I'm cheating a little this week...
Hello all. Hope you’re doing well. This week I’m cheating a little. I’ve been under the weather since late last week with that nasty little thing called “strep throat”.
Believe it or not, even coffee doesn’t taste good to me. But Pa’s tea does and that’s what I’m sipping on as I write this.
For those of you in NC, especially Lee County, we had some excellent news this week. Our local Caterpillar plant is expanding. This is welcome news for us. The unemployment rate in Lee County is one of the highest in the state at 12.3% or close to 3,166 people who have filed claims. Don’t get me wrong. There are several other counties with higher rates. Scotland County is 16.3%. That is staggering.
If you don’t know, the numbers reported don’t include those who have just given up and stopped looking. I’ve been there. Spent 2 long years unemployed. Only by the grace of God and some serious sacrifice by the family we survived. Miracles happened during that time. Some would just say, " No, you’re nuts." But when you get an anonymous bank check in the mail that is the exact amount of money needed to buy new tires, that’s a miracle. Especially since no one knew I needed new tires. Amazing. Miraculous and from above.
Anyway, as I stated earlier, I feel like I'm cheating a little this week because of being under the weather. And I'm going to use a paper I wrote Spring Semester to help make my points.
Incentives is the big talk around town here in Sanford and our state seems to be “high tailing it” (my mama use to say this) to #1 in the handouts. Many people don’t understand incentives. I sure didn’t. On one end, I heard the cries of the local politicians saying they HAD to give them because they were being used in a "bait and switch" game with the businesses, so to speak. (In my opinion, the bait and switch is with the NC government, not the businesses.) And on the other end, falls the rest of us. Those of us who don't get tax breaks (the real name for incentives). Those of us who when revenues fall short have to make them up with higher taxes. And I also wanted to know why only certain corporations were privy to the spoils! Seems to me tax cuts for all has spurred economic growth every time it's used. No one has ever been able to refute that statement because it's true. The Dems just use the rhetoric against us.
So for my last political class, I decided, to be fair, I should make incentives the topic of my research paper. I hope at the end of this you’ll be a bit more educated but willing to stick your neck out, get involved, and help our communities find ways to lure and more importantly keep businesses.
Incentives is the big talk around town here in Sanford and our state seems to be “high tailing it” (my mama use to say this) to #1 in the handouts. Many people don’t understand incentives. I sure didn’t. On one end, I heard the cries of the local politicians saying they HAD to give them because they were being used in a "bait and switch" game with the businesses, so to speak. (In my opinion, the bait and switch is with the NC government, not the businesses.) And on the other end, falls the rest of us. Those of us who don't get tax breaks (the real name for incentives). Those of us who when revenues fall short have to make them up with higher taxes. And I also wanted to know why only certain corporations were privy to the spoils! Seems to me tax cuts for all has spurred economic growth every time it's used. No one has ever been able to refute that statement because it's true. The Dems just use the rhetoric against us.
So for my last political class, I decided, to be fair, I should make incentives the topic of my research paper. I hope at the end of this you’ll be a bit more educated but willing to stick your neck out, get involved, and help our communities find ways to lure and more importantly keep businesses.
Happy reading. I’d love your feedback. And just so you’ll know, the names have been changed to protect the innocent.
Sheila
****NOTE: The documents referenced as Appendices can be emailed to you if needed.
Just send me a note at qgirl232@yahoo.com
****NOTE: The documents referenced as Appendices can be emailed to you if needed.
Just send me a note at qgirl232@yahoo.com
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The Good, The Bad, and The Ugly Game of Incentives
(Spring 2010 - State and Local Politics)
Executive Summary
Incentives – is it a dirty word in American politics or a necessary evil, like some of our elected officials are saying? While preparing for this research paper on such a hot topic in communities today, I was reminded of one of my favorite movies, “The Good, the Bad and the Ugly”, starring my all time favorite actor, Clint Eastwood. You see Blondie (Clint) is talking to Tuco. Tuco wants to know how and when he unloaded his gun. Blondie says this: “Last night. You see in this world there's two kinds of people my friend - those with loaded guns, and those who dig. You dig.”(wikipedia.com) Yes, there’s two kinds of us – those who see incentives as the only way to get businesses to come to our state and communities, and will do whatever it takes (loaded guns) and those of us who see incentives as a way the taxpayers are cheated with each transaction (those of us who dig)!
