment, it is unlikely an auto factory will come to a state without being provided incentives.

Incentives can come in many forms, but the most common are provision of infrastructure – such as roads and utilities for the plant – and reduction of selected future taxes. Property taxes, corporate income taxes and some sales taxes paid by the auto company can be reduced for a specified number of years. For an auto factory, these incentives can easily be in the hundreds of millions of dollars.

Of course, the use of incentives to attract businesses has been debated in North Carolina and other states for decades. One viewpoint says the reality is incentives have to be offered because other states and countries will use them. So if North Carolina doesn’t put together an incentives package, auto companies may not even consider coming to the state. Plus, most incentives packages have performance conditions – meaning the receipt of the incentives is based on the company meeting specified goals, such as hiring.

The opposition to this thinking says we should simply refuse to play the incentives game. The opposition says for many years North Carolina didn’t use incentives, and the state continued to grow and attract new households and companies. Plus, this thinking continues, incentives are tax cuts for companies that are just arriving and not help for firms that have been here for years.

It is not my job to solve the “use-incentives, don’t-use-incentives” debate. But I will say that in analyzing the potential use of incentives, North Carolina uses a very logical and technical process – one that has been praised by outside, objective observers.

Before offering incentives, the state considers the potential benefits and costs of the package. The state first estimates what having the new company and its suppliers would mean for the state economy in terms of new jobs, new income and new taxes. Also included are benefits from reduced state spending as a result of unemployed individuals obtaining jobs. These benefits are estimated over several years.

The state then compares the monetary sum of the new tax revenues plus reduced state spending to the cost of the incentives package. If the result is positive, then that’s at least a tentative indication the incentives package will pay for itself.

So, a new auto factory may be up for grabs. Should we go for it, and, if so, should we offer incentives? You decide!

 

Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks.

 

Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective

 

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