by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
On April 26, news came out that North Carolina had just given the world’s richest corporation the state’s largest-ever tax incentives package: $845.8 million over nearly four decades. The state’s most vocal opponents of tax cuts to companies were united in outrage.
“The last thing we need is more sweeping tax breaks for corporations and the wealthiest among us instead of investments in our hard-working families and communities,” said the spokesman for Gov. Roy Cooper, Ford Porter.
The editorial board for the News & Observer and Charlotte Observer thundered:
Let’s call it the Big Fib: Cutting taxes on the rich and corporations will stimulate the economy and the benefits will trickle down to lower-income earners. That it doesn’t work has been proven by experience.
This fib is often joined with a second dubious claim that low taxes are the main reason companies move to a state. Juan Carlos Suárez Serrato, a Duke economics professor who studies taxes and corporate relocations, said lower taxes attract “some businesses on the margins,” but generally a low tax rate “is not the only reason or the main reason that firms move.”
On June 9, the state Senate passed tax reforms that, in addition to cutting income taxes especially on the state’s lowest-income taxpayers, would also provide relief to small businesses statewide and begin phasing out the state corporate income tax on all businesses. It would also lower the state’s obsolete franchise tax, which only 15 other states still even have.
The state’s vocal advocates for the poor and small employers spoke positively.
As the N&O/Charlotte Observer editorial board summed it up, “Most importantly, what the state is foregoing in direct tax revenue will be dwarfed by what the state expects to gain.”
Here’s the problem with those quotations. They’re backwards. What the governor and the media praised was the monster, record-shattering, 39-year tax incentives package for Apple. It’s a single corporation, and it’s perennially among the richest in the world (it fell to second-richest this year because the iPhone had a down year).
But the “Big Fib” and “the last thing we need”? Those things were made in reference to lowering the tax burden on all companies in North Carolina. Who are they? Well, according to the U.S. Small Business Administration, 99.6% of them— over 930,000 different employers — are small businesses.
Most of them have fewer than 100 employees. They’re your local hardware stores, your roadside diners, your parts and service places, your lawn & garden people, your local boutiques, your Mom & Pops. They are — and they employ — what Cooper’s spokesman referred to as “our hard-working families and communities.” They are “the rich” when Cooper et al. want to denounce “tax cuts on the rich.”
Incidentally, many small businesses are legally organized in such a way that their income “passes through” to their personal income tax return. So cuts to the personal income tax rate would also benefit small businesses.
You won’t get that idea from the governor and his media cheerleaders. And all the while Cooper invokes the bogeyman of the Big Evil Corporations Getting Unfair Tax Breaks, he’s actually making huge state giveaways to big corporations.
Last year, Cooper pledged $519.3 million in incentives giveaways to just 48 corporations under the Job Development Investment Grant (JDIG) program and One North Carolina (OneNC) fund. In 2019, he pledged $146.0 million to 66 corporations.
What about this year? The cronyism is already at record levels:
So far this year, then, Cooper has pledged $930.7 million to just 22 corporations, but he opposes tax relief for the hundreds upon hundreds of thousands of small employers across the state — native corporations that have been providing jobs to their communities for years.
Cooper’s jaw-dropping cronyism is supposedly justified by the promise of creating jobs. Research consistently finds such claims highly suspect. Nearly all of the created jobs attributed to economic incentives giveaways would have been created regardless, since it’s very rare that an incentives package is actually the deciding factor. Also, any supposed benefit to the state is weak or nonexistent, whereas the recipient enjoys a windfall (the more so if, as is almost always the case, the company’s move was going to happen without it).
Studies specifically of North Carolina’s incentives also question their effectiveness. WRAL investigative reporting found that, from 2009 to 2016, only just over half the promised jobs were actually created. Over one-third (about 37 percent) of the incentivized projects failed to create even one single job.
Research published in 2015 in Economic Development Quarterly surveyed executives from 150 companies that received economic development incentives from North Carolina and 465 companies that did not. Not only did most executives not even know if their company had received incentives from the state, but also they listed 14 factors more important than incentives to a state’s business climate.
The top three most important items the executives considered were skilled labor, low regulations, and low corporate taxes. Low property taxes, good community colleges, and low personal income taxes were the very next three. Cooper opposes two-thirds of that list (low taxes and regulations). Especially with respect to regulations, his unilateral executive rule for over the past year was accompanied by the loss of 173,700 jobs from February 2020 (pre-Covid lockdowns, shutdowns, and severe business and personal restrictions) through February 2021. Most of those jobs lost (84,900) were in leisure and hospitality, two industries specifically targeted by his orders.
The tally of jobs supposed to be created by Cooper’s massive cronyism so far this year is 7,884 jobs. At a cost of $930.7 million, Cooper would pledge away over $118,000 in state money per “job created.” But all it would restore is only 4.5% of those lost jobs, over the course of several years. Fortunately, the more he lifts his severe personal and business restrictions, the faster businesses can recover and start hiring again — but Cooper cannot take “credit” for those jobs.
Ironically, the JDIG “Project Executive Summary” for Apple lists that the state’s main competitor for the project is Ohio, which also “offers lucrative incentives.” Ohio has other things on the table, however:
The state of Ohio has no corporate income tax, no personal property tax and low sales tax rates.
In other words, the Cooper administration views having no corporate income tax as favorable to business recruiting. Cooper himself has praised low corporate taxes for producing an excellent business climate. Strange, then, that he should publicly oppose cutting taxes on the state’s corporations and small employers.