Silver lining shines behind failed incentives deal

Now seems like a good time to compliment North Carolina’s leading targeted tax incentive program.

Sure, I work for the John Locke Foundation, the state’s leading critic of targeted tax breaks for more than three decades. It still makes economic sense for government to skip the incentives game.

But as long as the state doles out incentives, it can make that poor choice a little less objectionable.

One recent case deserves at least some praise.

In 2017 the North Carolina Economic Investment Committee struck an incentive deal with “insurance giant” Allstate. The committee oversees the state’s Job Development Investment Grant program. The News and Observer described the Allstate JDIG deal on July 25 as “one of the largest economic projects in North Carolina history.”

Allstate pledged six years ago to add 2,250 employees to a Charlotte operations center. In return, the company could collect up to $17.8 million in payroll tax relief.

Now, the deal is dead. Allstate never met the employment goal. It never collected a payroll tax break.

In a July 12 letter, a company official cited the surge in remote work that started during the COVID-19 pandemic. At the end of last year, Allstate counted only 213 employees working in Charlotte.

There’s good news to celebrate.

North Carolina taxpayers never cut a check. The newspaper reported that local governments offered Allstate cash grants of $1.4 million. That’s money that could have funded other government projects or remained in taxpayers’ bank accounts. Even if locals can claw back some money, a portion will be lost in transaction costs linked to the recovery.

The incentive committee monitored the deal. Few of us think much about incentives after the splashy initial headlines. Once a deal is made, we might expect that taxpayers’ money is as good as spent.

That didn’t happen with Allstate. The JDIG set job-creation standards. When the company failed to follow through on its promise, tax breaks disappeared.

Once the deal failed, it ended. Government often shovels money into programs for years, even when there’s no evidence of a positive impact. In this case, bureaucrats could have extended Allstate’s employment growth deadlines. The state could have offered a reduced tax break had Allstate hit some portion of its original target.

Yet state officials stuck to the original JDIG terms. Well done.

If you think I’ve gone soft on targeted tax incentives, you might appreciate the rest of this column. Regardless of JDIG’s positive attributes, the Allstate story reminds us why North Carolina should avoid the incentives racket.

No one in 2017 predicted the pandemic. It might have seemed reasonable six years ago that Allstate would need an additional 2,250 workers in the Queen City. But COVID-related shutdowns changed calculations for businesses around the world.

Allstate would have been forced to tackle these changes, regardless of North Carolina’s JDIG award. It’s likely that the prospect of millions of dollars of unrealized tax breaks prompted the company to waste at least some resources studying employee scenarios in North Carolina. Meanwhile, state bureaucrats spent time and money on an incentives deal that never produced any benefits.

The incentive did not make or break Allstate’s Charlotte plans. Boosters often claim incentives are necessary to secure a new business for North Carolina. But no one could argue with a straight face that an “insurance giant” needed taxpayer dollars.

Allstate was happy to take the handout. But it gave up incentives willingly when economic factors shifted its operations in a post-pandemic world. Other companies will make the same calculations in the years ahead.

We have limited knowledge about the future. None of us can say with certainty today how the employment picture will look in 2026 or 2029. Not even the sharpest business minds can know whether a particular company will need 2,000 more jobs at a certain location. We certainly don’t know about companies — large and small — in brand-new sectors that have yet to emerge.

The N&O reminded us that “early-terminated” JDIG grants have outnumbered “completed” grants by more than 3-to-1 since 2003. “From 2003 to 2015, the majority of awarded JDIGs ended prematurely in every year but one.”

North Carolina can prepare best for this economic uncertainty with policies that encourage growth for companies old and new, large and small, and even those that are just a dream today in some entrepreneur’s mind.

That means low across-the-board tax rates, minimal regulatory barriers, and sufficient spending on core government services.

We should be glad the Allstate deal died. It highlights JDIG’s positive safeguards. It also reminds us of the folly of pursuing targeted tax incentives at all.

Mitch Kokai is senior political analyst for the John Locke Foundation.