From Bob Orr, executive director of the North Carolina Institute for Constitutional Law:
Politicians talk about “creating jobs for people” as a rationale for giving incentives worth millions of dollars to selected corporations. Why give away huge chunks of our tax base in order to “create” jobs while cutting thousands of jobs in the public sector? Until the public gets a good answer to that question, state leaders should take a huge step back from the current incentives policy.
State government is eliminating jobs and cutting spending to balance the budget as required by the N.C. Constitution. The cuts will undoubtedly result in additional job losses in the private sector that depends on government projects.
From state parks to community colleges; from the university system to health and human services; from the prison system to the courts; the impact of a tax revenue stream that at best is not growing and at worst is shrinking is evident. Recent news stories detailed the probable loss of thousands of teacher jobs due to budget cuts.
These potential job losses will hurt public education and public services for our citizens. At the same time, a Florida powerboat company announced an expansion in Beaufort County, promising to create 411 jobs over the next five years. For this “magnanimous” act, the taxpayers of the state are further depleting revenues by $6.1 million through an incentive for the company. This follows on the heels of Hatteras Yacht Company being awarded close to $3 million in incentives with its recent promise to expand.
These incentives add to the ever-growing depletion of state and local revenue through the incentives game. Malt-o-Meal gobbles up $5 million for 80 jobs; SPX of Charlotte gets $9 million for 180 jobs; Facebook befriends the state and Rutherford County for $11.4 million for fewer than 50 jobs. The list goes on and on and the cost to the state’s treasury goes higher and higher.
“But we’re creating jobs!” proponents exclaim. No, the private sector is creating jobs and not for any charitable purpose. These companies are expanding because they expect to make a profit from it – and if the politicians are gullible enough to subsidize that business decision from the public coffers, then even better. It just means more money to the corporate bottom line – and less to North Carolina’s.
No one likes to pay taxes, but most North Carolinians don’t object to paying their fair share if tax revenue is used wisely and the tax burden is applied fairly. When the governor hands out cash and tax breaks to multibillion-dollar corporations and the likes of Apple, Google, IBM and Caterpillar shirk their fair share of paying taxes – then others are rightfully more reluctant to shoulder an increased burden of taxation.
When it comes to job creation, government leaders have a choice. Keep depleting state revenue through special incentives and explain to all those teachers and other state employees why they couldn’t find the money to keep them. Or instead reform the incentives practice and enact a modern, uniform system of taxation. A fair tax system, excellent schools, honest government and innovative economic development that assists small startup businesses will result in job creation that is the envy of our fellow states. North Carolina doesn’t have to, and shouldn’t, pay huge companies to create jobs.
The author presents a false choice.
It assumes that the company will locate, expand, or not layoff in NC regardless of the incentives. Not true!
Tax breaks and capital investment to attract business is not unique to any state. In good times when people want to move to NC, then the state doesn’t need to do much. In bad times, when companies are consolidating, then sometimes a local gov’t needs to sweeten the pot in order to protect its CURRENT tax base.
The impact from a company not locating or closing it doors is that the revenue from that source goes to zero. With the reduced revenue from no taxes, the gov’t lays off the workers anyway.
In the case of attracting a new industry, the revenue is not lost because it was never there to begin with.
Most gov’ts do a cost-benefit analysis. It has the responsibility to ensure that that the benefits outweigh the costs.
While it makes a good sound bit, comparing the two as the author does is disingenuous.
How long will it take the taxpayers of TN, Shelby County, and Memphis to recoup the cost that they have paid for the new Electrolux plant in Memphis?
The plant may bring 1200 new jobs to Memphis (I have seen this before where they claim 1200 but end up only bringing 900 – but lets just give the benefit of the doubt and assume they bring the full 1200 new jobs).
TN is paying $90 million, and Memphis and Shelby County are paying $20 million each, for a total of $130 million taxpayer dollars to bring this plant to Memphis.
