Taxpayer-Funded Subsidies Are Bad Economics | Eastern North Carolina Now

    Publisher's Note: This post appears here courtesy of the John Locke Foundation. The author of this post is Paige Terryberry.

  • North Carolina leaders have pledged nearly $2 billion in taxpayer resources in corporate welfare in the last two years
  • Interstate compacts represent truce agreements to cease corporate welfare incentives that pit states against one another while eroding the tax bases of both states
  • If North Carolina leaders refuse to stop corporate welfare because other states are similarly addicted, an interstate compact is a necessary next step

    Bipartisanship merits recognition, especially today. North Carolinians have benefitted from the bipartisanship that brought the recent passage of pro-growth budgets, delivering more money to taxpayers.

    Both parties in North Carolina also, however, find common ground on corporate welfare. Unfortunately, both parties are on the wrong side. Corporate welfare handouts are inherently unfair and make for bad economics.

    We know tax incentives are nowhere near the top of the list of factors considered when a company chooses where to locate.

    A report from the Mercatus Center found subsidies do not sway corporate decisions on where to locate. The report discussed several studies making that point, including a Brookings report that found:

    'While corporate decision-makers' top location concern is the availability of education and training, policymakers and lay people often think that tax incentives matter most. Tax incentives and tax packages are uniformly viewed as low priorities by location consultants, relatively unimportant to the basic decision.'"

    Moreover, we know that the handouts are highly inefficient. Paying $568,000 in taxpayer dollars per alleged job does not make sense. As my colleague Jon Sanders wrote, "The question isn't if corporate welfare makes us better off, it's how much worse off we are."

    It occurs to me that politicians on both sides know this, and if so, there might be another reason they continue to support increasing handouts to businesses.

    In just the past two years, North Carolina promised nearly $2.4 billion ($1.3 billion in 2021, and roughly $1.1 billion in 2022 so far) from more productive uses to corporate welfare. These giveaways were made under a divided government. Massive handouts to household names Apple and Toyota were championed by conservative leaders in the legislature and Democratic Gov. Roy Cooper.

    Yet Cooper hypocritically stands against corporate income tax cuts because they would "come at a high cost for middle-class families."

    Even so, Gov. Cooper said, "It's tremendous that Toyota has selected North Carolina for such an important part of its electric vehicle future, creating good-paying jobs and moving us toward a healthier environment." North Carolina House Speaker Tim Moore said of the same deal, "I am proud of the hard work the General Assembly has done to ensure North Carolina is a state ripe for new business and innovation."

    Ribbon-cutting ceremonies with any elected leader bestowing good graces on a business reeks of political favoritism and elitism.

    But there is an additional factor that might cause both sides to support such a blatant misuse of taxpayer dollars. State leaders could find themselves trapped by the thought of "If we don't offer incentives, some other state will, and we will lose out on a big project."

    This is an example of what economists call a "prisoner's dilemma." It occurs in this scenario where businesses are courting states for corporate welfare handouts. This is a race to the bottom, where states try to outbid each other for offering the largest corporate welfare deal. It's no excuse, but it is a likely factor in states continuing to dole out money.

    North Carolina leaders may feel pressured to continue the handouts, even though they are harmful, simply because other states are doing it. They don't want to lose out on the good publicity they'll receive from announcing all the "new jobs" supposedly created by the next big incentive deal.

    Unfortunately, handing out taxpayer money to remain competitive with other states rewards the wrong type of behavior. Corporate welfare rewards businesses for pursuing political favoritism instead of better serving consumers' needs. Capturing public money is not the proper job of a business. Corporate welfare is a shortcut tactic to get economic incentives that ultimately have nothing to do with rewarding the success of a business. Politicians get to claim they are creating jobs while politically favored businesses receive "free money" at the expense of the taxpayers and to the detriment of the other businesses in the state.

    The answer to the dilemma: interstate compacts

    Interstate compacts are one way to discourage states from outdoing each other in wasteful taxpayer-dollar spending. Interstate compacts are essentially a truce amongst states to stop using corporate welfare. This "unilateral disarmament" would ensure states are no longer fighting for the largest piece of the pie.

    While the push for corporate welfare comes from both sides, the pushback against corporate welfare is also a bipartisan effort. A coalition to create a national Agreement to Phase Out Corporate Giveaways saw related bills filed in 15 states in 2021. The campaign has already recorded a notable success in Kansas and Missouri - governors in both states called a truce to end subsidies in the Kansas City metro area.

    Corporate welfare subsidies create only artificial progress at best. The practice is inherently unfair, invites political corruption, and shifts the state away from free, competitive markets and toward central planning.

    North Carolina is a business-friendly state not because of our ever-increasing corporate welfare handouts to select businesses, but because of our low taxes, skilled workforce, and low overall cost of living. It's because of fiscally responsible spending restraint, which is antithetical to corporate welfare handouts.

    As the Mercatus report reads, "politicians don't make good investment decisions with economic subsidies." Corporate welfare incentivizes businesses to shift from economic competition to political competition. Economic efficiency suffers under corporate welfare. North Carolina should join the bipartisan coalition of states dedicated to ending this bad practice.
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