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End Swiss Cheese Tax Code: New Research Suggests Different Growth Agenda

posted on in Education (PreK-12), Spending & Taxes

A new study by two management professors associated with the Kenan Institute of Private Enterprise at UNC-Chapel Hill garnered a tremendous amount of press attention in early November despite the fact that its findings weren’t surprising. When Dennis Rondinelli of Chapel Hill’s business school and William Burpitt of Peace College surveyed executives of overseas businesses with operations in North Carolina, they were told what previous researchers have also been told over the years: special tax incentives for selected corporations rarely determine the location of a new plant or the expansion of an existing one.

When Rondinelli and Burpitt gave them 11 categories of plant location factors and asked for a ranking, the business executives assigned little importance to tax incentives, financial assistance such as loans, or state marketing subsidies. Instead, they ranked the availability, cost, and quality of labor at the top, followed by transportation, quality of life (including schools and energy costs), and business climate issues such as taxes and regulation (see first table on the next page).1

How did state politicians’ particular pet projects do in the rankings? Not too well. Among transportation factors, roads were far more important than ports and railroads, even though the state has spent tens of millions of dollars subsidizing state ports and buying the North Carolina Railroad. Among tax incentives, executives looked least favorably on those designed to attract firms to economically depressed areas (a key element of the Lee Act). And among marketing efforts, ranked last in the overall list, the lowest-ranked single activity was “overseas visits by N.C. officials.”2

“Our study of North Carolina strongly implies and other studies in the United States and internationally conclude that public resources now devoted to business location incentives could be used much more effectively to attract and retain investment by strengthening the overall business climate or by fostering industrial clusters,” Rondinelli and Burpitt write. They suggest efforts to improve the skill level of workers, good transportation, and an affordable and stable tax structure.3


What Matters in State Economic Growth?

Charts of Study FindingsAnother recent study took a different path but reached a similar goal with regard to what state policymakers can do to promote state economic growth. Harold Brumm, senior economist in the Office of the Chief Economist at the U.S. General Accounting Office, constructed an econometric model to gauge the impact of several variables on changes in Gross State Product (GSP) per person in the 48 contiguous states from 1985 to 1994. Among the factors he tested were state population growth, the extent of public and private capital investment, the extent of high school education, the starting size of the state economy, the marginal rate of state and local taxation, and an index of “rent-seeking” the use of government power to redistribute income from those who earn it to those who don’t. As a proxy for rent-seeking, Brumm used three measures: government employment as a share of the wholesale and retail trade sector, attorneys as a share of the state’s business services employment, and the prevalence of lobbying.

Of these factors, Brumm found that only the starting size of the economy, taxes, and rent-seeking had a statistically significant impact on state growth (see nearby table).4 The largest impact was from rent-seeking, suggesting thatpolicymakers who wish to stoke the state’s economic engine should focus on ways of reducing government spending and frivolous litigation. Two other implications of Brumm’s study were that population growth was not, as some neo-Malthusians believe, a detriment to state economic development and that the impact of formal education on state economic growth was hard to quantify.

Methods of Promoting Fiscal Discipline

If, as both the Kenan Institute study and Brumm concluded, the size and cost of government is an important factor in promoting economic growth, then state leaders may want to examine a third study, completed in April 1999 by Dale Bails of Christian Brothers University and Margie Tieslau of the University of North Texas.

Their report looked at how procedural rules at the state and local levels affect the amount of government expenditures. Over a 26-year period, they found that term limits for lawmakers, the presence of a citizen-initiative process, and formal expenditure limits like the proposed Taxpayer Protection Act led to significant reductions in state and local spending and taxes. States with all three of these mechanisms had about 14 percent less per-capita government spending than other states did.5

Taken together, these three studies suggest a new economic growth agenda for North Carolina: 1) eliminate the nearly $100 million in special tax breaks next year in favor of broad-based business tax relief; 2) devote new revenue growth and current low-priority spending to schools, roads, and income tax relief; 3) improve the quality of life and business climate through electricity restructuring and other cost savings, and 4) employ term limits, initiative power, and the Taxpayer Protection Act to free up additional resources for strategic investment in core public services and tax cuts.

John Hood, President


  1. Dennis A. Rondinelli and William J. Burpitt, “Do Government Incentives Attract and Retain International Investment? A Study of Foreign-Owned Firms in North Carolina,” Kenan Institute of Private Enterprise, UNC-Chapel Hill, 1999 p. 5-6.
  2. Ibid., pp 6-10.
  3. Ibid., p. 23.
  4. Harold J. Brumm, “Rent Seeking and Economic Growth: Evidence from the States,” Cato Journal, Vol. 19, No. 1 (Spring/Summer 1999), pp. 7-16.
  5. Dale Bails and Margie Tieslau, “The Impact of Fiscal Constitution on State and Local Expenditures,” unpublished paper, April 1999, pp. 13-14.
John Hood is president of the John William Pope Foundation, a Raleigh-based grantmaker that supports public policy organizations, educational institutions, arts and cultural programs, and humanitarian relief in North Carolina and beyond. Hood is also chairman of the board at… ...

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