That is $108,000 per projected new employee. How much tax dollars will those employees pay? At 10% sales tax each employee would need to generate $1 million dollars in retail sales just to recover the cost of what we paid to bring the plant to Memphis. Now of course there are other revenue streams, like property taxes, corporate taxes, etc… And of course, 1200 employed people spending their money create jobs in other areas, including the service industry…
I just think that for $130 million we could fund 1200 teachers, firemen, policemen, college professors, or other public employees and get the same economic returns AND have a better community, and then use that better community to attract new business…
I am not ignoring the “halo effect” of the new plant. Just wondering if it was worth $130 million taxpayer dollars.
source for my numbers:
http://www.memphisdailynews.com/editorial/Article.aspx?id=54939
Governments should reveal and foreground the cost-benefit-risk analyses for these incentives.
valkraider,
While I may be critical of public support of private development, especially to the degree we are discussing, let’s keep the discussion accurate and honest. Arguing that the money being spent on infrastructure to support Electrolux could have been spent on service oriented expenditures is not based on the reality of government finance. SCM has posted several excellent articles- found in the archives- describing the complexities of government funding. Needless to say, these funds are not interchangeable.
To balance the investment, you need to look at the investment over a period of time. Using the same numbers, if we assume the plant will close after 10 years, the city, county and state would require this plant to directly and indirectly generate $13 million in annual tax revenue (excluding interest and inflation). I’m not sure that I am ready to write off the ability of a plant of this size and the activity related to its operation to generate $13 million in economic activity. All the community needs to do is break even in its investment for this to be considered a “win”.
Just to provide a different perspective, we can also reverse the argument and ask- locally- is there anything we can invest $40 million in where government and social programs are concerned that will have the same immediate impact as this manufacturing operation? If it were possible to invest the $40 million in education over the same period, less than half the Gates grant, what is the risk? Will it definitely generate an equal degree of local economic growth? What percentage of those that receive this higher level of education will actually chose to stay in the local area thus ensuring the investment is returned to the community? That’s one of the issues that weighs most heavily on the other side of the scale. One can invest in education, workforce training, safety and services hoping that it will yield economic growth several years in the future or one can invest in a way that produces an immediately identifiable result with immediate benefits.
I agree with gates, I would like to see the cost benefit analysis that informed the decision making process. The governor gave the figure as a 1 to 2 cost to benefit ratio. How did they arrive at that number?
How have I not been honest?
I disagree that “money being spent on infrastructure to support Electrolux could have been spent on service oriented expenditures is not based on the reality of government finance.”
I work daily with government finance. Money is moved around all the time, just like you mention – only it is done when politicos have something to gain from it. When they don’t, they say “we just can’t move money around”. It is a lose lose. I have seen sewer dollars moved to transportation. I have seen school dollars moved to economic development. I have seen operational dollars used to pay capitol expenditures through accounting tricks. I have seen waivers given to state, local, and even federal laws to move funds. I once saw money transferred between agencies via “fines” where an agency that had extra money would break rules so they could be fined by the agency which didn’t have extra money – getting around restrictions on funds transfer. I have even sat on deciding bodies who were tasked with approving/denying the transferring funds. It is very common. I have even seen money from garbage collection get routed into gun control programs. It’s like statistics – how we report them can change the meaning. If a politician can find a way to gain from moving funds they will, and if they can find something to gain from preventing the move they will do that too… Each situation will involve tricks to make it legal even though it is ethically questionable!
Just like tax shelters and accounting tricks like “Double Irish with a Dutch sandwich” – there are ways around everything.
But that is not this debate. Not at all.
What I am talking about is that the package that was used to get Electrolux to choose Memphis costs TN taxpayers $130 million. And sure, some of that infrastructure in SW Memphis will be used by other people/business too, I am not denying that…
But the question I am asking is: Do 1200 jobs in the private sector generate more economic activity than 1200 jobs in the public sector?
Why is it good to spend $130 million for 1200 jobs in the private sector – but we keep getting asked to cut budgets and reduce spending in the public sector?
Would not a teacher or social worker eat out and buy TVs and purchase clothes and pay taxes – just the same as an Electrolux factory worker?
