Georgia Tax Breaks for NCR Get Costly

Published August 31, 2009

States continue to hand out targeted tax incentives, many of which are turning out to be far more costly than the original estimates.

Such is the case with the State of Georgia’s tax breaks to attract technology firm NCR to the state. The incentives were worth at least $96 million, far above the $60 million estimate made when the deal was announced, according to a recent report in the Atlanta Journal-Constitution.

NCR announced in June it would move its corporate headquarters to Gwinnett County and bring 2,120 new jobs to Georgia.

In addition to reduced corporate tax bills, NCR will receive approximately $15 million in free training and research and will be able to keep payroll taxes deducted from employee checks instead of sending them to the state Department of Revenue.

“If you chose to take the high ground, you will not get these jobs and you will not get these companies,” Matthew Murray, a professor of economics at the University of Tennessee, told the Journal-Constitution. “That is the ugly trade-off.”

States Played for Chumps

Not true, says Kelly McCutchen, executive vice president of the Atlanta-based Georgia Public Policy Foundation. He points out such incentives play little or no role in where companies locate.

“Our contention for years has been that many of these companies know how to play the game,” McCutchen said. “These companies do the search privately, decide where they really want to move, then play off the governments against one another. The tax incentives really don’t play into their move. NCR all but admitted that in the Journal-Constitution article.”

Scott Hodge, president of the nonpartisan Tax Foundation, says the giveaways tend to backfire.

“The targeted tax incentives might have the good intention of attempting to bring investment and economic growth, but these packages send unintended signals to the marketplace,” Hodge said. “First, it tells the market that your tax system is so out of line that you need specific tax breaks to get a business to locate in the state. Second, it tells your local businesses that they are foolish for staying in the state and paying taxes to subsidize another business with better political connections.”

Lawmakers Want Headlines

“These games have been played by states and local governments since the Great Depression,” said Mike LaFaive, director of fiscal policy at the Mackinac Center for Public Policy in Michigan. “States and municipalities greatly accelerated these programs in the 1990s. Every politician is sensitive to the headlines in the newspaper, so they are fighting for job announcements.”

But LaFaive notes such incentives can actually cost jobs because firms that don’t receive tax breaks might have to cut jobs to compete.

“There is empirical and anecdotal evidence that these programs are ineffective,” LaFaive said. “Government can’t give anything that it doesn’t take away from someone else. They’re robbing Peter to pay Paul, so there’s almost no chance of net new jobs. And even tax credits have an opportunity cost. They make it harder to cut taxes for everyone else.”

Perception Trumps Reality

States continue to provide these awards even though they don’t play into the eventual decision “because there is a public perception that [the incentives] do make a difference,” McCutchen said. “At the ribbon-cutting ceremony, they will credit the governor and the legislature and will say that the tax breaks did make a difference. The governor and the legislators hear this, so it becomes a self-fulfilling program.”

Some states—those with poor business climates, high tax rates, or other drawbacks—may indeed need to offer some incentives to lure business, but not Georgia, McCutchen says.

“We’ve done a good job in not going overboard in offering these types of incentives,” McCutchen said. Many firms are too small to qualify for the types of breaks NCR received, he notes. Still, McCutchen would prefer to see the state continue to attract business as it always has in the past, with a low overall tax burden and by continuing to support Georgia technical colleges, which benefit all companies in the state, not just a select few.

Phil Britt ([email protected]) writes from South Holland, Illinois.