Is the ‘Incentives Game’ Worth It?

In South Carolina, 2011 turned out to be a watershed year in at least one respect. For the first time, the merits of government-driven “economic development,” and especially the use of economic “incentives,” became the subject of serious and widespread public debate. Before this year, politicians and other officials could speak of using “incentives” to attract “investment” and most people assumed it to be a good thing. When state and local governments obligated taxpayers to pay out at least half a billion dollars to bring the Boeing Company to North Charleston, hardly anyone objected (“hardly anyone” being The Nerve).

Yet something happened in the summer of this year. That something was Amazon.com. The company’s decisions to stop construction of a distribution center in Lexington County because the legislature rejected a special sales tax break that would have applied only to one company – Amazon.com – provoked statewide controversy over the merits of taxpayer-funded “incentives.” Eventually, of course, the legislature gave in to the multinational retailer’s demands, but the debate only intensified.

It’s worth asking, therefore: What’s all the debate about? Isn’t it a prudent use of public dollars to bring companies to South Carolina, especially at a time of double-digit unemployment? Isn’t it a good idea to attract investment and jobs to South Carolina, even if doing so requires the use of taxpayer dollars?

Well, consider the evidence.

  • Spending on economic incentives increased from $32 million in 1995 to $525 million in 2008 – a 1,540 percent increase.
  • During that same time period, the state’s per capita income fell from 42nd to 44th in the nation, spending has dramatically increased, and the personal state income tax burden increased by 44 percent.
  • Despite South Carolina’s long history of handing out enormous tax favors to multibillion-dollar companies, the state’s unemployment rate is still among the highest in the nation.
  • The state hands out so many corporate income and sales tax breaks that both have become net revenue losers – we hand out more in breaks than we collect in revenue!

How does this happen? How do efforts by government officials to bring companies to South Carolina end up harming the state’s economic growth and prospects?

There are essentially two answers. First, incentives deals are always gambles, and oftentimes they don’t pay off for the state. Indeed, South Carolina’s history of deal-making with taxpayer-funded incentives includes a long list of utter failures – companies that took incentives and either went bankrupt or left the state long before producing promised jobs and investment.

Second, when government officials give away so many public resources – tax exemptions, tax credits, and even outright cash in the form of grants – the state has to make up that loss somehow. And “somehow” means taking more money from taxpayers and, by definition, out of the economy.

But if the state doesn’t offer incentives to companies (so the thinking goes) the companies won’t come. After all, if legislators or government officials can use public resources to attract jobs, shouldn’t they? Government officials can’t do nothing about the economy, right?

There are, in fact, some practical steps lawmakers can take to make South Carolina’s economy more competitive – steps that don’t involve taking foolish risks with taxpayer dollars, and don’t involve taking money out of the private sector.

  • Eliminate special interest tax breaks and lower sales and corporate income taxes commensurately.
  • Eliminate the corporate income tax, which is both an impediment to private sector growth and a low source of revenue.
  • Reduce the manufacturing property tax to 1 percent and lower the personal income tax to a lower, flat rate.
  • Simplify the business licensing process and reduce or eliminate fees and fines that punish entrepreneurial activity.
  • Dismantle the state’s heavy-handed regulatory regime.
  • Pass a spending cap that limits government expenditure against real economic growth, and refunds excess revenue to its private-sector source – that is, the taxpayer.
  • Dismantle the state’s multibillion-dollar state-driven “economic development” machine – a complex web of government agencies and government-supported nonprofits that takes billions out of the state’s economy every year.

So the next time you hear about government officials cutting a deal with a private company, ask yourself two questions. (1) Am I okay with politicians and bureaucrats using my money on this gamble? And (2) does government-driven “economic development” really have the kind of track record I can place confidence in?

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