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Last week I saw a headline, "City Searches For Ways to Ease Budget Crunch" in the Winston-Salem Journal, and I remembered a headline I saw not long ago from the same paper saying, "Sources say Herbalife, nearly 500 jobs, coming to former Dell site."  If a large company is coming into the city with new jobs and taking over the vacant Dell site, why are they expecting a budget crunch?  Let’s look at each part separately and then figure out what is going on.

Budget Crunch

Winston-Salem officials are concerned about the 2013 budget because they are expecting an $8 million shortfall due to countywide revaluation of property.  State law requires revaluation every eight years; real property in Forsyth County was last reappraised in 2005.  So in reality, the people of Forsyth have been paying property taxes on the 2005 value of property for eight years, when the true price of that real estate is now much lower than the tax value. 

This means the budget shortfall the city expects has been anticipated for the last couple years.  Knowing this decrease in revenue would come, the city and county continued to spend when they should have saved.  The best idea would have been to do a true reappraisal in 2009.  This would have saved the taxpayers money that could have helped them pay their mortgages or allowed them to spend money in the city and help local businesses.  It is obvious Forsyth officials didn’t want to do that, so they kept the inflated property values and spent city money claiming economic development.

Now the city has hired an advisory group to find means to save money.  The group reported 40 recommendations, only finding savings of $4.7 million; that still leaves a $3.3 million hole!  The top recommendations were cutting public safety expenditure by eliminating part of the police force and cutting the environmental health budget by reducing yard waste collections.  On top of this, the advisory group also suggested raising city and county tax rates by more than 9% to account for the reduced property tax revenues and increasing fees on government services to keep the county and city at their current revenue levels.

Large Company with 500 Jobs moving into Area

The company mentioned is Herbalife, a global nutrition company that has been in existence since 1980 and is headquartered in the Cayman Islands.  They sell nutrition, weight-management, and personal care products through independent distributors in more than 80 countries. They had nearly $3.5 billion in net sales in the 2011 fiscal year, which amounted to 26% growth for the company, and are publically traded on the New York Stock Exchange. 

The company wanted to locate a large manufacturing plant on the East Coast in early 2012 and chose Winston-Salem as one of the possible locations. North Carolina was chosen over Georgia because of two main factors (according to corporate executives): (1) the existing unused Dell plant would allow them to start production sooner because it would eliminate the need to build a new plant, and (2) the Winston-Salem area has a much higher unemployment rate than the area in Georgia, meaning there are more qualified workers readily available.  Given those two factors, North Carolina was chosen for strategic purposes; unfortunately politicians decided to seal the deal with corporate welfare.

Politicians claimed the monies they were giving were returned from the Dell fiasco in 2009, but why give money away when the state is recovering from a hard-hitting recession?  Alas, here is an outline of what Herbalife was given:

  • Forsyth County gave $1.19 million over five years,
  • The City of Winston-Salem gave an upfront payment of $450,000 and $1.8 million over seven years, and
  • The State of North Carolina gave $10.5 million in tax incentives

Shortly after the deal was finalized with Winston-Salem, Bill Ackman, a hedge fund manager, claimed the company was an illegally operating pyramid scheme.  Herbalife’s stock price fell and the new project made people remember the failed promise by Dell less than 10 years prior.

How it all fits Together

The City of Winston-Salem and Forsyth County are expecting budget cuts and want to cut the police force and raise taxes to fill the gap.  In the mean time, they have given Herbalife almost $1 million in tax breaks and cash for the first year of their operations – the same year the budget shortfall is expected to be $8 million.  These gifts will continue over the next seven years at varying amounts.  The city knew they would experience a budget shortfall when property revaluations occurred, yet they gave away money knowing that they would cut precious community services and that raising taxes would be a realistic option to fill the gap.  Saving the incentives would not have covered the entire budget shortfall, but it could have alleviated some of the impact and kept a few police officers in their jobs.

Former John Locke publications have discussed pertinent issues for large firms when selecting a location and what North Carolina needs when attracting business.  There are arguments that corporate incentives work, and it is evident they are on the top ten list of what corporations look for; more important, though, are things such as regulatory burden, education, tax rates, and labor force.  See below:

What Most Affects NC Competitiveness

What Matters to International Firms

1. State and Local Tax Rates

1. Labor Force (availability, wages)

2. Labor Skills and Availability

2. Transportation (highways, airports)

3. Education System

3. Quality of Life (schools, living cost)

4. Regulatory Burden

4. Business Climate (taxes, regulation)

5. Government Incentives or Subsidies

5. Education (community college, K-12)

6. Highway System

6. Proximity to Markets, Vendors

7. Access to Capital

7. Plant Location Services

8. Airport Service

8. Tax Incentives (investment, jobs)

9. Port or Rail Service

9. Government Assistance (local, state)

10. Recreational and Leisure Amenities

10. Government Financing (loans, bonds)

Winston-Salem will drive away more businesses if they increase taxes than they can ever attract with incentive packages.  Economically, if taxes are low people will have more money available to open a private business and employ local workers that pay the city and county tax revenue.  Or they will have more available to spend on local businesses causing them to hire more people to handle the increased business. Thus the city and county will receive more revenue from higher paid employees.  End result, low taxes will result in higher tax revenues for government.

Ultimately, the people of Winston-Salem can suffer with fewer police and higher taxes while city and county officials give free money to Herbalife. "It is contrary to the free enterprise system to recruit or retain businesses with targeted tax incentives when other businesses bear the full burden of taxation."  This is a quote from the 2012 North Carolina Republican Convention held in Greensboro last June — maybe one day elected officials in North Carolina will listen.

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