North Carolina’s record $846 million incentives package for Apple’s 3,000-job hub in Research Triangle Park is facing criticism from an economist who calls the sum, which equates to more than $280,000 per job, a little «too business friendly.»
In an interview, Michael Farren, an economist with the Mercatus Center at George Washington University, said the sum is exorbitant. But Farren said North Carolina is not alone – as his recent report, titled «The Billions Being Wasted in the Economic Development Subsidy Wars,» argues.
“It’s a 50 state problem, not a North Carolina problem,” he said. “We estimate the problem could be as large as $95 billion a year … and it’s not just that the money is misspent. It’s spent encouraging companies to do something they otherwise already would have done.”
He points to North Carolina’s top tier universities and talented workforce as bigger drivers than incentives when it comes to luring companies to the state.
Mega-incentive deals encourage additional waste, Farren said, pointing to the Amazon HQ2 project that Raleigh nearly landed: 238 different cities engaged in lobbying to try to score Amazon’s second headquarters – “and arguably the vast majority of those funds and time and government resources were all wasted.»
READ MORE: The companies flooding North Carolina with lobbyists
Subsidies – including the reimbursements provided through the North Carolina’s Job Development Investment Grant – protect companies from competition, resulting in less efficient operations that lead to slower economic growth for everyone, Farren said.
He said subsidies – even those in the form of reimbursements – are not free money, and that the majority of incentives are unnecessary, pointing to research that estimates just one out of every eight subsidies is actually responsible for changing a company’s decision on where to locate.
“And in situations where it does cause a company to change where it locates, it causes the company to choose a less efficient spot for production,” Farren said.
Looking at the state’s recent successes, there are many examples of cases where incentives were not the deciding factor.
Google (Nasdaq: GOOG), for example, did not pursue state incentives for its 1,000-job engineering hub in Durham.
Fidelity, which announced 500 jobs, and Biogen (Nasdaq: BIIB), which announced 90, also decided against pursuing incentives when they announced local expansions this year.
And in the case of pharma giant Amgen (Nasdaq: AMGN), which picked Holly Springs over Houston for a 355 job facility, the company actually turned down a superior incentives offer from Texas when it decided on the Tar Heel State, records show.
But not everyone thinks a project the scope of Apple’s would have had North Carolina on its radar without incentives.
“Of course we would like a company like Apple to come to [the Triangle] without incentives, but today that is not realistic,” said Mike Walden, an economist and professor emeritus at N.C. State.
Walden helped the state create a financial algorithm to determine whether incentives deliver more benefits than they cost. The so-called “Walden Model” is brought up often during meetings of the state’s Economic Investment Committee, the entity within the state’s Commerce Department tasked with approving incentives.
“The goal of the model is to tally all the benefits and costs and compare the results,” Walden said. “The model itself takes no position on incentives – it simply develops the numbers.”
In the case of Apple, for example, the Walden model estimated the net revenue impact to the state to be nearly $2 billion over nine years, records show.
Below: An excerpt of a project briefing memo tied to Apple and released at the behest of a public records request, showing how the Walden Model justified Apple’s incentives:
Officials in Catawba County, where Apple has had a data center complex for more than 10 years, have said the tax revenue gleaned from Apple has funded large infrastructure projects, a major return on their investment. Apple included more investments in its Catawba operation when announcing its plans for the state earlier this year – and it all factored into the mega-incentives package.
But Farren still doesn’t buy the math saying that “there was a high likelihood that Apple was going to build that data center in western North Carolina anyway.” And its prior investments at the site made additional expansion good business – with or without incentives, he said.
“You could have done so much more if you hadn’t given Apple company specific tax breaks in order to come to that region,” he said.
Farren also pointed out that Texas lured Apple – the company picked Austin for a campus a few years ago – for much less than North Carolina put up. The Lone Star state’s offer equated to about $10,000 per job, he said, calling the Tar Heel State’s offer “a bit too ‘business friendly.’”
Local officials defend the strategy
Walden argues that Farren’s math is misleading.
«Jobs last decades,» he said, theorizing you’d have to divide the price-per-job by 30 to account for 30 years, and even that would be a «simplistic way of looking at using incentives to attract businesses.»
«There are also new supplier impacts and consumer buying impacts, all elements the Walden Model includes,» he said.
Christopher Chung, CEO of the state’s top recruitment entity, the Economic Development Partnership of North Carolina, said the assumption that a company would locate here regardless of incentives is “a really hard leap of faith.”
“We don’t have the ability to know that,” he said. “We have a responsibility to put forward a competitive offer that still assures returns to the state or the community.”
Chung said that unless the federal government issues a pause on incentives for everyone, they’re going to be a reality in economic development. “
«This is a hyper-competitive industry – 50 states squaring off against each other,» he said. «Who wants to be the first one to say, ‘Okay, we will stop offering these.’ Because if you go first and no one else follows you, a community may be leaving itself vulnerable.”
Incentives “don’t compensate for a lousy location,” Chung said, adding that talent, location and infrastructure will always play into a company’s site decision. “But we’re never going to be the only place that has all of those things. And that’s where the incentives come in … a tie breaker to really improve the financial analysis for one location over another.”
Apple is bringing more than jobs, Chung said. It’s bringing prestige that can attract other projects, it’s bringing attention from venture capitalists and others interested investing in the state, he said. “There’s a multiplier effect,” he said.
In the case of Apple, it’s hard to compare the incentives package to those of other projects, simply because it’s so much bigger. While Apple’s $845.5 million worth of incentives is equal to nearly $282,000 for each of the 3,000 jobs the company says its RTP campus will eventually have, a typical project is far less when judged by the same metrics. Amgen’s incentives, for example, made out to about $32,700 per job.
If you add up the per-job incentive total for all other Triangle projects won since January 2020, the figure is still $15,000 shy of Apple’s number.
Here’s a look at how the projects stack up, in terms of incentives per job:
Closer look at incentive programs
Since the beginning of 2020, companies have announced more than 10,800 jobs in the Triangle. And the vast majority of those announcements have involved incentives. According to TBJ research, it adds up to more than $979.7 million in incentives since January of 2020.
To reel in job creators, North Carolina deploys what’s called a JDIG – a Job Development Investment Grant, defined as a performance-based, discretionary incentive program that provides cash grants to a company – but only when it can prove it creates jobs and invests in the state.
According to the state, JDIGs are determined using a formula that takes into consideration the new taxes generated by the new jobs that are created. A percentage of those newly generated funds are reimbursed to the company for the term of the grant – as long as the firm meets its performance targets.
A typical JDIG term is 12 years – but in the case of Apple, it qualified for what’s called a JDIG Transformative Project award. Specifically targeted at companies creating at least 3,000 jobs and investing at least $1 billion, Transformative Project grants last for up to 30 years, providing reimbursements of up to 90 percent of the new personal income withholding for a period of up to 30 years.
There’s also a program known as a High-Yield Project grant, reserved for firms creating at least 1,750 jobs and investing $500 million. They allow JDIG grant reimbursement of up to 90 percent of new personal income withholdings for up to 20 years.
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