Economic Incentives and Democracy

Once again, state and local officials have thrown millions of dollars in “economic incentives” at a for-profit business, offering us a chance to examine the system of legalized corporate blackmail and bribery that mars our civic life.

North Carolina Governor Roy Cooper and Charlotte Mayor Vi Lyles announced last month that in exchange for expansion plans that include capital investments of roughly $5.8 million and the addition of 500 new jobs over the next five years, state and local governments will award privately-owned mortgage lender Intercontinental Capital Group (“ICG”) tax breaks and other incentives worth $8.5 million.

None of the announcements disclosed the financial worth of ICG, which doesn’t appear to be publicly available, though some news coverage reported the company currently employs 2,000 workers nationwide, including 179 in Charlotte.

The incentives package includes nearly $7.7 million in state payments over twelve years, $650,000 in value from the community college system, and nearly $110,000 in city property tax rebates over seven years.

This is the standard manner in which so-called economic incentives work: Companies agree to invest capital and employment in the community, increasing the property tax base and generating dollars for the local economy. In exchange, these businesses get rebates on property taxes or other state and local payments. The idea is that the state and local economies reap a net benefit because the investments exceed the incentives.

There’s nothing particularly remarkable about the incentives officials extended to ICG. Consider:

• Health insurance giant Centene Corporation, which is worth about $36 billion, got $450 million in state and local incentives in mid-2020 in exchange for promises to invest $1 billion and add 3,200 jobs in Charlotte.
• David Tepper, the billionaire owner of the Carolina Panthers, received $225 million last spring from state and local governments in South Carolina in exchange for relocating the team’s headquarters to Rock Hill.
• Tepper also recently got $35 million from Charlotte (originally slated to be $110 million) as part of his plan to bring major league soccer to the city.
• In late 2018, Lending Tree, which is now worth nearly $4 billion, was awarded total incentives valued at roughly $9.8 million in exchange for keeping its headquarters in Charlotte and expanding its workforce here by about 436 jobs. (Just two years earlier, the company received $4.9 million from the state in exchange for adding 314 jobs to its Charlotte headquarters.)
• Also in late 2018, manufacturing company Honeywell announced plans to relocate its headquarters from New Jersey to Charlotte, bringing 750 jobs with it. The company, which is currently worth roughly $145 billion, got $80 million in incentives from state and local governments.
• Around the same time, AvidXchange, a financial services company worth somewhere north of $1 billion, nabbed about $24.6 million in state, local, and community college incentives when it announced an expansion of its Charlotte operations that would add 1,200 jobs to the local economy.
• And in 2017, city and county officials offered Amazon, which is currently valued in excess of $1 trillion, more than $270 million in incentives to locate its second headquarters here. That was on top of the roughly $2.2 billion the state offered to try to induce the company to bring its corporate operations to North Carolina.

The relative modesty of ICG’s incentives, when compared to these other awards, makes them a good prompt for examining the idea of economic incentives and the degree to which such incentives operate in a manner corrosive to the values we claim to honor in the public sphere. With ICG, we needn’t bother too much with sticker shock over the amount of the give-aways, which invites us to instead focus on the public behaviors that incentives tend to encourage and the manner by which incentives function as so many civic black holes that, by their mere presence, distort our public values and attitudes.

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Let’s briefly discuss two questions not primarily addressed here: efficacy and legality: Do economic incentives work, and are they lawful?

As for efficacy, while state and local governments across the country regularly pay businesses to relocate or expand in their jurisdictions, it’s not clear the payments achieve the desired end of encouraging economic development. In 2018, for example, the Federal Reserve Bank of Atlanta noted research on the question was “skeptical.”

The case of ICG illustrates why this might be:

Prior to getting its incentives, the company already had a presence in Charlotte and was looking to expand. Who’s to say the company wouldn’t have opted to expand here anyway without the incentives?

This possibility is underscored by the fact that at least one other jurisdiction, the City of Indianapolis, promised ICG larger incentives than those offered by Charlotte and North Carolina, but the company still chose to expand here.

