Tuesday, June 9, 2009

No winning: Incentives

Lately in my home state of North Carolina, there's been a lot of talk about corporate incentives. The way it works is straightforward: A company makes noises about considering locating in such-and-such places, and then turns around and asks state and local governments what it's worth to them to locate there. A special tax cut, an outright rebate, land arrangements, utility support, etc.

The result is that state and local governments are competing with each other to bid for a share of tax dollars and economic development. It's like the prisoner's dilemma: If one town/state offers incentives, and the other doesn't, they win with a low bid and take home a large benefit, reduced slightly by the cost of the incentive. If none offer incentives, one location gets the maximum possible benefit - a crapshoot, but a fair one. If a bidding war springs up, it turns into a crapshoot with a low payout.

The best strategy for all of us on the tax-paying end would be for nobody to offer any targeted incentives at all; the best strategy for each individual location is to bid up to the anticipated value of the prize. In which case the corporation comes out ahead, and the rest of us experience a slim net benefit. Throw in the griping about unfair taxation, threats to relocate from existing industries unless they get a similar break, and some bad math by legislators and town councils, I think the rest of us are outright losing the incentive game.

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