No Way Out?

The Incentives “Race to the Bottom” Continues

By Rob Schofield

Fans of The Godfather movie trilogy are likely to see some similarities these days in the dilemma that confronts Governor Easley in the corporate incentives debate and those that confronted Vito and Michael Corleone when the two dons sought to place limits on the depths to which their “family business” would sink. Once you’re in the game with both feet, it’s unlikely that your associates and competitors are going to want to hear about your plan to adopt some new, self-imposed ethical limitations – especially if it’s bad for their business.

Last week, Governor Easley played the role of the suddenly cautious and sympathetic head honcho who realizes that the business he’s been leading his “family” into has become too risky. Here’s what he had to say as he vetoed House Bill1761 – the bill to hand $40 million in cash to Goodyear Tire to keep the tire maker in Cumberland County:

“House Bill 1761 would set a dangerous precedent for North Carolina’s economic development policy and is not fair to her taxpayers. It calls for the state to give up $40 million in cash to an existing company in one county with little or no regard for how much the company actually pays in state and local taxes, what wages it pays now or in the future, or whether it lays off nearly 25% of its workforce. Never in the history of the state has anyone given a company up to $40 million and allowed them to lay off hundreds of workers.

We are proud of the employer and its hard working employees that House Bill 1761 was designed to help. But this bill does not protect those employees or the state of North Carolina.

Therefore I veto the bill.”

The Governor’s action was not well received by the lawmakers behind the bill. “That’s just ridiculous. He hasn’t read the bill,” said Senator Tony Rand in response to Easley’s claims that the bill would permit layoffs and is unfair. According to the Fayetteville Observer, Representative Rick Glazier called the Governor’s economic development policies “out of touch.” House Speaker Joe Hackney expressed the opinion that the legislature would return for a special session as early as next week to override the veto.       

In effect, the three lawmakers (all of whom are among the smartest and most influential politicians in the state and who generally get along with the Governor pretty well) were telling Easley “Not so fast, boss. You’re the one who helped lead us into this. You can’t jump ship on us now.”

Competing Proposals

The Governor’s veto was not, of course, his only word on the subject. In an effort to placate Goodyear, the Cumberland delegation, and other legislators and companies that have already bellied up to the bar, Easley proposed a new incentive plan dubbed “The American Productivity and Competitiveness Act of North Carolina.” Unlike the other incentives schemes in the state’s rapidly growing menu that are best known for luring new relocating companies to North Carolina, the Productivity and Competitiveness proposal would be targeted directly and specifically at retaining existing businesses.

According to a media release from the Governor’s office,

“The program would operate in a fashion similar to the current incentive programs that require approval by the Economic Investment Committee and award grants measured by a portion of new taxes resulting form the investment and by training costs.”    

The idea behind the new proposal is, in effect, to limit the damage of a new and wholesale plunge into the “pay them to stay” game. Recognizing the momentum that approval of the Goodyear deal as written would likely provide to dozens of other demands for special treatment by powerful companies, the Governor attempts to establish at least some broadly applicable guidelines that keep the incentives game somewhat in check (while, at the same time, making incentives available to Goodyear’s competitor, Bridgestone/Firestone, which operates a tire plant in Wilson).

Among the requirements:

• No job cuts or contracting out allowed,
• Local government must provide a “match,”
• Wages must equal or exceed 140% of the county average,
• A somewhat tighter and less generous method of calculating the amount of the grant.

According to the N.C Budget and Tax Center, the Governor’s plan is better than the Goodyear bill – especially in its ban on cuts in the existing workforce, lower cost and generally higher level of accountability – but still a worrisome expansion of incentives.

At press time, no key legislators had indicated any expectation that the two sides would be able to work out an agreement.

An Endless Spiral?

Whatever the outcome of the contest between the two competing proposals, it is all but certain that the resulting program will not be the last expansion of North Carolina’s metastasizing array of corporate incentive programs.

In fact, according to Governor Easley, neither will it be the first foray into “pay to stay.” In one of the stranger moments of the press conference that followed his veto announcement, the Governor attempted to defend his action by noting that large percentages of existing incentives program dollars (80% of the Lee Act credits, 70% of the Job Development Investment Grants and 42% of the One North Carolina Fund outlays, he said) already flow to existing businesses. 

How this fact was supposed to help justify opposition to the “dangerous” precedent involved in the Goodyear bill is a bit of a mystery, but it does seem to confirm the claim of some Goodyear supporters that the horse is already long out of the barn.

It also seems to confirm what many critics (like Chris Fitzsimon in this space) have been saying about North Carolina’s incentives policy for some time: Despite the measured terms under which the state first officially entered the incentives game more than a decade ago, it is increasingly (and it seems inevitably) resembling a free-for-all. New businesses, old businesses, expansions, contractions, threatened moves – everything is fair game and up for bid to the corporation with the willingness and ability to play hardball.

Those who have any doubt about this rapidly evolving reality ought to read “The High price of Wooing Google” in the July 23 edition of Business Week in which the magazine documents the lengths to which the internet giant will go to cow public officials. 

Perhaps the most telling and distressing moment at the press conference that followed the veto announcement occurred when the Governor was asked whether the latest episode reaffirmed the need for comprehensive federal legislation to help save states from themselves by putting an end to the costly incentives bidding wars.

Easley, who allowed that he had made the same argument himself a decade ago, declined to endorse it now. According to the Governor, it’s too late for comprehensive controls on the incentives war because the competition is now coming from overseas. All we can hope for, apparently, is an endless array of temporary dikes and quick fixes that stave off the worst of the bidding wars for some uncertain period.

Looking Ahead

In The Godfather, Vito Corleone’s objections about the New York Mafia’s move into heroin distribution are overcome – at least in part – with the assurance that the trade will be “controlled” and kept away from select neighborhoods. In the long run, however, these attempts to quell and “regulate” the vicious competition are swamped by the reality on the street. Absent strong, unified and comprehensive action by courageous political leaders, a similar fate almost certainly awaits the attempts to regulate corporate incentives.