That ICG turned down Indianapolis is anecdotal confirmation of what researchers and observers from across the political spectrum have found: Incentives do little to actually attract business investment and are mostly needless costs accompanied by few, if any, benefits.

As for legality, incentives’ opponents have unsuccessfully sought on multiple occasions to seek their judicial invalidation.

In 1996, the North Carolina Supreme Court ruled in Maready v. City of Winston-Salem that economic incentives did not violate the state constitutional requirement that tax dollars be used “for public purposes only.” The court reached this conclusion, at least in part, by claiming that giving millions in incentives to private businesses only incidentally benefitted those businesses while primarily benefitting the public, a line of reasoning that is, to say the least, strained.

Two justices disagreed and argued that the majority’s decision was more about interstate economic competition than North Carolina’s constitution. “[I]t is evident … that the primary argument for such assistance to private industry is that ‘all the state are doing it’ and, thus, that North Carolina must do it too in order to be competitive,” Justice Robert Orr wrote in dissent. He described incentives as both ineffective and “distasteful.”

After his retirement from the state supreme court, Orr appeared as counsel in Blinson v. State of North Carolina, a 2007 North Carolina Court of Appeals case challenging more than $300 million in state and local economic incentives awarded to Dell, Inc. in exchange for the computer company building a plant in Forsyth County.

The plaintiffs argued the incentives violated a different provision of the state’s constitution, the Exclusive Emoluments Clause, which states, “No person or set of persons is entitled to exclusive or separate emoluments or privileges from the community but in consideration of public services.”

Merriam-Webster defines an “emolument” as “the returns arising from office or employment usually in the form of compensation or perquisites.” A synonym of “emolument,” according to Merriam-Webster, is simply “payment.” The plaintiffs in Blinson essentially argued the payments to Dell were an improper expenditure of public money for a non-public purpose.

The court in Blinson held that because government officials could have reasonably concluded the expected economic impact of the Dell plant would benefit the public, the incentives did not count as an unconstitutional exclusive emolument. (As it turns out, the long-term economic impact of the project would be zero: For a few years, Dell employed a smaller number of workers than expected, and then it completely shut down the facility in 2010. The company kept about $6 million in incentives it received prior to closing.)

The court also suggested, as then-Justice Orr had argued in his Maready dissent, that perceived imperatives of interstate economic competition, not the text of the state’s constitution, played at least some part in the judges’ thinking. Tellingly, the Blinson decision began, “Today, every state provides tax and other economic incentives as an inducement to local industrial location and expansion.”

Meanwhile, at the Supreme Court of the United States in 2006, opponents of economic incentives didn’t get through the courthouse doors: The Court unanimously ruled in DaimlerChrysler v. Cuno that those challenging incentives under the Dormant Commerce Clause of the U.S. Constitution, which generally prohibits states from engaging in behavior that interferes with interstate commerce, lacked standing. The Court basically said those challenging the incentives weren’t harmed by them, so they couldn’t ask the Court to invalidate them.

In at least one important way, the courts got it right: We do want our lawmakers to have leeway in deciding how best to serve the public interest. We do want legislators to have lots of tools available to them to promote and safeguard the health, safety, and welfare of the state, including its economy. And we do not want judges lightly second-guessing lawmakers’ judgments that a policy will provide economic benefit. As the state supreme court noted in Maready, a policy’s “wisdom and expediency are for legislative, not judicial, decision.”

It is to the wisdom of economic incentives, then, that we must now turn. More specifically, we need to explore those values and attitudes our current system of economic incentives tends to encourage. Five stand out: dishonesty, secrecy, inequality, servility, and futility/fatalism.

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When officials announced ICG’s incentives package in December 2020, Dustin DiMisa, the company’s founder and CEO, claimed the decision to expand its operations here was made “in part because of the existing talent pool,” according to the Charlotte Observer. “I felt in my gut we would be more inclined to being successful there with attracting the talent and retaining it for years to come,” he said.

