In April, Toyota announced that it will move its national headquarter to Plano, Texas, moving thousands of jobs out of California, where Toyota’s headquarter had stayed for half a century. Thanks to Texas Gov. Rick Perry, who worked tirelessly to visit California and take on business, the company will create a campus north of Dallas that will bring together 4,000 employees from manufacturing, sales and marketing around the country.
While Perry made a habit of bragging about taking California business, few people know that North Carolina business recruiters offered Toyota more than $100 million in incentives for the world’s largest automaker to move to Charlotte rather than Plano. But despite the fact that Plano offered only half as much money as Charlotte, it still won the bid. Associated Press business writer Emery Dalesio reported this week that North Carolina’s offer had to be “significantly larger than Texas to be competitive because the Lone Star State has no corporate or income tax.”
Competition to lure businesses has become fierce across the U.S. Even in a global economy, states’ stiffest and direct competition is not from the underdeveloped world but from the other states. This is because states in the U.S. share common language and culture, but vary largely in terms of regulatory framework and tax system. The Department of Labor reports that most mass job relocations are from one state to another, rather than to a foreign country.
Businesses, big and small, tend to settle in a place where they can find the greatest competitive advantage in terms of mobile capital and labor, two of the most important factors characterizing the market economy. The structure and efficiency of a state’s tax system affects whether businesses want to locate in that state to a large extent. Evidence shows that states with the best tax system will be able to attract new business, spark economic development and sustain long-term growth.
In 2005, the world’s largest chipmaker, Intel, decided to build a multi-billion chip-making plant in Arizona due to its favorable corporate income tax system. In 2010, Northrop Grumman chose to move its headquarters from Maryland to Virginia, citing the better tax system climate. But a fine tax system doesn’t always equal low tax rates in some areas or temporary tax incentives to businesses that newly arrive. A competitive tax system should have an efficient regulatory system that reflects low cost in filing taxes and implementing the regulations.
Many state lawmakers are still not aware of the importance of the structure of a tax system. Very often, they cannot resist the temptation to offer lucrative tax credits and subsidies to attract businesses. This can be a dangerous position. A classic example is North Carolina and Dell, a computer maker. North Carolina agreed to offer a $240 million incentive in the form of tax credits and subsidies to lure Dell to the state. Unfortunately, Dell closed its plant in the state after only four years of operation, spurring criticism of whether the state government should use tax revenue to fund grants for private companies. In the Toyota bid, North Carolina still offered generous tax credits to businesses rather than fundamentally reform the state tax system.
According to Tax Foundation, a think tank focusing on tax system and public finance, North Carolina ranked 44th out of 50 states, whereas Texas ranked 11th in the recent publication 2014 State Business Tax Climate Index, a comprehensive measurement and evaluation of each state’s system. Though North Carolina’s lawmakers have pushed significant reforms to the tax system, it still lags behind compared to other competitive states such as Florida and Texas.
Though Toyota’s bid does not entirely depend on Texas’s tax system, lawmakers in North Carolina should still be mindful that tax incentives must not become the regular way to lure businesses. Tax incentive is the forgone tax revenue that could have been used in other public services. Furthermore, tax incentive shows unfairness to the local businesses that have been in the state for a long time, further distorting the tax system.