As you read the discussion I have proposed on this vicious game that pits communities against communities, instead of aligning them with the needs of the citizens, please keep an open mind and hopefully, your conclusion will be an “ace in the hole” for us all.
Incentives: Definition, Creation and Issues
To understand incentives, you must understand the meaning of the word. The definition of an incentive can vary in meaning. However, for this paper’s purpose the definition we will use as according to Meriam-Webster is a reward for desirable behavior or desirable outcome, such as telling your kid to clean his room and he’ll get a cookie. What kid in his right mind wouldn’t do that?
In the political arena, an incentive is used or should I say supposed to be used to entice companies to states in order to bring jobs and increased tax revenues. But as you will see, the bad part of incentives is that, and especially in North Carolina, they are used to pit counties against counties, with the heads of our state allowing these actions.
Incentive giving was created by the William S. Lee Quality Jobs and Business Expansion Act of 1996 and signed into legislation by Governor Jim Hunt. The legislation was named for former Duke Energy chairman, William States Lee III, who also was chairman of the NC Economic Development Committee for Governor Hunt during his tenure.(1)
The William S. Lee Act (2) was created with a 5 Tier module mind set. In other words, extremely economically depressed areas were Tier 1, less Tier 2, etc. (Appendix C – graph). The General Assembly believed this legislation would make North Carolina more attractable and competitive. North Carolina has always been a heavy manufacturing state, with companies like Hanes, Sara Lee, Philip Morris, Parker Hannifan, Caterpillar, etc. In the middle of our state, we have North Carolina’s “Silicon Valley”, Research Triangle Park. RTP is the home of IBM, Quintiles, GlaxoSmithKline, Pfizer (Wyeth), as well as numerous prestigious universities and other learning institutions. It would only make good sense to keep these companies from leaving and to entice new ones to come. And this is what this bill was intended to do.
The creators of the bill believed that inspiring existing businesses to expand footage, modernize equipment, and hire more employees, would benefit all industries. After all, people need food, shelter, gas, cars to drive, babysitters, hair dressers, places to eat and play, and all the other niceties of life.
A prominent county commissioner where I live in Lee County, works for the state of North Carolina . It is in our conversation about incentives that I learned that the General Assembly sets the stage for using incentives. According to the gentleman, the counties do not have much liberty or legroom, so to speak, to maneuver. He states: “The General Assembly lays the ground rules to say and do certain things. They instruct who we can provide incentives to and who we cannot.”
I have often asked our county commissioners about accountability. Who is responsible if the businesses that get them don’t do their part? Do we ask for the tax revenue back? Is the deal null and void when the promised jobs don’t come to fruition? My question was answered by the Lee County Economic Development head(4) , very simply (paraphrased), “No. No rules are given. No dead contracts.” This is what I call the ugly part of incentives. No accountability on the local level. How can we trust that incentives are a good idea? A Q&A on incentives in Lee county is in Appendix A of this paper.
I also contacted the current chairman of the Lee County Board of Commissioners. He had a very convincing argument on the need for incentives. He stated that they are a necessary evil because in this economic climate businesses are using this as a tool to pit county against county, state against state. He says businesses are coming to Lee County and point blank asking what incentive packages are available. I rebutted the gentleman by asking about lowering the tax rate for all – citizens and businesses. Why would a broad tax cut, to both citizens and businesses, not work? More money in our pocketbooks means more money to spend on discretionary items, like the boats, new cars, new homes, etc. He replied it didn’t matter. The business clientele know that what one county or state won’t do, others will. He admitted that the incentive program needs revamping on the local and state level. He added more accountability is necessary as well as requesting the state take a look at what they offer.
But according to the documentation found on the Incentive bill (William S. Lee Act), the General Assembly has put milestones in place. The William S. Lee Act was replaced with the Article 3J Tax Credits which superseded the original incentive bill passed January 1, 2007. The new bill focuses on three distinct items that will lend to getting a tax incentive (see Appendix D for credits):
1) Creating Jobs, 2) Investing in Business Property, and 3) Investment in Real Property.