I am happy that Memphis got Electrolux. I just don’t understand why a private sector job is a “gold mine” but a public sector job is a “waste of taxpayer dollars”. And that is without even trying account for the impact of having a better community due to teachers, firemen, police -etc. etc…
And in a sense of strange irony, I have had an old high school friend on Facebook who works for the federal government and voted “tea party” across the board complain about the federal pay freeze. Everyone wants government cut until it hits their own interests. I don’t own any Electrolux products, and maybe never will – but I at least can see the value of having the plant in Memphis and am glad for the thousand who will be employed there. Just like I don’t use many government services but I do support the fact that we have them – for the greater good!
And Electrolux just laid of more than 2000 employees in Canada and Europe. Lets hope that doesn’t happen in the Mamphis plant too quickly – before we recoup the $130 million.
will the county commission (who now looks into such things)
require that only Memphis residents be considered?
will they prohibit mississippi residents from applying?
require 10% be convicted felons?
I see a great opportunity here for more race-based fine tuning.
I agree that I’d like to see how they arrived at the 2 to 1 benefit ratio. But if we accept that number as realistic or even if it turns out to be 1 to 1, then it’s an overall win.
I believe that Memphis and Shelby County own the park (and maybe the state?). Therefore, like any lessor, they are responsible for improvements to it. If you rented space in a shopping center contingent on the owner putting in a new entrance, you’d expect the owner to pay for it. The lessor (MEM and SC) are paying for the infrastructure improvements … I don’t know but it could lead to others moving there as well.
But isn’t that what we expect local gov’t to do? We expect the city, county, and even the state to improve or repair our infrastructure. If the city fixes the potholes and repaves the street in front of my house, it has improved the infrastructure for residents on the street. At least with this infrastructure improvement, the city will get a payback!
@valraider, to answer your question: Do 1,200 jobs in the private sector generate more economic activity than 1,200 jobs in the public sector?
The answer is definitely yes and here’s why. The private sector jobs are part of a process to create wealth (via creating a product that is sold for a profit) that, in itself, returns money to the economy.
OTOH, the public sector jobs are part of a process that drains money from the economy with no return on investment (ROI) … they do not create wealth. So to ARTIFICIALLY provide a job (create one just for the sake of providing a job) that provides no ROI (such as repaving my street that really doesn’t need it nor helps attract a new business) has an overall negative effect on the economy. That is why it is best to keep the size of gov’t to a minimum.
Also, keep in mind that public sector jobs tend not to go away and thus remain a drain the economy year after year.
valkraider,
If we took your argument to the extreme, which I am not suggesting you are trying to accomplish, you could make the case that we could spend our way to economic prosperity via investment in the public sector. That each dollar spent on safety and education are not only circulated through the local economy, but in turn yields a taxable return greater than that initially invested. I agree with the concept to a point. However, as Midtowner illustrated, there is a point where one can have too many employees in the accounting department, more firefighters than a city needs or more teachers than there are students. Simply put, there is a point where your investment yields decreasing returns either through a lack of demand or mismanagement. I am not suggesting Memphis has reached a point of the former- although our fire department might be a little overbuilt- but there are definite indications we have the latter. In our very local situation, there is not much discussion of laying off teachers or city employees in mass while simultaneously investing in private development. At the same time, I am not sure that investing this same $40 million into the public sector (even if it were possible) would yield the same returns as the Electolux plant. Simply preserving jobs for the sake of preserving jobs is not in the best interest of the government or community as a whole in the long run.
I just thought of a point of false math while reading another bit of false math earlier. All residual investment in the economy and secondary economic development aside, if we instead divided that same $130 million in public expenditures as a pay check for public employees (just cut them a check for $28,000 annually for some such job), that would allow us to employ the same 1,200 individuals until around October 9th of 2014. $130 million/ $28,000/ # of projected employees. Pay periods beyond that date would represent new money being injected into the region. In no way does this represent an accurate portrait of the economics involved in this scenario, just more bad math to add to the mix.
