Economic development incentives: are they worth it?

February 21, 2023

In 2022, as in years past, the state of North Carolina awarded a variety of economic development incentive packages to companies interested in investing and creating jobs in our state. These incentive packages have generated controversy, from both right and left, since the two biggest programs – the Job Development Investment Grant (JDIG) and the One North Carolina Fund – were started decades ago. With billions of dollars on the line, incentive programs like these have increasingly become a major part of how economic development is done, under both Republicans and Democrats, in North Carolina and across the country.

Ideological critics on both left and right have complained that state incentive packages like these amount to “corporate welfare” and an inappropriate entanglement of government and industry. There is merit in some of this criticism. But there is also a great deal of basic misunderstanding of how incentives work, which leads to many premature conclusions. On a purely practical level, well-structured incentive programs are demonstrably effective at job creation and new investment, and this is good for our state. Moreover, without coordinated, multi-state action to rein them in, incentives are here to stay – so it’s important to make them work well.

How incentives work

When the NC Department of Commerce “awards” a new JDIG incentive grant, some might envision Governor Cooper handing the CEO a big check. But that is not at all what happens.

JDIG (and One NC Fund) incentives are performance-based, and contingent on an awardee company hitting specific performance benchmarks. The amount of the award depends on multiple factors: how many jobs are to be created (more is better), size of the investment (ditto), and where (high-need counties are prioritized). Those interested can read about the process in more detail in the JDIG 2021 Annual Report. (The 2022 report is due in another month or two.)

Incentive “awards” are not easy cash. Instead, recipient companies are eligible to receive a portion of their total award grant annually, based on actual performance in jobs created or retained (and average annual wage commitments) or in direct investments, as reviewed and audited by the state Department of Commerce. When job or investment targets aren’t met, awardees don’t receive anything.

Critics sometimes point out that a minority of companies who are awarded incentive grants fail to hit their targets, and this is true. After all, neither corporate executives, nor certainly government leaders, have any gift for predicting the future. Yet when this happens, those awardees are ineligible to receive any grant money. Even if companies eventually fail after meeting some annual targets, their workers – and the North Carolina economy – are still better-off for it in the meantime. And more importantly, the data shows that the plurality of successful companies more than make up for the failures.

Understanding leverage

Incentives are a powerful tool for economic growth not just because of the jobs they create directly, but because the leverage they create for knock-on economic activity. That is, the amount of downstream economic growth those jobs and investments create dwarfs the relative size of the incentive grants themselves.

They do this in three ways:

  1. Every job supported by an incentive grant indirectly supports other jobs in their local area. Supporting the creation or retention of just 1 job has a multiplier effect on others in that worker’s immediate community (think grocery stores, gas stations, service workers, schools and more). This effect is powerful: in 2021, the JDIG program estimated that while that year’s incentives would directly create “only” 13,482 jobs, those jobs indirectly supported the creation of 18,681 other ones (see page 9).
  2. In addition to jobs, companies must also invest in capital expenditures. A relatively modest incentive grant can be thought of as leverage that induces a company to spend $500 million (Boom Supersonic in Guilford), $1 billion (Apple in RTP or Eli Lilly in Cabarrus), or $4 billion (VinFast in Chatham) in physical plant and equipment – and these are just a handful of examples. That private cash investment goes straight into local economies, with the same knock-on effects.
  3. Those new jobs created, both directly and indirectly, generate much more economic activity than the incentive grant alone. The 2021 JDIG total award liability of $1.2 billion, if fully disbursed (and again, actual disbursement is contingent on performance), was estimated to result in $124 billion in total state GDP impact, when downstream effects were calculated.

These are big numbers.

Clearly, not every incentive grant will result in a billion-dollar private investment (though some do). But the net effect of the grants is to leverage a much greater amount of private capital which is deployed to hire North Carolinians and build in their communities. It’s hard to get much more pro-business and pro-growth than that – and the black-and-white ROI is so clear that incentive programs have remained popular among both Republican and Democratic state leadership.

There’s still a better way

While economic incentive programs have demonstrably positive net return, critics have a compelling argument that pitting states against one another to incentivize private investment in such a way is not just unseemly, but also creates a “race to the bottom” situation. It would be clearly better if no incentives at all were necessary to attract major, transformational economic development projects. But is that realistic?

Unfortunately, that seems unlikely. In competing with one another with incentives, states are currently stuck in a classic “Prisoner’s Dilemma,” a game theory concept that illustrates the difficulty of coordinated action with multiple players. Essentially, no state wants to be the first one to cancel out incentives, because doing so would almost certainly mean losing out on investment.

Indeed, North Carolina itself learned this the hard way: the state famously lost out on a massive Mercedes-Benz plant mega-project in 1993, as well as similar projects from automakers Audi, Volkswagen and Volvo, and in 2018, Toyota-Mazda, to states like Alabama. Auto manufacturing is a particularly prized economic development engine because the industry’s long supply chains generate one of the highest “multipliers” for indirect jobs created. Economic incentives are not the only differentiator between states competing for such a project, but they are a powerful one.

Some form of coordinated, multi-state compact agreeing to baseline standards, a common framework, or even an agreement not to offer incentives altogether would certainly be ideal. Unfortunately, to say that the politics of such a major deal would be complicated would be a major understatement. Moreover, Chambers of Commerce – corporate special interests which are major players in Republican politics – would be strongly opposed, for obvious self-interested reasons, making it a likely non-starter in many states.

Economic development incentives are thus probably here to stay. It’s important to keep them transparent. But fundamentally, what keeps North Carolina economically competitive in our modern economy is high-quality infrastructure, good transportation links, and most importantly, a well-trained and highly educated workforce. Shortchanging education funding for North Carolina’s next generation will do far more to hurt our state’s economic present and future than more tax cuts will benefit it.

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