ICG’s chief operating officer, Daniel Wilson, told the Charlotte Business Journal, “The talent pool in Charlotte and North Carolina generally had the best alignment of what we’re looking for.”

Government officials parroted the same line.

Governor Cooper explained, “Growing companies like Intercontinental Capital Group chose North Carolina for their expansion plans because of our tech-ready workforce and strong leadership, even during a global pandemic.”

Fran West, the city’s assistant economic development director for business recruitment, agreed. She said ICG’s decision was motivated by Charlotte’s “strong talent pool, low cost of doing business and our commitment to creating a great place for both people to live and do business.”

To hear company and government officials tell it, the decision by the state, city, and community college system to throw $8.5 million at ICG had nothing to do with the company’s decision to expand here.

This is fundamentally dishonest.

To be sure, there is no way to know for certain just what role these economic incentives played in ICG’s decision to expand in Charlotte. But it strains credulity to think the incentives played no role and, instead, that the company’s decision was solely based on our “talent pool” and “tech-ready work force” and “low cost of doing business.” Indeed, if the economic incentives were irrelevant to the company’s decision, then state and local officials just threw away millions of dollars!

This sort of dishonesty extends beyond any particular project.

The 2019 annual report of the Economic Development Partnership of North Carolina (“EDPNC”), the state’s lead economic development agency, is filled with data about successful recruitment projects, millions of dollars invested, and thousands of jobs created, but it says little about the bribes and blackmail state and local governments paid to secure those investments, thereby telling, at most, only part of the story.

Likewise the EDPNC’s slick sales brochure on behalf of the state, which touts, among other things, North Carolina’s large manufacturing workforce, low corporate income tax rate, low cost of living, and superb transportation network. The publication only briefly mentions the availability of economic incentives.

A representative of one incentives recipient, the former CEO of ATI Speciality Materials, Richard Harshman, is quoted in the brochure explaining the reason his former company expanded here. “The positive business environment and employee work ethic in the region were key factors in the selection of Union County for the expansion,” he said. No mention of the $2.73 million in economic incentives his former company received.

Perhaps that’s because a majority of the public thinks big business doesn’t pay its fair share of taxes, making incentives appear, to use Justice Orr’s term, “distasteful.”

The consequence of this popular disfavor is to tend toward dishonesty in the public discussion of economic incentives.

Companies and governments probably rightly suspect that the people would react poorly to an announcement that a business is coming to town simply because elected officials shoveled public money its way. So, instead, everyone plays along with the fiction that we earned this economic investment on our merits: talented workforce, favorable tax structure, available land, and so on.

But this injects the problem raised above: If we were good enough to land these new gigs on our merits, why spend millions of public dollars lining corporate coffers? Aren’t we then just needlessly throwing money at the wealthy?

This our economic development friends must deny. But their denials only act to obscure the real reasons businesses choose to invest here.

Which brings us back to our initial quandary regarding the dishonesty animating the discussion of incentives: Who’s being truthful? To what degree? And what aren’t they telling us?

The people have no means of knowing the answers to these questions because those involved in crafting incentive deals, on both the giving and receiving ends, feel an imperative to spin the truth — that is, to be dishonest — in the name of public relations. Thus we’re denied access to the information necessary to better answer the question of whether economic incentives are a wise expenditure of money.

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Such dishonesty is facilitated by the secrecy that surrounds economic development projects.

When state and local leaders announced ICG’s incentives, the deal was done. 

The announcement from Governor Cooper’s office said matter of factly that state incentives of more than $7.7 million over twelve years were “approved by the state’s Economic Investment Committee earlier today.” (The committee is comprised of five members, including the secretary of commerce, secretary of revenue, director of the office of state budget and management, and two individuals appointed by the General Assembly.)

As for the city incentives of nearly $110,000, state law requires a public hearing and vote to formalize the deal, but the incentives’ announcement makes a mockery of the principle of open government that undergirds this requirement: There is no chance that after the public hearing, City Council will vote to deny the very tax breaks the mayor has already announced.