Midtowner: The author actually tees up the two choices clearly. Why is it that our county has doled out seven times more tax freezes than all the other metro areas in Tennessee COMBINED? Because we have taken the time to develop an economic development plan based on quality but on cheapness.
And the purported cost benefit analysis performed by bureaucrats and economic development officials will also show what a great deal it is. But the problem is that the system has no process for gauging if they would have come here anyway.
For most of these international companies, the local tax freeze is just lagniappe.
Urbanut:
We can easily argue that spending $40M to create entrepreneurs and small businesses would yield more employees than the Electrolux incentives will and they would more likely be rooted here for the future since Electrolux has already shown that it is willing to chase the next cheaper location.
Also, if we can’t find $40 million to spend to create healthy neighborhoods, an ecosystem for talent, etc., we shouldn’t have $40 million for $13.50 an hour jobs. The local yearly debt service for $40 million will be about $3.2 million a year for 20 years.
Because we don’t have a mature economic development plan, we cannot evaluate where our incentives are best used. We simply throw them all at every prospect.
Everyone should keep in mind that the $130 million does not include the tax freeze, which we figure will be more than $60 million over the term of the freeze.
We’ve said for five years that chasing jobs by telling companies how cheap we are is a race to the bottom, and it seems telling that we were competing with a third world country for these jobs. That’s our future unless we get serious about balanced economic development plans and investments in quality of life that are driving talent which drives jobs which drives economic expansion.
We were willing to tolerate our overreliance on tax freezes as a poor man’s economic development program while we buy time to develop a quality community that can’t treat our addiction to them. If all the other metros in Tennessee somehow have economies that have more activity than ours and do it without tax freezes, it’s curious that we can’t.
We’ve spent too much time giving excuses than doing the hard work of creating the environment for better paying jobs. To do the same is a competition with Mexico and South America, and we can’t seem to pull out of the tailspin that these tax freezes have wrought.
SCM,
I agree that a locally grown start up business is more likely to become the economic engine that lasts as compared to transplanting an outside operation- playing other side of the aisle if nothing else. As in so many other things, it is comparable to my tireless efforts to finally achieve yard of the month (and gain respect from my fellow Midtown neighbors). I can either plant an indigenous species as a seed in my yard or I can plant a exotic species potted plant from a nursery. While the path of the seed has its own risks and requires more time to reach a desired effect, once established it is far more likely to produce results for years to come. The exotic species while providing instant gratification, will require far more care and depending on the climate zone to which it is accustom, its survival into another season is far less likely.
Electrolux provides instant gratification via instant job creation. It also requires a secondary and perhaps more important component- the public as a willing participant. I have no evidence to support this latter opinion other than sheer gut instinct. The notion is that Joe is going to be more willing to see his tax money spent in a way to provides clear and immediate return and a concrete object as opposed to an investment that could take many years and would have a more gradual effect even if that effect was far more substantial. I played the bad math game more as a joke in regard to the numbers that have been thrown around by both those in support and those opposed to such expenditures. I would like more information that details where this $40 million in local funding is coming from. If we were in such desperate straits just recently that the city is or was facing a serious financial crisis in the required payment to the city schools, how is it we can simply find $20 million so quickly? While jobs are desperately needed, since when was an annual salary of $28,000 something to cheer about? Preacher to the choir here, but that is not too far above the DHHS poverty level for a family of 4.
Where a long term plan is concerned, it seems that we are so caught up as a community in fighting the current brush fire that no one is willing to consider planning for a more sustainable landscape. It seems to be consuming our collective focus if not our collective energies leaving little to employ in thinking of the future. Are we asking too much for the mayor- who apparently has become our defacto economic planner and advocate, to tackle two missions at once- one the brings immediate short term relief and the second that brings focus to an economic future further than 5 minutes from the present? If so, who will be our advocate for this future that we all know is desperately needed? Whoever it is, this individual cannot be regulated to the Chamber nor can they be hampered by the IDB. It would need to be an individual (or group) that can report directly to the mayor(s) assuming that the mayors show true understanding in this regard. It would need to be within city/county government in order to ensure that it can command both the attention and financial resources such a position/group would need.