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The Economic War Among the States: Cutting Corporate Welfare in North Carolina

This is a transcript of a story by Minnesota Public Radio's Stephen Smith. It aired on public radio's Marketplace April 11.

STATES SPEND BILLIONS OF DOLLARS each year to compete for new and expanding businesses. Some economists argue that vast amounts of public money get wasted in the process. While the bidding wars may help one state land a big new factory...others the national economy as a whole may be no better off. Public opposition to so-called "corporate welfare" programs appears to be brewing. In North frustrated citizen sued the government to get incentives declared illegal. Minnesota Public Radio's Stephen Smith has the final report in our series on economic war among the states.

SFX: Cash machine

Even though cash machines are replacing bank tellers...a bank still needs an off in 1995...North Carolina's Wachovia Bank moved into a gleaming new headquarters downtown Winston-Salem. Wachovia traces its history in Salem to the community was naturally anxious to keep a major local employer happy. The city Forsythe County kicked in $4 million dollars to the office project... mostly to employee parking deck. That ticked off local attorney Bill Maredy.

Tape: That private corporation is taking money from the citizens of this community and adding to its bottom line. That's not fair. It's not right. Maredy sued the county. He says giving public money to a private business violates the North Carolina constitution's requirement that public money be spent for a public purpose. Subsidized parking for the nation's twentieth largest bank...he says...doesn't not just on legal grounds.

Tape: It's in my judgment immoral on the part of government to deprive schools, welfare, environment, streets, police protection, in favor of writing checks to some of the wealthiest entities in the world. When it comes to the subsidy checkbook...North Carolina is actually among the more conservative states. In recent years Mercedes-Benz sought bidders for a new car plant...North Carolina offered 110-million dollars in subsidies. But Alabama won with a staggering promise of some 300-million dollars. However thrifty... North Carolina officials still fought Maready's lawsuit. Gary Carleton heads the state Commerce Department office that doles out incentive money. He argues that even though North Carolina's unemployment rate is below the national average and its economy robust...the state must still compete in the bidding.

Tape: I'm saying that with downsizing, mergers, off- shore manufacturing and environmental problems having companies close...we have got to continue to attract companies to the state because there are factors closing every day. And it's not because it's a not a good place to have a company. It's because it is the nature of their business.

The philosophical argument for spending public money on private business is usually grounded in the notion of the public good. If helping a company build a headquarters or expand a factory contributes to the common welfare...Carleton says...the money can be justified. The payoff comes in more jobs...higher tax revenues...a boost in retail sales...

Tape: When we do roads and bring companies in's for public's for the people who don't have the jobs or want to upgrade from where they are now.

SFX: Cabinet factory

At the Marsh Furniture Company in High Point North Carolina...a machine grinds out panels for kitchen cabinets. A vocational trainer from nearby Guilford Technical Community College steps around the conveyor line to talk with one of the workers.

Tape: On this machine we have a scoring saw. And if you notice Thomas that head is turned in opposite direction of the wood. ... fades under

Training programs may be the least controversial breed of government subsidy because they make the workforce more employable...and therefore more likely to contribute to society than drain it down. Critics of state incentives...such as William Schwecke of the Corporation for Enterprise Development in Chapel Hill... say that more direct giveaways such as outrights grants and tax breaks are the real problem. Schweke's think tank studied the national bidding war and concluded it is out of control. He says incentives rarely determine whether a company expands....but where. Schweke says savvy business people now expect subsidies.

Tape: percent of the cases your wasting scarce public resources in creating no new jobs. You're just moving development from one place to another. It's going to take place anyway. So you're subsidizing the shareholders of these companies for what they would have done anyway, and you're diverting policy makers from putting energy and money away from things they should be doing into these things.

Researchers at the free-market-oriented John Locke Foundation in Raleigh...villify government incentives as worse than simply a waste of money. The foundation is named after 17th century English philosopher John Locke...who championed the rights of the individual against government tyranny. Foundation president John Hood insists that government has no business giving money to business.

Tape: It is impossible for a government planner to design an incentive that will promote the common good. Obviously many state and local officials are intending to benefit their citizenry...whether its through more jobs or greater investment larger tax base...things like that. Problem is that to assume that an incentive package can do this is to assume that governments know better than markets how to guide investment decisions.

Hood says incentives do more to help politicians than the people.

Tape: The purpose of incentive programs is not to create's top create job announcements. Politicians thrive on job announcements so they can go to the ribbon cutting, cut the ribbon and say what I did led to the creation of 3 thousand jobs. When you spend money top crate those three thousand jobs, you'll be killing jobs elsewhere in the economy, money you can't spend on highways, education, tax relief.

SFX: construction site

Tape: My name is Czerny Brasuell and I'm VP of the SE community development corporation of Raleigh NC. This is umaga village which is a 72 unit subdivision that our corporation is developing. It is an affordable housing unit for moderate income families.

Left-leaning critics of business incentivessay this publicly-funded housing project for African-Americans is exactly the kind of government spending that often loses out to business in the scramble for public dollars. They say Ujama village is a better way to promote the common good.

Tape: If you start at the ground where people are and improve their standard of living...their ability to feel good about contribute to the general welfare in a way that I'm not sure that tax incentives to businesses does because I'm not sure how much those businesses move outside of the sphere of their business. In other much do business incentives help neighborhoods that need jobs the most? Some economists argue that government should act more like a real investor...demanding a clear, demonstrable return...spending money more carefully and attaching tough provisions to incentive deals to ensure a public payoff. Economists at the Federal Reserve Bank in Minneapolis say Congress should use its authority to end the bidding war among states. One possible method: taxing a company on the value of state and local enticements. The Czar of North Carolina's comparatively modest incentives program...Gary Carleton...would welcome a cease-fire from Washington.

Tape: That would put us all on the same playing field, with the same equipment again. Right now we're going to the sale with a wagon and nothing in the wagon to sell. When everybody else has it loaded with money, free land and tax abatements. They can pull out from three or four different slots and say "what do you want today?"

In North Carolina...the state supreme court tossed out the lawsuit to end subsidies. Congress shows little immediate interest in taking on the issue. For those who believe that incentives are bad...the most likely venue for change is state legislatures. Shrinking budgets will increasingly pit business enticements against government programs. But as one critic explained...the game will go on because lawmakers would have to make the politically painful choice to give up local ribbon cuttings in order to end a national bidding war. For Marketplace..this is Stephen Smith.

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