By Leslee Kulba- In October, outgoing Buncombe County Assistant Manager and Planning Director Jon Creighton announced changes to the way business incentives would be awarded, noting results had not been as anticipated. Striking the term, “economic development incentives” from the title and renaming it an “economic development investment” program, the new policy was just one of many changes made under new manager Mandy Stone.
Many of the changes are housekeeping, tightening the language. In a few places, the document states the incentives must comply with all state and federal laws. One area of compliance explicitly added is that companies must have a written diversity policy. Elsewhere, language was added to require any amendments to the document to be in writing and approved by the board of commissioners. Whether the obvious is stated for public relations purposes or to correct for past errors, the county commissioners and staff remain unable to explain a lot of recent changes due to an ongoing federal investigation involving the retired county manager.
One change, requiring “investments” to only be awarded for developments within the county, appears to address news broken about funds given to the Tryon International Equestrian Center in Polk County and related interests. Buncombe County taxpayers recently gave $276,427 to the center, $150,689 to an equestrian center in Florida, and $150,000 to The Chronicle of the Horse, a magazine published in Virginia. After undervaluing amounts in communications with the press, the former county manager explained she was trying to develop business on a regional level.
A few changes are substantive and appear to expand the program. Recipient businesses are now required to present, “a written policy on sustainable business practices and principles outlining the company’s environmentally-friendly or green activities that help ensure that all processes, products, and manufacturing activities adequately address environmental concerns.”
Businesses can also now qualify for a $1000 per-employee incentive if they commit to covering at least 50% of employee childcare costs. Businesses paying between 80% of AMI and less than the living wage, as determined by the community organizer group Just Economics, can receive a $500 per-employee incentive if they hire people involved in certain government jobs programs or persons traditionally cut off from the workforce because of a low-level, nonviolent criminal record. Incentivized jobs must now last at least three years.
Overall, the document states a couple times the purpose of the grants is “tax base enhancement,” which sounds a little different from the community prosperity promised in public hearings. There, colorful pie charts and graphs pseudoscientifically show how the jobs created and investments in the community will defy economic theory and trickle down with first- and second-order multipliers for tenfold returns on investment in the community, while high-profile economists and developers of the IMPLAN software used by the county insist multipliers as high as 1.8 push the limit of credibility.
Planners could at least, change consideration to a more humane sounding per-capita increase in the tax base. More honestly, the numbers should reflect net gains, after subtracting for wear and tear on infrastructure and additional demands on services like public schools, as well as adjusting totals to account for how resources may otherwise have been allocated.
When a new factory is incentivized, government counts its entire payroll as jobs created. It assumes people would just sit and not participate in the economy were the business to locate elsewhere. The county then adds as fractional jobs the number of people who will get new work as dentists, waiters, grocers, etc. for the factory’s workforce. If somebody were to give new and existing private-sector employers the same kind of credit for the jobs they create and induce, IMPLAN users might then see that for every seven jobs “created,” fewer than two exist.
Then, people taking jobs at incentivized businesses were likely already employed, some at businesses that may fold because of the new one. An existing competitor may even have had a better product and business model, but the subsidies allow the new company to undercut the older’s pricing long enough to force him to fold. What’s more, businesses creating high-pay jobs often bring in talent from other jurisdictions, shifting demand for county services in favor of the standards wealthy professionals demand and away from the basic needs of the neediest.
The public hearings are shams, anyway. Members of the public cannot provide “peculiar knowledge” about a company’s financial responsibility or its need for corporate welfare, because the identity of the company cannot be released while negotiations are underway. Multimillion-multinationals typically shop deals among cities, and the anonymity prevents suitors from comparing notes.
Before proceeding, it is important to note the county has made some improvements in its redistributions. Following Chair Brownie Newman’s leadership, small businesses interested in applying can now access special tax breaks from the county. While the idea is definitely more egalitarian than offering deals only to conglomerates rich enough to afford lawyers and lobbying teams, it is not as fair as just lowering the tax rate for everybody. The county has also attempted to correct for incentivizing large corporations to set up factories that paid so little, beneficiaries of the job creation were also adding a load to the county’s welfare programs.
In evaluating the practice of corporate welfare, two questions should be asked: (1) Does it work? and (2) Is it just? According to the classical liberal principles on which this country was founded, big government was feared, not because the founders were racist, but because they and their forebears had lived under the whims of aristocracy. As with the fallacy of the law of the jungle, might does not make right; with the fallacy of aristocracy, money does not make right. While original intent can be debated, it stands to reason a government that keeps the playing field level for all by enforcing laws against fraud and coercion is superior to one that taxes the poor to bestow favors on those in with the in-crowd.
For starters, incentives definitely work short-term for the direct beneficiaries. For anybody not wanting to think globally, locating industry in one’s jurisdiction can definitely put at least some of one’s constituents in a better financial position than those of neighboring districts.
The problem is with economic distortions resulting from government acting as a force of redistribution instead of as an enforcer of fair practices. The mere asking for public subsidy is indicative of living beyond one’s means, or just preferring to enjoy needlessly taking money from other people. It would be a rare person who walked through life never needing to reach out for help at one time or another, but businesses are chartered to be profitable. If they can’t do this, there is something wrong with their model. Maybe their products have been obsoleted, maybe their workers don’t care about quality output, maybe they’re charging too much to cover inefficiencies successful companies have long ago resolved. When government consents to subsidize bad business models, they perpetuate antiquated technologies and help flood the market with goods and services for which consumers have already voted, “No,” with their pocketbooks.
In another form of waste, the incentives foster demand for “rent seeking.” If businesses know they can get more money hiring accountants, lawyers, grant writers, and lobbyists;, they will find the funds to support them if it means cutting back on research and development, foregoing the manufacture of new product lines, or deferring equipment maintenance and upgrades. The poor view economic success in terms of having access to creature comforts, meaning somebody has to be mining, harvesting, designing, building, inventing, and delivering stuff. Paying bureaucrats to process legal documents only drives up the cost of necessities.
With its commitments to diversity, county leadership talks about creating more opportunity for people of all walks of life. What about all the elderly people who have to negotiate payment plans with the county tax office to keep their family home? They’re old, feeble, and on fixed incomes, and the county raises taxes on them to offset hundreds of thousands of dollars in incentives for multimillion-multinationals.
With incentives, the multimillion-multinationals can plow funds that would have gone toward paying taxes into paying lobbyists to, for example, draft legislation outlawing their competitors’ lightbulbs or capping their beer distribution networks. They can hire accountants to take advantage of every loophole. They can have their executives wine, dine, and see the sights with government leaders on the dime of the taxpayers. And, they can hire high-power attorneys to exhaust the resources of anybody who wants to sue them.
This is not to say there aren’t some very nice and talented people in the business world. The economy would come to a screeching halt without them. Some of them also play the incentives game, as it has become the new normal. For decades people in local government have said they’d prefer not to play, but “everybody’s doing it.”
The fact is, business is dynamic. Economist Joseph Schumpeter coined the phrase “creative destruction” to describe how the economy, like natural ecosystems, is composed of entities that grow, give birth, and die. In both cases, it is always hoped the next generation will be better off than the last. One way to help this is to remove from government its assumed role as money pump, forcing resources in directions consumer preferences don’t want to go. Market distortions, by definition, introduce inefficiencies that raise costs for everybody.
Data is a poor measure of economic policy, because bad rules incentivize people to innovate new paths to prosperity. But North Carolina’s recent decision to lower business taxes across the board has, at least, had good returns.