The North Carolina Department of Revenue is required to publish reports about the tax credits given as incentives (http://www.dornc.com/publications/williamslee09.html). Guidelines were created in 2005 (Appendix B). Some interesting facts to note is why incentives can be given (page 2, Article3 - A Tax Credit Guidelines). These fall in line with my local municipality objectives.:
Credits are available for:
• Creating jobs
• Investing in machinery and equipment
• Technology commercialization
• Research and development
• Worker training
• Investing in central office or aircraft facility property
• Development zone projects
• Substantial investment in other property
The types of businesses that can draw from the pool (pages 3,4: Article3A Tax Credit Guidelines) are:
• Central Office or Aircraft Facility – Business must create 40 or more jobs that must be in place within 12 months for existing facilities. Business will get a tax credit for new facilities if they start hiring 24 months before the construction is completed and ending 12 months afterwards.
• Air Courier Services or Data Processing – Businesses have no job requirements but must make an investment in facilities.
• Manufacturing, Warehousing, or Wholesale Trade – No particular amount of jobs have to be created according to the guidelines.
• Computer Services or Electronic Mail Order House – This type of business must be for Computer services or electronic mail order centers and must create 250 jobs or more and be in a Tier 1 (worst economic conditions), Tier 2 or 3 region of the state.
• Customer Service Center - Business must operate a customer service center and meet these conditions:
o Primary business is telecommunications or financial services center (defined by NAICS)
o Must locate in Tier 1, 2 or 3 area. (Northhampton County is an example).
o Jobs created must be those used in the day to day operations (not construction of the facility).
My employer was a recipient of tax incentives. They created a call center in rural Martin County that has 70 employees or more. At an average of $520/week, this was a real boost for the area. This is the area I grew up in and basically was a tobacco farming area. Many businesses have closed down. When incentives are used in this manner, they are good.
• Warehousing at Establishment - Business must be in warehousing and serve 25 or more establishments (not specific to category) and span distribution over at least 5 counties. All jobs created (no specific number given) would have to be used in day to day operations. In Lee County, JR Davenport would suffice. They distribute to the Pantry/Kangaroo Convenience stores all over North Carolina
• Research and Development – The guidelines are not very specific. But as an example, my employer is a Pharmaceutical Research organization. We specialize in drug studies for GSK, Pfizer, etc.
We were granted tax incentives from Durham by promising to hire 1000 new employees at pay of $65,000 or more. We are on track to fulfill this promise. In turn, we built a multimillion dollar headquarters in Durham, named QPlaza that will generate thousands of property tax dollars each year.
The drawback is that when the state sets the guidelines, they usually end up expecting the counties to ante up, forfeiting their responsibility and forcing the counties to compete. This is causing undue hardships on the county commissioners and economic development teams.
Just what does this mean for the taxpayers? We are left holding the bag. When incentives are given to a business and they do not own up to their responsibility, or held accountable, the taxpayers are asked to pick up the tab. Those anxious to have job creation instead of revenue building would tend to disagree. They argue that it’s the businesses money to begin with and that I, or you, the average joe would not be affected. Wrong! Let’s examine several incentive packages given over the past few years, both statewide and local, and see how they have worked out for the taxpayers:
STATE
1. Dell Computers - $259 million incentive – Given incentive to build a manufacturing plant in Forsyth county. Promised to employee over 500 new jobs.
Dell announced in the Fall of 2009, they would close the Winston-Salem plant putting 900 employees out of work.
Result: Dell is required to pay some of the incentives they received back. However, this has been a huge embarrassment to North Carolina and its leadership. Thankfully, Judge Orr with NCICL (NC Institute of Constitutional Law) had the guts to sue the state over the deal. (http://www.businessweek.com/careers/managementiq/archives/2009/10/dells_plant_clo.html)
2. Google – The state offered, along with Lenoir, a $260 million deal for Google to build a data center in Caldwell County and employ 210 jobs. In case the math perplexes you, you could look at this as:
$260 million/210 = $1,238,095/per job
In layman’s terms, Google will get a tax break of $1,238,095/job created over 30 years. That’s a lot of Google-ing (sic). (http://www.wral.com/news/local/story/1197713/)
3. Apple – According to Civitas, Apple was offered a $58 million deal over 10 years. Due to the state recalculating its incentive giving formula, data is not readily available. However, this deal has caused several people to stand up and question the legality of giving them away at whim.
