Editor’s note: Part 1 of 2.
Do we need to use economic incentives as bait to lure new businesses to our state? Is it the best use of our public money? Proponents say the tax breaks and grants are important tools in the quest to bring more jobs to the area. Opponents condemn what they see as government picking winners and losers without any accountability for how the money is spent. Who’s right? Perhaps both. What is clear, however, is that at a minimum the entire process could benefit from increased oversight and transparency.
The practice, which leading incentive researcher Timothy Bartik has referred to as “legalized bribery of the rich,” has gotten more attention of late as Horry County Council and local economic developers have ramped up their efforts to rope in new companies. Local leaders have embraced the idea of paying for jobs as a vital and cost-effective means of securing new employers. And there’s some evidence that it can work on the local level. But the landscape looks much different from higher up.
From a national level, it’s clear that incentives are a terrible practice. While nobody is quite sure how much money is being spent on these government gifts to companies, a current conservative estimate is about $70 billion a year nationwide. That’s $70 billion nationwide that’s not being spent on education, infrastructure or other public needs. And what do we get for all that money? A lot of expensive reshuffling that benefits business at the expense of taxpayers.
Economist Arthur Rolnick explained recently in an interview with online news outlet Remapping Debate: “It’s at best a zero-sum game. The evidence is pretty clear that these incentives don’t actually create jobs; they just move them from one part of the country to another.”
That’s what happened recently in Horry County with the vaunted opening of a new Frontier Communications call center. As Horry County was cheering the creation of 110 jobs this summer, more than 100 workers at the company’s call center in Idaho were losing their jobs, which paid a few dollars more an hour than what Frontier is offering here. For their relocation, which will save the company hundreds of thousands of dollars a year in wage costs, the company also received $450,000 in state and local incentives.
But should South Carolina care what happens in Idaho? So what if 100 Idahoans are out of work? We’ve still got 100 more jobs, which is good for the state. The public money we spent to bring the call center here was worth it. Right?
Economic researchers Alan Peters and Peter Fisher mounted a comprehensive study of economic incentive data and literature in 2004 and concluded that even on the state level, incentives to pull in businesses from elsewhere don’t make a whole lot of sense either. The pair estimated that at least 90 percent of the time, the incentives had no real impact on a location decision, meaning that we’re needlessly paying nine businesses in order to capture the tenth.
“State governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway, than they gain from the few firms induced to change location,” the economists wrote.
To compound the problem, this public munificence is rarely studied after the fact by those who oversee the programs. A recent report by the Pew Center for the States found that most states (including South Carolina) pay little attention to whether their incentive programs are actually working or give lawmakers the information they need to judge whether the deals are worthwhile.
We saw this in action in 2010, when lawmakers voted to give Boeing hundreds of millions in tax breaks and subsidies, without anybody knowing exactly how much the package was actually worth. It was not until after a newspaper did some math of its own after the package was passed that we learned that what had been billed as a $450 million package was actually worth more than $900 million, and perhaps more. Few, if any, of the lawmakers who voted on the package were aware of the cost, and none of the leaders the Post & Courier talked to particularly cared.
When states bother to check on such programs, they can get some unpleasant surprises, as North Carolina did in 2009. It was that year that the legislature received the results of its first commissioned study of state incentive programs. The report determined that recipients of N.C. incentives were creating jobs at a slower rates than companies not receiving incentives, revealed that the deals were so standard and long-lasting that 62 percent of CEOs of businesses receiving them weren’t even aware of them, showed that less than a fifth of the money actually went to job creation and that most of the funding – though it had been targeted for poorer counties – was actually ending up in the least distressed parts of the state.
A few South Carolina lawmakers – notably Sen. Tom Davis of Beaufort – have raised questions in recent years about the need for more transparency and accountability in our own programs. Davis filed a bill in the last legislative session that would have addressed many of these concerns, requiring companies asking for subsidies to explain exactly why they are needed, conduct a pair of economic impact studies before receiving any money and submit annual reports afterward that detail progress toward reaching job and salary promises. Former Myrtle Beach Rep. Thad Viers filed a similar bill in the House. Neither bill went anywhere.
We’re not talking about chump change here. The latest estimate is that about $525 million a year of S.C. money is going toward business incentives and subsidies. If we’re going to be laying out that much year after year as a state, it deserves more than a passing nod. Taxpayers who foot the bill for such state programs deserve at least a regular accounting of where the money is going and whether it is achieving its stated purposes. Legislators can make that accounting a reality. It’s time to do so.
Tomorrow: Incentives work a bit better on the local level