In articulating her economic development strategy, Nikki Haley demonstrates that she learned much more from E.B. White’s Charlotte’s Web than from the large body of research literature on what works in economic development. In this children’s story, Wilbur the pig is saved from Christmas slaughter by the spider Charlotte who spins webs extolling Wilbur—”some pig,” “terrific,” “radiant,” and “humble”. Haley’s economic development strategy is the same. We will weave a web of policies that convince business people that we are “some state,” “business friendly,” “low business taxes,” “anti-union,” “anti-regulation” and “anti-lawsuit”.
State and local governments have been trying to entice businesses for a long time and economists have been studying what works for nearly as long.
“One policy option that is NOT cost effective is an across-the board cut in business taxes” notes Timothy Bartik, one of the foremost authorities on state and local economic development. Our existing corporate income tax apportions multistate income solely on sales inside South Carolina. Exporting companies, the ones we should be incentivizing to locate or expand here, are already exempt from income taxes on the bulk of their business. These generalized cuts go largely to businesses either in no position to create new jobs or whose new jobs are driven by consumer demand rather than state taxes.
“Once one accounts for the opportunity costs of paying for business tax cuts through cuts in public spending or increases in household taxes, the economic development benefits of general business tax cuts are usually less than their costs and may even be negative.” (Emphasis added.)
In their summary of a 1997 symposium, Katherine Bradbury and her colleagues from the Boston Federal Reserve Bank note that tax incentives “… can also indirectly impede development if they reduce expenditures on public services that businesses value.” Those things that businesses value include education, health care and infrastructure.
Broad-based tax cuts don’t work and cutting services like education and health care is counterproductive. But there are things that work. Bartik, in his 2011 book Investing in Kids, argues for well-designed tax incentives targeted at business that will increase per capita income. The average incentive only makes a difference in a branch plant location or expansion 3.6 % of the time. It’s important that there be clawbacks in place for failure to meet targets and that they be enforced. A recent study by Good Jobs First suggests that monitoring and enforcement in South Carolina are lax.
Bartik tells us: “Two policies with rigorous evidence of cost-effectiveness are customized job-training and manufacturing extension services.” Our ReadySC program provides customized job training. Manufacturing extension services might include advice on improving productivity or product design or finding new markets. These are especially useful for small and medium size businesses. Infrastructure investments pay off.
Workforce development is important. The Governor has announced her as- yet-undefined workforce development program in conjunction with ACT, the testing company. Besides pushing ACT’s WorkKeys jobs skills assessments, we don’t yet know what it will look like in South Carolina.
The return on investment increases significantly the earlier the intervention. Additional learning time at early ages delivered by “reasonable quality programs,” Bartik’s research shows, “can be effective in dramatically changing the future earnings of many children from all income classes.” At later ages, “the effectiveness of labor supply programs depend on targeting persons with good basic skills and focusing on the skills needed by employers.”
These are all long-term investments. There are proven, short-term training programs providing wage subsidies to employers to add new jobs. Bartik’s study of Minnesota’s 1980s MEED program shows a $6 increase in local earnings per capita for every dollar invested.
There is a lot of evidence on what works and what doesn’t work. Clearly, Governor Haley’s plan to cut corporate income taxes won’t work and may be counterproductive if it’s combined with cuts in education, health care and infrastructure spending. Every business-climate study out there, except those crafted to push a particular policy agenda, already says that we are a business-friendly state. It would help if we were also known as a state making solid investments in our human capital, infrastructure and workforce development.
E.B. White was a great writer. However, we should look elsewhere for guidance on economic development policy. There are ways forward, but it will take more than spinning slogan-filled webs to improve the quality of life for all South Carolinians.