All the decisions were made, if not formalized, behind closed doors and away from public scrutiny. (This secret work is often accompanied by code names. For example, local officials named the ATI project mentioned above “Project PIPE.”)

This is the modus operandi for decision-making regarding economic incentives, perhaps most amply illustrated in Charlotte’s unsuccessful campaign to land the second Amazon headquarters.

State and local officials refused to publicly disclose the incentives they offered the company.

Only after Amazon axed North Carolina from consideration did we find out: Charlotte and Mecklenburg County offered roughly $270.5 million in total incentives (about $100 million from the city and $170.5 million from the county). The state offered at least $2.2 billion. (Officials in the Triangle called the Amazon deal “Project Smith.”)

All without any public input or say-so regarding a proposed corporate give-away that, if successful, would have radically reshaped the community, and not necessarily for the better.

State law expressly allows local governments to perform this work in secret.

While our Open Meetings Law requires most of the city and county’s business to be done in public, there is an exception for the discussion of economic development projects, with the limitation stated above that when it comes time to actually approve a suite of incentives, the vote must be held in public.

As mentioned above, ICG’s incentives illustrate the meaninglessness of this requirement: The terms were set before a vote was to be taken by City Council, and the formality of a vote won’t change the reality that all the work and deliberations went on behind closed doors.

Justice Orr, in his Maready dissent, recognized this as problematic.

While he found the formal decision to award incentives in that case adhered to the strict letter of the Open Meetings Law because the vote to approve the deal was held in public, he also observed that “what transpired appears to violate the spirit of the law and result in the abuses the law is intended to prevent” — because the real work of the public’s business was done in private, a form of secrecy anathema to open, democratic government.

Such secrecy can result in public dollars going toward companies with a history of shady business practices that the public might reasonably object to subsidizing.

ICG, for example, has a history of trying to rip people off. As the Charlotte Observer reported when the company’s incentives were announced, the U.S. Department of Justice sued ICG and its CEO in 2015 for their role in committing mortgage fraud. The company and its leader settled the case in exchange for a payment of nearly $425,000, but without admitting any wrongdoing.

Then, in 2019, the State of Washington accused ICG of making false, deceptive, and misleading statements about its mortgage lending practices. The company paid a $150,000 fine. The Observer also reported that regulators in New York, Massachusetts, and Connecticut have fined ICG.

DiMisa, the company’s CEO, told the Observer that so-called “trick and trap” marketing in which lenders advertise rates they know they cannot honor is common in the mortgage industry, seeming to excuse his company’s deceitfulness. He added that the consent orders entered into by the company because of its deceptive practices were “a blessing because it teaches you that trick and trap marketing … is the wrong thing to do.”

Maybe the people of North Carolina and Charlotte don’t want to do business with a company that can’t figure out on its own that defrauding customers is wrong. But because ICG’s incentives were negotiated and decided in secret, there’s little we can now do to stop a crooked business from using public dollars to expand its operations here.

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Economic incentives tend to encourage inequality and an attitude of acceptance toward inequality.

Let’s begin with the income requirements built into such programs.

The state’s primary incentive program, the Job Development and Investment Grant Program, requires state officials to use as one criterion for considering such a grant the wages that would be paid by an incentive’s recipient. And, “[a]s a general rule, the higher the wages, skill levels, benefits and sustainability of the jobs, the more appropriate a Project may appear for a Grant.”

Another program, the Job Maintenance and Capital Development Fund, “seeks to stimulate economic activity by maintaining significant numbers of high-paying, high-quality jobs.” Specifically, the average job created by a recipient of such a grant must be at least 140% of the average wage of the county where the project is located.

Local governments also must consider wages when determining whether to award economic incentives: The average wage created by any project to receive incentives must be at or above the county’s median wage.

We see these sorts of wage requirements satisfied in the ICG project, which will result in jobs paying an average annual wage of $87,500. (The county’s average is $68,070.)

The logic of these wage requirements is understandable: If state and local governments are going to pay a company to open up shop here, we’d like the company’s employees to be well-compensated, not poorly paid, so the newly created work force is a boon to, and not a drag on, the state and local economies.

