Economic Development

While economic development has dominated the agendas of many governors, legislators, 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.

Such policies would allow for the maximum amount of opportunity and prosperity for all North Carolinians, not just a favored few at the expense of everyone else. They would respect the rule of law, protect private property, promote competition, and allow markets to operate freely.

Analysis

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 with the purpose of expanding economic activity, particularly employment.

The problem with this approach is that while subsidies may benefit the targeted business and entice it to locate its operations within the state or a particular county or region, 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.

There's no such thing as a free subsidy. First, when the state, city, or county decides to use tax dollars to entice a new company to set up shop, that money has to come from somewhere. Other businesses and their employees must pay more in taxes and other costs to support the subsidized industry. This is why such programs are often 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 and other taxpayers to the subsidized businesses and the people who work for them.

Higher taxes for the state 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 resources, such as workers and land. This drives up costs for all businesses.

In the area of labor the pressure would be felt by any business that is employing similarly skilled workers in the area of the state where the subsidized new business locates. This effect is particularly pronounced if the unemployment rate is already low. It 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.

If the economic development subsidy involves exemptions from local taxes, then the effect is to shield the subsidized businesses from bearing some or all of the costs of infrastructure needs that their presence generates. These include the costs of road construction, police and fire services, 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. Corporate welfare schemes, under the guise of economic development policy, simply allow these new, subsidized businesses to be free riders. Again, this adds to the tax burden for the rest of the community and the state.

A partial list of 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; and

• Special tax breaks for "job creation" in distressed communities, worker training, and research and development.

Programs that support all of this activity include the Golden LEAF Foundation, The William Lee Act, and the One North Carolina Fund.

Economic Growth, Not Economic Development

Economic development policy, as it has developed, has become simply a term used for state management of entrepreneurial activity and an excuse for funneling favors to privileged businesses and industries.

The fundamental premise behind it is that the state will reward specific companies that it deems worthy. If a company will run its business the way politicians and state economic development planners think it should be run, then the subsidies will flow in its direction.

If it locates in the right place, if it hires the right amount of workers, if it compensates the workers with the correct mix of salary and benefits, and if it is producing the right products or providing the right services, then it will qualify for the privilege of being subsidized by the citizens of North Carolina. This is government central planning, plain and simple.

The entire focus of policy should shift away from this approach and toward a concern for statewide economic growth. That is, it should focus on creating an economic environment that will maximize gross state product (GSP).

A growing economy will create jobs, lift people out of poverty, provide consumers with affordable products, etc. It is about creating wealth and prosperity and not shifting it from less favored businesses and taxpayers to those who are more favored.

The general approach to policy should be as follows:

• Eliminate disincentives to investment and entrepreneurship, typically brought about by regulations and taxes.

• Create an overall environment that is conducive to efficient, market-motivated investment.

• Create conditions statewide such that all businesses, entrepreneurs, and investors have an equal opportunity to compete for capital, resources, and labor based on efficiency and success in satisfying customers.

Recommendations

1. Eliminate tax biases and multiple layers of taxation against saving, investment, and entrepreneurship. This could be accomplished by adopting a low, flat-rate, consumed income tax. That is, all income used for saving and investment would be exempt from taxation.

2. Abolish the corporate income tax or at least dramatically lower the rate.

3. Eliminate all estate and inheritance taxes, which are additional layers of taxation on saving.

4. Lower the overall level of taxation by cutting state spending.

5. 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.

6. The state should devote its resources to core functions and to making sure that the services that it is providing are of high quality, are consistent with the citizens' desires, and are conducive to economic growth. This would especially include safety and law enforcement, education, water and sewer services, and roads.