LEE COUNTY:
4. Parkdale Industries - The Lee County Board of Commissioners recently granted Parkdale Industries a $34,715 to 1) save 60 jobs and 2) move equipment from the Hanesbrand facility on the south side of town to the Parkdale facility on the north side of town.(6) Let me ask you: Does it really take that much money to rent a U-haul? I asked the chairman that in our meeting for this paper. His reply was that no one would look at him and say he was the reason for the loss of 60 jobs. Are you beginning to see the plight of this game? The elected officials are playing with a full deck.
5. Frontier Spinning - On March 17, 2010, the Lee County Board of Commissioners granted a $15 million dollar incentive package to another manufacturing facility in Sanford, Frontier Spinning.(7) The promise: 45 new jobs. Time to do the math again, and might I add I must be using a different calculator or mine must be broke because the dollars promised per job are staggering:
15,500,000 million/45 jobs =$ 333,333 per job
Yes. My trusty old TI-86, the one used in most economic and statistic classes must be broken!
Is there anyway to stop the madness? Is there anyway to stop the state from mandating the where, when, how, what and how much on incentives to the counties? That’s the $600,000 question.
Let’s Solve the Problem!
Are there real solutions we can work with? In my opinion, yes. Here are my recommendations:
1) Reduce taxes for everyone. If a county (or state) has a low enough tax rate, people will come. Businesses will come. The more people we have, the more businesses will be inspired (and required) to manufacture, service and or create. As I noted on page 5, “After all, people need food, shelter, gas, cars to drive, babysitters, hair dressers, places to eat and play, and all the other niceties of life.”
Trickle-down economics has worked and will work again. Give me more of my money and I’ll buy more or visit more the businesses in my own community. What happens when people spend? More taxes are paid.
2) Petition the State of NC to stop the ante game. In other words, use incentives only at the state level and play the hands of the bluffers, the businesses requiring the incentives, no matter how low the tax rates are, to plant themselves within our state borders. This takes the competition game away from the counties and allows them to work together to increase jobs, etc.
For example: BRAC. Fort Bragg (Cumberland County) should be working with Lee, Moore, and Harnett, as well as others, to find housing for relocators and jobs for their spouses. They should be working at the state level on incentive packages for industries they rely on for the goods and services to make Fort Bragg function.
3) Improve the other things to make the counties or at the state level, NC better. Make NC the only place a citizen wants to live. Like lowering the tax rates. Improving the schools in the Tier 1 and 2 areas. Focusing on improving the landscape, infrastructure, and other qualities of life the citizens so desperately are searching for.
Work with the small businesses that make our world work. Help them expand, build new facilities and create jobs instead of just dealing with the big boys, ie, Dell, Google, and Apple. Sure they are a huge chunk of the tax revenue intact. But it’s the small mom and pops that make the cities and rural communities feel like home. And consider helping mayors to be strong and not weak in their communities.
Summary
As we look at this vicious game being played across our state, we have to wonder who the winners will really be? Is it the businesses who get their goodies and then close-up shop? Is it the taxpayer who insists our elected officials revisit the game plan, watch the film of the competitors, and revise the strategy? Good points. But the overlying opinion is that it is time North Carolina decide to play this game with a full house or fold.
REFERENCES
1 What is the Bill Lee Act?, News and Observer, http://projects.newsobserver.com/faq/what_is_the_bill_lee_act.
Retrieved 25 March 2010.
2 The William S. Lee Act of 1996 actual bill was unavailable.
3District 1, Lee County Commissioner. Term expires 2010. http://www.leecountync.gov/Commissioners/CommissionerRoster/tabid/88/Default.aspx
4 Lee County Economic Development, http://www.lcedc.com/incentives.htm. Retrieved 31 March 2010.
5Chairman, Lee County Board of Commissioners.
6 Anderson, Gordon. (2010, January). County board approves Incentives Deal. Sanford Herald, pp. 1A, 3A.
7 Mullen, Caitlen. (2010, March 17). County approves Frontier Spinning incentives. Sanford Herald, pp. 1A, 3A.
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