The News & Observer

Raleigh, N.C.

September 22, 1995

Smarter on incentives?

Copyright © 1995, The News & Observer

Those who worry about the practice among states of attracting new industry with tax breaks and other costly giveaways may find reason for optimism in a report in the Financial World publication Corporate Finance. The report doesn't just detail how incentives have gotten out of hand but also indicates that many governments and businesses are beginning to have misgivings. That news deserves a cautious welcome.

To be sure, the problems with incentives are far from licked. The publication calls the competition among states an "open arms race" in which unilateral disarmament is impossible. But there are grounds to hope that good sense is beginning to creep into the picture.

Executives who were surveyed said that while states have become more aggressive in the past five years about luring business with handouts, the trend has begun to slow over the last 12 months. That may be because the pitfalls for all concerned are becoming too obvious to gloss over.

For example, industries looking to relocate play states against each other to drive up the value of incentive packages. Recruiters, their eyes fixed on the creation of new jobs, offer deals that may turn out to be bad investments of public tax dollars.

Existing businesses justifiably resent the largess that states extend to newcomers. And as Watts Carr, former industrial recruiter for North Carolina, points out, the practice can backfire on recipients. Their decisions may be colored by the size of incentives rather than more traditional and reliable factors such as quality of the work force, transportation and wage rates.

In a ranking of states based on the generosity of their incentives, North Carolina comes out 16th from the bottom, a sign that it has managed to avoid becoming too swept up in this expensive game. Though it wasn't taken into account in the report, the use of incentives by the state and its localities also faces a serious court challenge that may lead to severe restrictions.

There is little sign that states are about to ditch recruitment tools altogether, and it's doubtful that they should. Done right, the competition can be healthy.

For instance, everyone benefits if states are driven to improve schools and job training so that workers have more to offer prospective employers. The same goes for strong environmental policies and public services such as transportation and parks, which are important to responsible executives concerned about quality-of-life issues.

The goal should be to design incentives that don't just favor a particular company but instead lift entire communities. Otherwise the deals that state and local governments strike with private industry are likely to be bad bargains for everyone else.

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Copyright © 1995, The News & Observer.

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