The Charlotte Observer

February 25, 1993

Dangling the wrong carrot
Hunt's proposal to use financial incentives to recruit business to N.C. flies in the face of logic

Tom Vass, Special to The Observer

Copyright © 1993, The Charlotte Observer

Gov. Jim Hunt has proposed that state tax dollars be used as a direct subsidy to private firms to induce them to locate in North Carolina. His expansion budget request contains a $15 million ``discretionary`` fund for the next two years to implement these incentives. The money could be used for direct subsidies to private industry for equipment purchases or for land acquisition.

Hunt`s logic is that the natural competitive factors that have made North Carolina one of the top three states in industrial recruitment for the past 20 years will cease to be attractive.

There is no basis for this assertion, and Hunt`s logic for using taxpayer dollars in the ``elephant hunting game`` is flawed.

First, there is no credible economic research to suggest that such financial incentives are effective in private corporate decision-making. The research on industrial recruitment suggests that savvy companies make a private decision on a location first. That initial decision is based on factors such as proximity to markets, the costs of production, and social amenities, including the local school system.

After the location has been determined, the private companies use public relations leverage to get communities to bid against each other to derive maximum concessions. Some evidence from BMW`s recent decision to build a plant in South Carolina suggests that a Midwestern state was used as a strategic ploy.


Taxpayers' loss

Second, once the policy of using tax dollars as a direct subsidy begins, there is no political constraint on stopping the bidding process. Each case takes on a life of its own, with the stakes getting higher and higher. Taxpayers should remind themselves that the N.C. food tax in 1961 was exactly such a case where a ``temporary`` tax to fund the community college system became a permanent feature of life.

Third, such a policy has no recourse mechanisms for the taxpayers to obtain a refund when the corporation decides to leave North Carolina. In the case of the Proctor-Silex plant in Sanford, which moved to Mexico, taxpayers would be left scratching their heads trying to figure out what happened to their investment.

Finally, this type of policy has already proved to be a colossal failure in our recent past. In the early 1980s, Jim Hunt used a version of taxpayer financial incentives to recruit General Electric to the state. Hunt promised GE a magnificent ``microelectronics center`` to help with its research. The initial taxpayer investment in the N.C. Microelectronics Center was about $15 million.

GE stayed in North Carolina for a couple of years and then decided to get out of the microelectronics industry.

Taxpayers have been left holding the bag and have now invested over $200 million in a venture that has yet to produce tangible industrial recruitment benefits. Needless to say, if the $200 million had been simply invested in the money market, the taxpayers would have obtained a greater return.


Narrow the focus

Since his election, Hunt has variously described himself as the ``child`s governor,`` the ``education governor`` and sometimes as the ``economic development governor.`` His best chance to improve the financial security of families is to focus on just one of these themes, and improve North Carolina`s chaotic educational system.

The very last thing the citizens of this state need to finance with tax dollars is a national platform for politicians to preen and stroke themselves demonstrating how ``competitive`` they can be on a misguided policy that uses tax dollars in a give-away program to international companies.

Tom Vass is an environmentalist and investment adviser who lives in the Swift Creek community of Wake County.

Used with permission.
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Copyright © 1993, The Charlotte Observer.

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