Wanted: A New Approach to Economic Development

WHY KEEP TRYING TO ‘COMPETE’ ON OUR COMPETITORS’ TERMS?

For generations, South Carolina lawmakers of both parties have shown an unwavering commitment to the idea that special tax incentives encourage economic growth – the idea, in other words, that lawmakers can effectively spur economic vitality by offering tax credits, exemptions, and deductions to specific companies and industries. Every year, scores of bills are introduced in the General Assembly, a significant number of which pass – and yet there is virtually no serious debate on them.

Yet for all the bi-partisan consensus that tax incentives work, there’s no evidence that they actually do.

Take the obvious indicator of per capita income. In 1999, the median household income in South Carolina was $37,082. In 2010, it had grown to $43,311, an increase of 16.8 percent. Yet the national average went from $42,000 in 1999 to $51,144 in 2010 – an increase of 21.7 percent. In other words: An already poor South Carolina was outstripped by the rest of the country by about 5 percent.

Or take employment growth. In 1999, South Carolina industries employed 1,561,727 people, whereas in 2010 that number had actually dropped by about 60,000 to 1,502,853.

All the while, however, tax incentives have grown like kudzu in the tax code. From 2000 to 2009 (years for which the Bureau of Economic Advisors, or BEA, provides data), corporate and individual tax incentives for economic development grew from $70.3 million to $261.2 million. These tax incentives have continued to grow since 2009, while at the same time the size of special sales tax exemptions has been staggering.

In 2010 (the latest year on which the state Department of Revenue provides data), South Carolina gave out $469.4 million in individual income tax credits, $67.8 in job development or retaining credits, and $143 million in corporate income tax credits – not counting the $1.5 billion in corporate income tax credits that were carried over from previous years. And according to the latest data from the BEA, during the current fiscal year the state will hand out a massive $3 billion in sales tax exemptions.

To put these numbers in perspective: they are actually greater than the total amounts of sales and income tax collected by the state during that year.

The counterargument, of course, is that, even if tax incentives are an evil, they’re a necessary evil. Other states are using them to attract companies and industries, so we can’t afford to cut back on incentives and hope to remain competitive. There’s a major flaw in that argument, however, and it’s this: South Carolina simply doesn’t have the resources to “compete” with other states in the incentives game. A recent study by the New York Times found that South Carolina spends $896 million* annually on direct targeted economic incentives, which translates to $194 per capita or 15 cents for every dollar in the state budget. South Carolina’s neighboring states on the southeast coast are for the most part outspending South Carolina: Virginia spends $1.29 billion, North Carolina $660 million, Georgia $1.4 billion, and Florida spends $3.98 billion.

These are pure dollar amounts, but take a look at the numbers as they relate to their respective state budgets. Virginia spends $161 per capita or 8 cents per dollar of the state budget, North Carolina $69 per capita or 3 cents per dollar of the state budget, Georgia $144 per capita or 8 cents per dollar of the state budget, and Florida spends $212 per capita or 16 cents per dollar of the state budget.

The take-away from these numbers is clear: In a bidding war with Virginia, North Carolina, Georgia, or Florida, South Carolina is going to lose.

There is, however, a sphere in which South Carolina can compete and win – consistently. By removing all special sales tax exemptions, the state can eliminate its state income tax altogether. Or – assuming the value of corporate, job, and individual income tax credits stay at 2010 levels – the state could eliminate its entire corporate income tax and still have room to reduce the sales or income tax rates. Or, to suggest another option, the state could also eliminate its job, individual income and corporate income tax credits and use the new revenue to reduce the individual income tax rate.

The fear will be that cutting off special incentives will discourage companies from investing in the state. There is no empirical evidence for this fear, though. In fact, a study by Antony Davies and John Polito of the Mercatus Center found that states with lower income tax rates tend to have net in-migration while their higher tax neighbors tend to have net out-migration.

The policy of incentives has had its chance, and it has failed. It’s time for a different approach – one that doesn’t put elected officials in the dubious business of using public resources to negotiate secret deals with corporate lobbyists and lawyers, all the while ignoring the increasingly burdensome tax rate carried by businesses unable to hire lobbyists in Columbia.

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*This number only accounts for General Fund dollars. It would be considerably higher if it included Other Funds (fine and fee revenue) and Federal Funds.

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