The thinking of economic boosters goes that when these wealthy companies and well-paid employees start to work and live here, their contributions to the economy will provide a net benefit to the community at large as the economic benefits of their presence and activity trickle down.

But the nearly half-century project of crafting public policy that caters to the already-wealthy and well-off on the theory that the benefits of this approach will redound to everyone is a failure. It doesn’t work, as a comprehensive study recently concluded in the context of trickle-down tax cuts.

Instead, when governments tend to the interests of wealth, the result is often severe gentrification and inequality. Study after study after study confirms that throwing money at wealthy companies, whose well-paid employees then live and spend in a community, tends to accelerate gentrification and increase the demand for low-paying service jobs, which in turn worsens economic inequality and immobility. Such inequality comes to be seen by boosters for economic incentives as just another cost of doing business, and one worth paying. (This resulting inequality is also contrary to an assertion made by Mayor Lyles in a 2020 video welcoming Centene to town in which she thanked the company for “helping us with upward mobility.” About this, the mayor was just wrong.)

When states and localities across the country, including North Carolina and Charlotte, sought to out-do each other several years ago while trying to land Amazon’s second headquarters, voices rose in opposition to the economic developers who mistakenly saw Amazon’s potential expansion into their communities as an obvious good. Bringing Amazon to town, these dissenters argued, would further accelerate the process already underway whereby the haves get more and have-nots less.

This is of particular concern in Charlotte, which suffers from the least economic mobility among 50 large American cities, according to a widely discussed report.

But for the officials in power at any given moment, the narrow political incentive for appearing to bring jobs to town, thereby allowing them to make triumphant announcements like that which accompanied the awarding of incentives to ICG, prevents a broader, deeper political analysis that would likely find economic incentives worsen the very inequality those same officials claim to be fighting.

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Economic incentives also tend to encourage an attitude of servility toward wealth in our public officials, with the latter bowing down before the former in violation of our most cherished beliefs about democracy and public power.

The narrow political value of jobs announcements motivates public officials to cast themselves in a beggar’s role vis-a-vis big businesses and corporations. “Please come to our community,” governors and mayors plead in competition against other states and cities.

There is debasement and desperation in these campaigns, born of the idea that unless we please monied interests, they will abandon us, depriving us of jobs, taxes, and economic growth. Our leaders play the part of so many civic vassals embracing their dependence upon our economic lords, with true power held not by the public representatives of the people, who alone are sovereign, according to our political mythology, but by those who possess private wealth and privilege.

While there is some of this dynamic in every announcement of tax give-aways to big businesses, including the recent ICG deal, there was perhaps no better (and embarrassing) an example of this political obsequiousness before economic power than in the City of Concord and Cabarrus County about ten years ago.

Billionaire Bruton Smith, who owns racetracks all over the country, including Charlotte Motor Speedway in Concord, announced plans in 2007 to build a drag strip across the street from the existing track. City officials, in response to complaints from nearby homeowners, changed the land’s zoning to stop the project. The people’s representatives responded to public outcry in just the way we are taught our system of government works.

Smith went ballistic, threatening to shut down the speedway and build a new one somewhere else. “I’m deadly serious. I am ready, willing, and able to do that. … If I found the land today, I would have our engineers on the job within a few days,” he said. The cost to do so would have been about $350 million.

Shutting down the race track would have been a devastating economic blow to Concord and Cabarrus County. The speedway brought in an estimated $169 million in tourism receipts the year prior to Smith’s threat, about 70% of all tourism money coming into the county annually. The speedway also generated, by itself, about 1% of the county’s property tax revenue and 2% of the city’s property tax revenue. The speedway was the community’s fourth-largest taxpayer.

And what did city and county officials do in response to Smith’s threats? They caved.

Local officials quickly reversed course — not only approving the drag strip, but proposing $80 million in economic incentives for the project. Then, to make their servility clear, less than a year after Smith threatened to blow up the local economy, public officials in Concord honored Smith by naming the road that leads to the speedway after him.

