Study: State Overestimates Returns on Incentives

A watchdog group released a report Wednesday questioning the way the state calculates the return on investment for tax breaks and other incentives given to manufacturers.

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RALEIGH, N.C. — A watchdog group released a report Wednesday questioning the way the state calculates the return on investment for tax breaks and other incentives it gives to businesses to get them to locate or expand in the state.

In its "Are We Getting Our Money's Worth?" report, the North Carolina Budget and Tax Center contended that the state Commerce Department and other officials overestimate the benefits the state receives when businesses take the incentives.

"If it's a net loser, then that amount, we lost on it. We could have conceivably invested in some other economic development activity," said Elaine Mejia, project director for the center, which advocates for the poor.

A spokesperson for the Commerce Department said officials stand by the way the department analyzes incentives. Tax breaks don't kick in unless a corporation delivers jobs and economic benefit, the spokesperson said.

The state Commerce Department and a creator of the formula defended the complicated method used to determine how a potential project's activity would affect the gross state product and state revenues generated by the incentives. The numbers usually are cited in job announcement news releases from Gov. Mike Easley.

"It is operating, in my view, a consistent and responsible manner," Commerce Secretary Jim Fain told reporters after a legislative committee. "We believe it produces a very good outcome."

The report's co-author disagreed.

"The method used by the state to project economic and fiscal impact, while thoughtful and comprehensive, remains flawed and leaves the state vulnerable to overbidding in order to attract large corporate relocations or expansions," said report co-author Elaine Mejia.

The report, on the heels of criticism about an incentives deal to being Google Inc. to Caldwell County, is likely to generate further discussions at the General Assembly about whether the state gives up too much to persuade companies to set up shop in North Carolina.

The researchers reviewed public records, looking particularly at the deal Dell won in 2004 to build a computer manufacturing plant in Forsyth County, potentially employing directly more than 2,000 workers.

If the company meets employment and investment goals, Dell could redeem a total of about $318 million in grants and tax breaks, making the deals one of the richest in state history. The numbers the model generate are usually cited in news releases from Gov. Mike Easley announcing that a company decides to expand in North Carolina will receive incentives.

Records show that Virginia officials offered only $37 million in incentives and believed the Dell plant would generate half of the direct and indirect jobs than North Carolina officials projected.

The Dell plant exemplifies a model that relies too heavily on annual sales in calculating the overall benefits in part because it doesn't take into account profits sent to out-of-state shareholders, Mejia and co-author Bill Schweke said.

State commerce officials used a computer sales figure provided by Dell of $2.3 billion in annual computer sales from the plant, but the report also found those amount was unrealistic and that the department didn't use its regular method for estimating sales.

The department contends the project would add $24 billion to the gross state product and $707 million in state revenues over a 20-year period.

The authors used lower figures for annual sales, along with in-state construction and employment levels to enter into the state's model and an alternative model developed in Iowa. The result, the report said, estimated the gross state product at between $5 billion and $8 billion and that the state would actually lose from $63 million to $72 million in revenues.

"That's going from a positive to a negative," said Schweke, who works for the Corporation for Enterprise Development in Durham. "That's a vast difference."

Commerce officials disagreed strongly with the report's assertion that the state would lose money from the deal since Dell's receipt of the incentives is contingent on exceeding investment thresholds. Lower economic impacts mean fewer incentives given to Dell.

"They have some misstatements and misunderstandings about the model," said Mike Walden, an economics professor at North Carolina State University who helped develop the formula.

The report also looked at about 30 other projects that also received Job Development Investment Grants, created by the General Assembly in 2002 and provide cash back to companies that build or expand in the state. Dell could get nearly $9 million from the grants.

"We have evidence that we could be overbidding in lots of instances," Mejia said.

The report said the state should take a more cautious approach in calculating the impact of a business upon North Carolina's economy. The Commerce Department also should be more transparent in its project agreements, including posting them on its Web site, the authors said.

Schweke acknowledged that all models have strengths and weaknesses: "There's no perfect way to do this."