Google plays hardball. So does Dell. So does every other company that comes to the negotiating table in a new state. But it’s the taxpayer — i.e., you and me — who pays the price. Who benefits? Politicians and certain companies — usually big ones.
A North Carolina newspaper reports that Web-behemoth Google is the latest to benefit from this form of corporate welfare, and they’re passing the costs onto everyone else. First, we learn that Google’s fourth-quarter earnings nearly tripled. Then, from the News & Observer we see, perhaps, why:
“As work proceeded on the bill to remove much of its tax burden, Google threatened to end negotiations because legislative staff didn’t write exactly what it wanted. State Commerce Secretary Jim Fain was asked to ‘prevail upon’ the bill writer.”
Prevail upon? Hardball indeed. “[T]he first set of state documents released from the 13-month negotiations reveal a company obsessed with secrecy and not above bullying, tactics that helped get it tax breaks that could top $100 million over three decades.” Tax breaks worth $3 million a year to build a server farm in the foothills?
But seriously. Should we blame Google? After all, Google doesn’t make the rules, it simply operates within them. If they don’t, their competition will. And the rules are crafted in such a way that state bureaucrats may use tax-dollars to sweeten deals that bring business. Who can blame the bureaucrats? If North Carolina doesn’t, South Carolina will. The system itself is to blame.
We’ve created a situation in which states must compete using so-called “economic incentives.” But this isn’t capitalism. This is just another form of subsidy that distorts the market and fattens the largest companies in America, if but temporarily, while ignoring small businesses. That doesn’t do taxpayers much good.
Instead, it creates appearances. Politicians like North Carolina’s Gov. Mike Easley are eager to post press releases about businesses their administrations have attracted. A North Carolina deal Easley brokered with Dell last year was inked behind closed doors so citizens would see only benefits and no costs. So much for transparency. So much for free markets. But when Easley comes up for re-election he can say: “Look at all the jobs I brought us.”
The irony is that local yokels believe politicians are bringing them jobs. But many of the big companies coming to North Carolina are not replacements for furniture and textile jobs lost overseas.
They are high-tech jobs requiring the importation of high-tech talent. New jobs at Google and Dell, for example, are going to many who are moving to North Carolina from out of state. That’s not a bad thing. It’s just not likely to put unemployed factory workers in Caldwell County to work in anything but a service industry built around “Yankee transplants” running Google’s server-farms.
But let’s step back. I don’t want to send the idea that free movement of people, goods, services and capital is a bad thing. Quite the contrary. What I’m suggesting is that targeted subsidies for one-upping other states are bad. It’s a system that concentrates benefits on the few and soaks the citizenry.
Economic development is a process that will occur naturally within a region when the region is has stable, fertile business climate (due to low, predictable tax rates and a reasonable regulatory environment).
According to economist Frederic Sautet:
“For decades now targeted tax incentives have been a favorite elixir of state and local politicians in depressed communities. But targeted tax incentives don’t spur real growth. Quite the contrary.
“While across-the-board tax cuts expand economic activity, targeted tax incentives are inevitably financed at the expense of established businesses. Today’s winner of a targeted tax break is tomorrow’s victim of a broad increase in business taxes. Assuming, that is, that this employer sticks around.”
States like North Carolina must offer subsidies in the absence of a fertile, predictable business climate. Which should lead us to ask something taboo: Is corporate taxation even a good idea to start with? After all, businesses simply pass along the costs of taxation to you and me in the form of higher prices.
Here’s a humble proposal: Governors in a region (say, the South) should form a consortium to discuss forming a regional economic bloc. The governors could hammer out details of a scheme that would harmonize taxes, limit regulation and put an end to competitive subsidies. The scheme would have to be attractive enough to draw businesses away from other parts of the country — despite isolated deals.
One place to start might be with the abolition of state corporate taxes within the bloc, or at least a radically reduced tax burden. And let such be guaranteed into the distant future.
Of course, the governors would have to get buy-in from their legislatures. But something must be done. The current system is out of control.
Max Borders is a North Carolina native living in Virginia.
