Fresh from his election victory, Gov. Mike Easley wasted no time in issuing one of the most bombastic statements by a North Carolina politician this year. Announcing that Dell had agreed to locate a manufacturing plant in the Triad area in exchange for a $242 million incentives package, Easley said that it would have been “morally incomprehensible” to do anything other than approve the agreement, which the legislature obligingly passed Nov. 4 in a hastily called special session. Easley’s phrasing was doubtless inspired by the conclusion that “moral” issues swayed a majority of voters in the November election. Better to claim the moral high ground from the outset than let opponents grab it and sour the plan. But a breakdown of the Dell deal and its implications shows that it’s Easley and his Commerce Department pals who are behaving incomprehensibly.
Dell’s terms broke new ground in the giveaway game, which North Carolina has played in earnest since an Economic Development Board task force issued a report in 1996 concluding that the state needed to beef up its incentives offerings to entice new business to the state. The task force recommendations included a number of safeguards and guidelines; for example, a company would have to pay 110 percent of the average wage for the county in which it would locate in order to qualify for the incentives, and tax credits would be limited to half the company’s total tax liability.
All that and more went out the window when Commerce Secretary Jim Fain and a small group of economic development insiders hammered out the deal with Dell behind closed doors. Under the agreement, only a summary of which was presented to legislators the morning they were asked to vote, Dell could potentially pay no taxes at all to North Carolina. It established a new type of tax credit–money back for each computer manufactured at the plant–that had not been previously envisioned. And it removed many of the standard provisions that would ensure that Dell lives up to its end of the bargain.
During the special session, boosters rejected any suggestion that the state could have done better to protect its interests. An amendment offered by Rep. Verla Insko to require that Dell cover the same portion of employee health insurance premiums as it does at its facilities in Texas (which has no state income tax, by the way) and Tennessee was killed as a potential deal-breaker. “This is no time for a social agenda,” blustered Rep. Rex Baker of Forsyth County, which is bidding for the plant.
In practical terms, this means that plant employees with a family of four, who will earn a meager average wage between $24,000 and $28,000, may have to pay more than $4,500 for health care coverage–almost double what they would pay at Dell’s other plants.
Dell will get even more breaks from the county that eventually lands the plant. Five counties were initially in the running, but three (Davidson, Rockingham and Yadkin, the three poorest) dropped out when it became apparent they could not afford the property tax waivers, free land and other perks the company is seeking. Forsyth and Guilford counties are now bidding against each other for the privilege of hosting the facility. A rough analysis by the Greensboro News and Record puts the potential value of such incentives at more than $24 million, with little or no return to the county. “The truth is, nobody can afford it,” said Forsyth Board of Commissioners chairman Peter Brunstetter.
Traditionally, business growth is healthy for state and local economies. Cash from taxes and other revenues increase bottom lines and enable governments to keep pace with inflation and provide needed public services to the citizens. But the rush to kick money back to business and industry has altered the traditional equation, and no one really knows if the incentives are reaping their intended economic dividends. “I don’t know of anybody who has done any long-term tracking of these incentives to see if they pay off,” says Dennis Rondinelli, a professor of management at UNC’s Kenan-Flagler Business School.
Easley and others say that any revenues from new business are a positive, as they would not otherwise exist if a company chooses to locate elsewhere. And they invoke the rosy promise of the Dell plant: As many as 8,000 jobs might eventually be created by Dell and spin-off businesses created to serve it, according to Easley, though he can provide no hard data to back that assertion.
That simplistic thinking ignores the fact that state and local governments incur costs from new business in the form of providing services to the company and its employees. And Dell won’t be held to any but the most minimal requirements–the company must create at least 1,200 jobs to get the incentives, but can lay off as much as 40 percent of the workforce in a given year and still qualify. Crunching the numbers before offering incentives would be a logical and prudent step, but that might get in the way of the program. “I doubt very much whether the state did a very thorough cost-benefit analysis on [the Dell deal],” Rondinelli says.
The myopia about incentives brings to mind the persistent argument that building huge sports arenas at public expense is a great investment. Thousands of jobs and millions in economic impact are the inevitable result, say the Fains of the world. But numerous studies show that while a few select facilities make money for their states and communities, most have proven to be vast money pits.
Proponents of hefty incentives are also ignoring the 500-pound gorilla pounding on their door: Dell’s deal doesn’t exist in a vacuum, and every company wanting to expand or relocate in North Carolina will be demanding equal treatment. Three Guilford County companies, for example, are now asking local officials for a total of $420,000 in incentives for plant expansions. In the old days, of course, successful companies would expand without asking for giveaways, with everyone sharing the benefits.
One wonders, as Wake Forest University economist Gary Shoesmith did recently in the News and Record, how IBM (which employs 13,300 people in RTP) and other large companies will react to their competitors cashing in on the state’s largesse. One clue can be found in the agreement last December to award R.J. Reynolds more than $150 million in tax breaks the company wanted to “create” 800 jobs in Winston-Salem–even though the tobacco giant laid off 1,700 employees in North Carolina last year. “What sense does it make for IBM to pay state taxes to subsidize one of its competitors?” Shoesmith asked rhetorically.
The fact is, no executives in their right minds would pass up the opportunity to enhance their balance sheets at public expense, and the line of companies with their hands out will get longer by the week. It’s a relatively short leap to imagine North Carolina companies simply threatening to move out unless they’re granted tax breaks, even if it would make no economic sense for them to pull up stakes. The slippery slope is turning into an avalanche.
Whether Dell would have pulled out of the deal if the incentives package were not approved exactly as delivered to the legislature is doubtful, though details of the negotiations are (outrageously) off-limits to the public. Site selection experts note that other factors are more important in location decisions, and North Carolina is consistently rated as one of the top states in which to do business. These days, says Kenan-Flagler professor Rondinelli, companies will determine their preferred site and then play competing sites off each other to ratchet up the freebie ante.
After initially dodging the question, Dell spokesman David Frank declined to comment on whether any tweaks to the deal would have deterred the company. “You’re asking me a speculative question that I’m not going to make a speculative answer about,” Frank said.
The backdrop to the trend toward ever-sweeter incentives packages can be found in a recent report on state health by the American Public Health Association, which ranked North Carolina 41st, down from 36th last year. The state’s poor showing was fueled in part by its dismal per capita spending on public health, which ranked next-to-last. The likelihood of improving that position is virtually nil given the state’s projected billion-dollar budget deficit and the push from all sides to lower the corporate income tax rate, which will further shrink revenues. Mental health, education and other programs that benefit the public are at risk, since budgets are usually balanced on the backs of the citizenry in the form of service cutbacks.
How morally comprehensible is that, governor?