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Do incentives spur economic growth?

Business incentives can come in several forms – tax breaks, direct grants, the building of infrastructure – such as roadways or utilities.  

But whatever the package, the goal is to get companies to locate in a certain area or create a certain number of jobs. 

New Hanover County and the City of Wilmington recently chose to hand over half a million dollars in incentives to Castle Branch, a local employment screening company that just broke ground on a major expansion near Mayfaire.  

GE Aviation is reportedly seeking incentives to expand its operation in Castle Hayne.  

And debates are raging in Raleigh over whether to keep tax breaks for out-of-state film companies. 

But do incentives work? 

To find out, I sat down with Craig Galbraith, an economist and professor at UNCW’s Cameron School of Business.

RLH:  When we talked a few months ago, you made a pretty provocative statement.  You said, “Incentives don’t contribute to economic growth.  They don’t work.”  What did you mean by that?

CG:  The vast majority of companies really aren’t encouraged by incentives and for a number of different reasons.   There are certain industries that incentives become very, very important and for a number of reasons also.  Incentives really have been shown not to be very effective – and even may be even counterproductive in those particular cases.

RLH:  Counterproductive, how?

CG:  Well, incentives do cost money.  And if you have a company that would have moved to an area because the package of everything looks good to that particular company would have moved in without the incentives, the city would have made more money in terms of tax revenues, they wouldn’t have had to spend money on other things.  So you actually may have a cost.

RLH:   Getting back to the idea of film incentives, though, we know – don’t we – that if we take away film incentives, those film production companies are just going to disappear and they’ll go to states that do have incentive packages to offer. 

CG:  Oh, you’re absolutely right.  The state of California is worried about the movies and the film industry moving out.  And it has to some extent moved out of California.  So they commissioned a study done by the Milken Institute and it’s called “A Film Flight:  Lost Production and its Economic Impact on CA”.  And they have a comment about North Carolina. 

It says, “Effective January 2010, the state’s tax credit rate has increased to 25%.  The new rate is more in line with competitors, so given its more established infrastructure and more experienced local talent base, North Carolina is positioned to market itself as a more attractive film location going forward.” 

So in fact they see that the importance of incentives -- and it’s not because incentives work in general but because incentives work in this particular industry because of the nature of this particular industry.  

RLH:  Which is different from other types of industries and other types of incentives.   You were saying incentives don’t really work when you’re looking at the long-term and looking to build low-tech industry in a community.  Is that right?  Is that the difference? 

CG:  That’s absolutely correct. The long-term relationship, a manufacturing company moving into an area is going to make a commitment for 20 or 30 years.  A movie production, which has very high fixed costs, these are very short-term sort of things. 

RLH:  So even though this is short-term kind of business deal, we still have something of a multiplier effect and it still benefits the state.

CG:  Oh, absolutely.  Any time you employ somebody who is either here temporarily -- and many of these production people will fly in from California, but they’re here for 3 months.  They’re renting houses, they’re buying food, and they’re going out to the local restaurants.  So you have a multiplier effect there.  In addition, if they do employ people that are locally based, again, you have that multiplier effect for people that permanently based here also.

RLH:  So to sum it up – what can municipalities do to attract desirable companies and create growth?  And should incentives be part of the strategy?

CG:  High technology, financial institutions, are going to make the decision not on incentives and those sort of things.  They’re going to make their decision based upon ambience.  They’re going to look at recreation.  They’re going to look – is there a university in the area?  Is it well-designed?  Is it safe?  They’re going to look at crime statistics. 

We know that manufacturing companies are going to look at other things.  They’re going to look at utility costs.  They’re going to look at land costs.  They’re going to look at a number of issues related to that.  They’re going to look at infrastructure requirements. 

For most companies, particularly the kind that we’re trying to attract in southeastern North Carolina, incentives are not really very effective.  What we need to do is really concentrate on the elements that we need to attract those companies into this particular area.

RLH:  Craig Galbraith, thanks so much for joining us today.

CG:  Thank you.

Rachel hosts and produces CoastLine, an award-winning hourlong conversation featuring artists, humanitarians, scholars, and innovators in North Carolina. The show airs Wednesdays at noon and Sundays at 2 pm on 91.3 FM WHQR Public Media. It's also available as a podcast; just search CoastLine WHQR. You can reach her at rachellh@whqr.org.