Economic Development Policy
Recommendation
Local governments should focus on making their communities conducive to economic growth and business investment by keeping property taxes, sales taxes, and business regulations and fees low. Furthermore, they should avoid implementing new taxes such as land transfer taxes currently being considered in many counties.
They should also focus on essential government services, making sure that these services meet the needs of business. This would include providing reliable sources of water and transportation services that accommodate the desired lifestyles of the workforce and the needs of industry. This cannot be accomplished by targeting businesses for special subsidies while burdening local businesses and citizens with the cost of those subsidies.
Background
North Carolina's county governments divert hundreds of millions of dollars to individual businesses in an attempt to attract economic growth and job creation to their communities. These subsidies come in a variety of forms, including property tax exemptions, direct cash grants, land conveyances, and low interest loans.
According to a study by the North Carolina Institute for Constitutional Law, local governments in the state have shelled out more than $403 million in incentive packages in the period between 2004 and 2006. This represents 66 of the 92 counties from which NCICL was able to obtain data.
North Carolina has 100 counties. Twenty-six counties provided no incentives during this period. By far the largest incentive package during this time came from Caldwell County in its well-publicized deal with Google, which totaled $165 million.
Most grants are much smaller than this. Most of the largesse comes in smaller amounts of less than a million dollars.
Analysis
The problem with business subsidies is that while they may benefit the targeted business and entice it to locate its operations within the county, they harm existing business and other taxpayers. Such policies do not generate net benefits for a county. Instead they simply hurt some and help others.
There's no such thing as a free subsidy. When a county decides to use tax dollars to entice a new company to set up shop in a community, that money has to come from somewhere. Local businesses and their employees must pay more in taxes and other costs to support the subsidized industry. This is why such programs are referred to as corporate welfare. Since higher taxes are an added cost of doing business, these subsidies depress economic growth for those businesses not receiving the subsidy. In reality the subsidies end up being a mechanism for transferring wealth from existing businesses to the subsidized businesses and the people who work for them.
Higher taxes for the community at large are not the only way existing businesses must pay the cost of these subsidies. The subsidized entrants into the market add to the demand for workers, driving up labor costs for all businesses that are employing similarly skilled labor. This effect is particularly pronounced if the unemployment rate is already low. This means that the existing businesses not only have to pay for the subsidies through higher taxes, but, adding insult to injury, they may also face higher production costs.
The effect of these subsidies is to exempt the subsidized businesses from bearing the costs of infrastructure needs that their presence generates. These include the costs of road construction, police and fire services, the costs of new school construction and other public facilities.
It has also become clear that many communities will have to make additional investments in reservoirs and other new sources of water. Bonds will be floated to pay for all this, which will have to be paid back with future property and sales taxes. Many corporate welfare schemes enacted by localities will simply allow these new, subsidized businesses to be free riders. Again, this adds to the tax burden on the rest of the community.
There is an alternative. Counties should pursue a policy of sustained economic growth that makes the possibility of investment attractive to all businesses, not just those favored by local politicians or planners. This policy would seek to keep property and sales taxes and business fees low. But beyond this, the policy should also focus on keeping land-use and other regulations to a minimum. Such regulations drive up housing and land costs, both of which make investment less attractive.
The primary role of local government is to provide for sound and reliable infrastructure services. This last includes effective police and fire departments, efficient trash collection, a road system that is kept in good repair, a safe and instructionally effective school system, and a dependable sewer system and water supply that can accommodate economic growth.
The goal should be to create an environment that is conducive to investment and business activity, not to favor some at the expense of others.
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