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Economic development

While economic development has been part of the agenda of most recent administrations, the legislature, and local elected officials in North Carolina, it is one of the most misunderstood activities that governments undertake. Politicians love to attract attention to themselves through job announcements and ribbon cutting, but those are a poor substitute for less glamorous policies that promote free markets, entrepreneurship, and overall economic growth.

The idea of economic development policy has come to mean policies meant to funnel tax and other kinds of subsidies to businesses and/or regions in the state. Hence the term corporate welfare is derisively attached to these policies, even though their stated purpose is to expand economic activity and employment, not to provide relief. Corporate welfare is the much more accurate term because like traditional welfare, these programs ultimately transfer wealth from some state residents to others without adding to economic growth or net job creation.

A partial list of economic development/corporate welfare programs would include:

• overseas advertising subsidies in the departments of Commerce and Agriculture
• special marketing programs for industries as varied as film production and meat goat farming
• state subsidies for private ventures such as the N.C. Biotechnology Center's venture capital fund
• state services offered below cost to agricultural and other businesses
• regional subsidies such as the state's investment in the Global TransPark in Kinston
• special tax breaks for "job creation" in distressed communities, worker training, and research and development

Programs that support all of this activity include the The William Lee Act, the One North Carolina Fund, and the Golden LEAF Foundation. The latter's revenues flow from North Carolina's portion of the tobacco settlement.

Key Facts

• In 2008-09 the General Assembly's appropriations for economic development in the form of tax credits and direct payments totaled over $1.2 billion.
• Those appropriations do not include money allocated by the Golden LEAF Foundation, which added about $172 million during 2008-09.
• While incentives may benefit the targeted business or entice it to locate within the state, they harm existing businesses and other taxpayers.
• Such policies do not generate net benefits for the state. Instead they simply hurt some and help others.
• Since higher taxes are an added cost of doing business, these subsidies depress economic growth for those businesses not receiving the subsidy.
• The subsidized entrants into the market add to the demand for resources, such as workers and land. This drives up costs for all businesses.

Recommendations

1. Create an economic environment that will maximize gross state product (GSP).
2. Eliminate tax biases against saving, investment, and entrepreneurship.
3. Adopt a low, flat-rate, consumed income tax where all income used for saving and investment would be exempt from taxation.
4. Abolish the corporate income tax or at least dramatically lower the rate.
5. Eliminate all estate and inheritance taxes, which are additional layers of taxation on saving.
6. Lower the overall level of taxation by cutting state spending.
7. Keep the regulatory burden to a minimum. All proposed regulations should meet a rigorous test of benefit/cost analysis with the presumption that no new regulations are implemented unless the benefits from their stated objectives outweigh the costs to the state's consumers and businesses.
8. Devote state resources to core and constitutionally mandated functions and to making sure that the services that it provides are of high quality, consistent with the citizens' desires, and conducive to economic growth. Those would include safety and law enforcement, education, water and sewer services, and roads.