Greensboro News & Record

June 12, 1994

The Smart Way for NC to Play the Incentives Game

Nic Johnson

Copyright © 1994, Greensboro News & Record

North Carolina doesn't need to act like Alabama and South Carolina and throw money at companies. Instead, it should focus on attracting "clean" industry.

In the nationwide contest among states to attract economic development, the stakes just seem to keep getting higher. In 1980, it cost Tennessee $ 33 million to lure a Nissan plant. In 1992, South Carolina lured a BMW plant with $ 130 million. Last year, Alabama spent more than $250 million to lure a Mercedes-Benz facility.

North Carolina feels tempted to keep up with the Joneses - to increase our own spending on incentives to stay "competitive" with other states, particularly our Southern neighbors.

A consultant hired by the state last year claimed that, by national standards, we ought to be spending up to $80,000 per job to lure manufacturers and $40,000 per job to lure corporate headquarters. (Right now, state and local incentives packages in North Carolina, including public and private sources, rarely exceed $10,000 per new job.)

Are North Carolina's incentives programs so skimpy that we are in danger of losing jobs? It is possible that we provide less generous incentives than some other states, although comparing one state's incentives program to another is difficult because state and local governments offer a confusing array of incentives with varying guidelines and procedures.

North Carolina lacks one tool that other states have - the ability to offer property tax exemptions (our state constitution bans them).

But we have many other advantages to offer relocating companies, such as skilled, nonunion labor, good roads and proximity to major population centers, good higher education programs, attractive scenery and so on.

Whatever the reason, North Carolina is doing well. In surveys of business relocation decisions, North Carolina has consistently ranked at or near the top in attracting new jobs from out of state.

But raw numbers of jobs do not tell the whole story. Too often forgotten in the discussion of recruiting incentives is an understanding of what kinds of jobs North Carolinians hold today and a sense of what kind of labor force we want to become. Jobs here pay lower wages and workers have less education and skills than in the rest of the country.

Yet we are moving in the right direction. The state's manufacturing base remains less advanced than that of the rest of the country, but we're catching up.

For example, in 1980, about 64 percent of all North Carolina manufacturing jobs were located in the relatively low-tech, low-wage sectors of food, textiles, apparel, furniture and lumber production. That figure has now dropped to 56 percent - still a far cry from the national rate of 25 percent, but getting closer.

Meanwhile, North Carolina is rapidly increasing its manufacturing of chemicals, primary metals, industrial machinery and instruments, all of which tend to pay relatively high salaries and invest in research and development. These higher salaries may expand local spending on goods and services, and the more sophisticated research may spawn new products and processes that will further boost the state's economy.

As the state undergoes this industrial transformation, however, we cannot forget the costs that many manufacturers impose on their communities by creating congestion, pollution and burdens on government services. Some manufacturing sectors, although impressive in their economic and technological impacts, pollute the air and water heavily, release large amounts of toxins and create occupational hazards for workers. Others do not pollute much but provide unimpressive economic benefits.

A colleague, Elise Hood, and I analyzed predicted economic and environmental impacts for 20 industrial sectors and found that only two sectors - industrial machinery and equipment, and instruments and related products - combined strong economic and technological benefits with low environmental and occupational-safety costs. These sectors, which now employ 7 percent of North Carolina's manufacturing workers, include makers of scientific instruments, medical supplies, engines and computers. These are the kinds of industries on which the state should be spending its incentive dollars.

Yet as it now stands, the kinds of new jobs that we are luring from other states are all too similar to the kinds of jobs that we already have. About 54 percent of those newly recruited jobs are in the same old low-wage, low-tech industries that already dominate the state. Only 9 percent of newly recruited jobs were in the two sectors that we consider optimal.

Moreover, economic development in North Carolina is unevenly distributed across the state.

In rural coastal and mountain regions, unlike the industrialized Piedmont, counties now face high rates of unemployment and poverty, and young people are leaving in droves in search of good jobs. Those rural counties work hard and spend extra money to lure manufacturing jobs, and they have succeeded in recruiting even more manufacturing jobs from elsewhere (on a per-capita basis) than metropolitan areas. But the kinds of jobs these rural counties attract are even more heavily weighted toward low-wage, low-tech sectors - food production, textiles and so on - than the jobs that urban counties attract.

The state already focuses some incentives programs, like the jobs creation tax credit, on rural counties. This focus should be intensified, with higher levels of incentives per job and an expanded list of industries - including makers of transportation equipment, electronics and rubber and plastic products manufacturing - eligible for support.

Incentives are no panacea for the economic problem facing North Carolina. The state's manufacturing sectors ultimately can only become as sophisticated as the skills of its workforce will allow; if a company needs scores of engineers and computer whizzes, we cannot shoehorn it into a county where low-quality schools have failed to educate half the young people and low-quality jobs have scared away the rest. Moreover, we cannot expect that existing businesses will tolerate endless subsidies to build new facilities for their competitors.

Improving the state's economy to benefit as many North Carolinians as possible will require a broad vision of where this state is heading. By making careful decisions about who receives incentives in this state, we can begin to bring that vision into focus.

Nick Johnson, of Durham, is a 1994 graduate of the Terry Sanford Institute of Public Policy at Duke University. He conducted research on industrial incentives in North Carolina for his master's project.

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Copyright ©1994, Greensboro News & Record.

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