High rate of failure

Published February 19, 2015

Editorial by Greensboro News-Record, February 19, 2015.

North Carolina needs to be smarter about spending money to attract new businesses. An analysis of the state’s primary economic incentives program shows a high failure rate and grossly unbalanced distribution of funds.

The report was prepared by the North Carolina Justice Center, a left-learning public policy group. Its findings may confirm suspicions of conservative legislators who last year resisted Republican Gov. Pat McCrory’s request for more economic incentive money.

When it comes to picking business winners and losers, the state has had a poor track record since the inception in 2002 of its Job Development Investment Grant program. Sixty percent of firms receiving awards have failed to meet targets for jobs created, money invested or wages paid.

When that happens, the state can rescind awards and recover money granted. However, when state officials make poor choices in the first place, that ties up money that could have been put to more productive use. Furthermore, the governor wouldn’t be as worried about running out of JDIG funds if awards were handed out more selectively.

Many conservatives hold philosophical objections to incentives. Government simply shouldn’t support some businesses with public funds and not others, they say. It’s better policy, they add, to lower tax rates for all businesses.

In principle, they may be right. In reality, nothing is as simple as it appears. Tax rates don’t apply equally to all businesses because some industries have used political influence to carve out special tax breaks. And many companies demand incentives when they scout for new locations. If North Carolina won’t pay, South Carolina will. Or some other state.

McCrory wants North Carolina to be a bigger player. Recent corporate income tax cuts don’t give the state an advantage, so he wants more JDIG money and a $20 million to $30 million closing fund that the secretary of commerce can use to finalize deals.

There’s reason to be wary, as the Justice Center’s Allan Freyer showed in exposing JDIG’s flaws. State officials don’t sufficiently evaluate prospects to determine how well they’re really likely to perform. A basic question is whether the recipient is in an industry in decline or one that’s on the way up. Seventy percent of the companies in declining industries failed to meet their performance goals. For firms in growth industries, the failure rate has been 48 percent — not great, but better. And Freyer didn’t report how many of those companies exceed their goals for job creation, wages and investment.

Also troubling is how little JDIG money ends up in rural counties. Most counties have never had a company earn a JDIG grant. Nearly 60 percent of JDIG dollars have gone to just three counties — Wake, Mecklenburg and Durham. Guilford is fifth, after New Hanover.

Most businesses prefer to locate in or near thriving cities. Maybe they don’t really need extra incentives to choose Raleigh, Charlotte or Durham. Maybe greater inducements should be used to lure some companies to Stokes or Yadkin County — but only if they stand a good chance to delivering on jobs.

http://www.news-record.com/opinion/n_and_r_editorials/high-rate-of-failure/article_4083dd30-b7b8-11e4-a32c-4fd2cb208945.html