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OM in the News: Are Location Incentives Worth the Cost?

March 17, 2015

incentivesJay and I were just discussing the OM in Action box in Chapter 8 (Location Strategies) called “How Alabama Won the Auto Industry.” We are working on the 12th edition (due out Jan.1, 2016) and debating the value of the $253 million in incentives that brought Mercedes to Alabama. The recent article in The Wall Street Journal (March 13, 2015), called “Corporate Giveaways Are Not a Good Deal for North Carolina” helped enlighten our debate. For years, N.C., like many states, has had a system under which the governor can dangle tax breaks and grants to companies considering relocating to the state. As the pot of money available for these corporate incentives is about to run dry, the governor is urging state legislators to sign a bill for more funding.

The bill would increase the amount available to award this year by $15 million. If that sum sounds relatively modest, consider 2 points. First, each new grant can last up to 12 years, meaning the extra $15 million could increase the program’s payout by $180 million. Second, N.C. has already issued more than 200 grants since 2002 that will deprive state coffers of an estimated $157 million in the next 2 budget years alone. Outstanding liabilities for corporate incentives–$1 billion!

Proponents argue that other states are playing the incentives game, and businesses expect to trade tax cuts for jobs. That claim deserves a closer look. A recent report summarized the results of 55 peer-reviewed articles on the impact of targeted tax incentives, and the results are not encouraging. More than 70% of the studies found that incentives either did not substantially contribute to economic performance or produced mixed results. As an example, in 2011, $20 million of state money helped lure Chiquita Brands from Cincinnati to Charlotte. But after a recent buyout, Chiquita plans to close the headquarters, and community leaders are now working to recover as much money as possible.

There are other steps lawmakers can take that are much more likely to boost the economy: Ensure the delivery of high-quality services such as schools and roads while lowering costs, flattening taxes and repealing unnecessary regulations.

Classroom discussion questions:

1. Argue the pros and cons of such incentives.

2. Discuss the OM in Action box on Mercedes on page 331.

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