Thursday, November 15, 2012
By Russ Sobel
In late October, the South Carolina Policy Council hosted a panel discussion on the role of selective economic incentives in South Carolina economic development. High profile cases, like the incentives given to BMW and Boeing, are just the tip of the iceberg — South Carolina spends over $300 million per year on selective incentives with names like the Corporate Headquarters Credit, Milk Producer Credit, Texting Revitalization Credit, Biomass Resources Credit, and three credits for the Motion Picture Industry.
Kim Statler, Executive Director of the Lowcountry Economic Alliance, argued that her ability to offer incentives to specific companies is a critical part of getting new firms to locate in South Carolina. Taking the opposite view, Ashley Landess, President of the South Carolina Policy Council, stressed the fact that there is no economic data suggesting that South Carolina's economy has actually improved as a result of taxpayer-funded incentives.
Among the most important points to make on this subject is the one made by Dr. Frank Hefner, Director of the Office of Economic Analysis at the College of Charleston. “You wouldn't need incentives,” he said, “if you didn't create disincentives in the first place.” Taxpayer-funded incentives are a poor solution to what is a real problem in South Carolina — its uncompetitive business climate.
South Carolina has the highest property tax on capital investment by manufacturers in the nation. A typical manufacturing facility that locates in our state will pay twice as much as it would in Georgia, and four times as much as in North Carolina. The result? Less capital investment, fewer jobs, and lower wages for all South Carolina workers.
South Carolina's personal income tax, which hasn't been adequately updated for inflation since the 1950s, puts virtually every taxpayer in the top marginal tax bracket, and this hurts small businesses who report their income on their personal income taxes. Given these “disincentives” in the current South Carolina tax system, it's no wonder local development officials feel they have to have the ability to give breaks to selective companies.
There are two problems with that view, though: (a) there's no evidence that targeted incentives work, and (b) they allow policymakers in Columbia to ignore the underlying problem.
And the underlying problem, of course, is South Carolina's uncompetitive business environment. We can start to improve that environment by lowering our prohibitive tax rates. Lowering comparatively high rates could be done at half the cost of what taxpayers pay to offer targeted incentives.
These incentives favor some firms at the expense of others — new firms moving to the state over existing ones, and large multi-million-dollars corporations over small businesses. South Carolina's many existing businesses are also a source of job creation, and they shouldn't be disadvantaged simply to give breaks to large companies that can afford to have four, five, or six lobbyists in Columbia.
The published economic research clearly concludes that selective incentives are not a very effective economic development strategy. While the numbers of jobs these companies say they'll create may sound impressive, the net impact on employment and economic growth is far less impressive. Very few of the new employees are actually unemployed, and those who are hired away from existing firms actually harm the businesses that lose their employees and have increased costs to compete for labor. Local small businesses that have to directly compete with these favored firms, both for customers and employees, are thereby harmed. Sure, competition is great for the economy, but with incentives we have government forcing some businesses (through taxation) to subsidize their competition!
The net impact of incentives, once we account for these unseen costs, is virtually zero — if not actually a loss.
The solution isn't complicated: the state's resources would be better spent improving the business climate for all firms in the state, including existing small businesses, by eliminating selective incentives and using the money to reduce the uncompetitive taxes on capital investment and small businesses. This would create far more jobs than taxpayer-financed incentives could create.
Local economic development authorities say they'd be crippled without the ability to negotiate deals with specific companies. The problem is that every firm in South Carolina deserves a better business climate — not just new big, politically connected firms and industries. If these breaks are good for them, they're good for all businesses. So instead of giving breaks to the few, let's cut taxes across the board and dismantle the huge regulatory burden the state places on businesses.
Those would be real incentives.
Russell S. Sobel, Ph.D., is a Visiting Scholar in Entrepreneurship in the School of Business Administration at The Citadel, and a Visiting Fellow at the South Carolina Policy Council.