Incentive ruling ripples

Copyright 1995 News & Record (Greensboro, N.C.)

August 20, 1995

Justin Catanoso
Staff Writer

The recent WinstonSalem ruling on incentives continues to have a drastic effect across the state, while a UNCG professor argues in a new study that incentives make sense.

Guilford Commissioner Chuck Winfree doesn't want to take any chances. When the Board of Commissioners meet on Sept. 7, he will propose a county moratorium on the use of economic incentives in business recruitment until the so-called Maready case is sorted out.

"We need to be cautious," said Winfree, a Republican who generally opposes the use of incentives. "Our first obligation is to uphold the law."

On Aug. 10, Forsyth Superior Court Judge Julius Rousseau agreed with WinstonSalem attorney William Maready that the use of economic incentives, at least in Forsyth County, violates the state constitution.

As Winfree's response indicates, the ruling is rippling beyond the Twin City.

Maready says he has gotten calls from lawyers elsewhere interested in filing similar lawsuits to stop the use of incentives. David Copenhaver, Greensboro's top business recruiter, said two companies canceled scheduled site visits and he suspects Rousseau's ruling was the cause. And James Shriner, a partner at Chicago-based site-selection firm PHH Fantus, told The Wall Street Journal that two of his clients interested in locating in North Carolina have decided to look elsewhere.

Gov. Jim Hunt is not happy with Rousseau's ruling, believing it will leave the state at a competitive disadvantage in attracting new industry. Earlier this year, Hunt asked the General Assembly for $10 million for the Governor's Competitive Fund, which provide incentives. The fund received $2 million.

"Yes, there's concern here," Hunt spokeswoman Rachel Perry said of Rousseau's decision. "But whether the ruling stands on appeal remains to be seen. Very often the state Supreme Court overturns lower court rulings." If the court upholds Rousseau's ruling, however, incentive programs statewide will be endangered.

Observers estimate that the state's high court won't rule on the appeal, which will be handled by state Attorney General Mike Easley, for at least three months. The appeal process could take as long as a year, thus making the use of incentives a risky proposition until the matter is resolved.

Meanwhile, a curious bit of information surfaced in Greensboro this week from a News & Record poll of city residents. Of the 504 people surveyed, nearly two-thirds—62 percent—said they favored the local use of tax breaks or incentives to help attract new industry to the community.

"I'm surprised by that number" said Winfree, who wondered how residents would have answered if the question was phrased: "Do you approve of bribes being paid to private companies to move here?"

In followup interviews with some of those polled, Greensboro residents who favor incentives explained that they believe the city needs more jobs that pay higher wages. Many said that as long the companies checked out as financially and environmentally sound, incentives are a good way to accomplish what they want.

That sentiment makes sense to John Rees, an economic geographer at UNCG: "Maybe the people in answering that poll are further ahead than the politicians. What they seem to be saying is, `We have got to be concerned about economic development. We are losing opportunities to Charlotte and to Raleigh.'"

Rees himself has mixed feelings about the use of incentives.

He favors national legislation that would ban the use of incentives in every state. That way, the competition for new industry would focus on the quality of each community--its schools, roads and work force.

But no state can afford to stop using incentives unilaterally, he said. Moreover, Rees said, a study he completed last week that evaluated the economic impact of the Governor's Competitive Fund illustrates that incentives pay off to the public in jobs and revenues.

Rees studied 30 of the 51 companies that located or expanded in North Carolina during 1993 and 1994. He found that for every $1,000 spent from the governor's fund to attract companies, average workers at those companies took home between $23,000 and $46,000 in yearly wages.

In turn, the study found, the workers generated between $57,000 to $200,000 in value added to their employers. Value added is determined by calculating the total value of outputs from a company minus the cost of inputs such as raw materials, but excluding labor costs.

"Whether you like industrial incentives or not, the evidence shows a high rate of return for the state in terms of new jobs and income generated," Rees said.

Rees, who is a member of Gov. Hunt's Task Force on Industrial Incentives, said the study was part of an independent research program at UNCG. He based his calculations on data from the N.C. Department of Commerce and the Federal Bureau of Economic Analysis.

Companies that received money from the state's Industrial Recruitment Fund made initial investments ranging from $2 million to $40 million when they moved to North Carolina, Rees found. Annual payrolls ranged from $500,000 to $37 million.

The new or expanded businesses that came to North Carolina also had a ripple effect, he said. For example, when a new plant opened in western North Carolina another 1,200 jobs were created across the state through supplier chains.

"Much of this income could have gone to South Carolina or Virginia if it were not for the Governor's Fund," Rees said. "And some of the new plants end up in the more rural parts of the state, which have been bypassed by investors in the past."

The Associated Press contributed to this story.

Reprinted by permission of the News & Record.

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