But Smith wasn’t done trying to humiliate local officials.

When the package of economic incentives didn’t come together as hoped, Smith sued the city and county for breach of contract. The city settled and paid Smith $2.8 million. The county fought in court, winning a dismissal of the lawsuit in 2013. (The court ruled there had not been a contract, only a proposal that was never finalized.)

Meanwhile, around the same time Smith’s lawsuit got bounced from court, he was back to threatening local governments, this time saying he was considering moving one of the track’s races elsewhere because he thought taxes on the speedway were too high.

No amount of groveling by public officials, it seemed, would satisfy Smith.

Today, the speedway still stands in Concord, situated at the terminus of Bruton Smith Boulevard. Drivers still take the track there, as they also now do at the drag strip, and fans across the country bring their dollars, unwitting soldiers in the economic warfare a billionaire threatened to wage against the community and a reminder that politicians too often sacrifice the sovereignty of the people before the whims of wealth.

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But what’s to be done about it? Even if we recognize the legalized bribes and blackmail paid by government to big business tend to encourage dishonesty, secrecy, inequality, and servility, what choice do we have?

We need to grow the tax base and encourage jobs in the state and local economies, the thinking goes. States and cities across the country are competing to land the same investments. Competition is stiff, and if we don’t throw millions of dollars at businesses to bring them here, someone else will, and then we’ll lose out. We may not like it — indeed, surely no elected official actually enjoys giving away millions of public dollars to big businesses — but we must do it.

This is the futility and fatalism that economic incentives tend to encourage in the public mind, perhaps the most grievous harms such policies inflict on the body politic.

By “futility” is meant the attitude that public officials are helpless to do anything but play the game of economic incentives given the current political and economic arrangements in which they are required to act. By “fatalism” is meant the more pernicious attitude that nothing can be done to change those political and economic arrangements.

The former idea presents a practical problem of the sort with which public officials must often wrestle. It is, in theory, solvable: How do we change current arrangements to achieve a better outcome for the community we serve?

The latter idea, though, presents a far more dangerous problem because it tends to convince the holders of public power that no matter how unsatisfactory they find current political and economic arrangements, they are powerless to do anything about them. An endorsement of such impotence underlays the appellate court’s decisions in Blinson: We can’t not dole out economic incentives because forces beyond our control won’t allow us to do so, at least not without the consequence of losing business investment. Servility is our fate.

This fatalism strikes at the essence of self-government, which is premised on the assumption that all problems a community faces are capable of being effectively addressed by the representatives of the people, one way or another. Once certain problems are rendered unsolvable in the minds of the people or their representatives, the project of effective, meaningful self-government threatens to unravel. It puts the lie to the idea that power is vested in the people and expressed through their representatives. Democracy comes to be seen as a sham — because, at least to some significant degree, it is.

Whether in the pandering to Amazon by communities across the country, or in the groveling of local officials at the feet of a racing billionaire, or in announcing ICG’s relatively modest economic incentives, government officials necessarily resign themselves to their powerlessness — and the inevitability of their powerlessness — before wealth. It demeans democracy and inflicts indignity on self-government.

Such civic humiliation is not limited, of course, to the arena of economic incentives, which provides us with but one of its manifestation.

In another context, for example, we all recently witnessed the triumph of economic power over political authority when a couple of billionaires declared by fiat that the President of the United States would be deprived of his preferred means of communication on social media.

While we may rejoice that Donald Trump has been at least temporarily halted from inflicting his rhetorical poison on the nation, that Jack Dorsey and Mark Zuckerberg possess the power to silence the president tends to encourage the idea that wealth can, should, and must throttle popular government and the people’s representatives.

That many of us rejoiced at Twitter and Facebook’s decisions to silence Trump is some evidence that we have surrendered to the seemingly inevitable power that plutocrats hold over us, the very same attitude of fatalistic resignation that, in the name of economic growth, legitimizes a system of legalized bribery and blackmail that directs public dollars to the wealthy in response to their implicit threats to our economic well-being.