John Locke Update / Research Brief

North Carolina Needs a Broader Debate over Corporate Welfare

posted on in Law & Regulation, Rights & Regulation
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The budget standoff in North Carolina is generating national attention, which focuses on the debate over Medicaid expansion. But there’s another policy standoff in Raleigh, and it’s interesting not just for what’s up for debate, but also for what isn’t.

This debate is over how the state should govern tax revenues coming from and being directed to corporations (i.e., corporate taxes and corporate welfare). There are four possible policy combinations involved. They are:

Freedom & Growth: Low corporate taxes, low corporate welfare

Letting producers and households keep more of their own resources to use as they see best is a proven way to promote faster economic growth and expansion.

Redistribution, Anti-Business: High corporate taxes, low corporate welfare

High levies on producers with few giveaways to corporations is the political class redirecting resources from one group to others.

Redistribution, Pro-Business: Low corporate taxes, high corporate welfare

Low levies on producers with high giveaways to corporations is the political class redirecting resources to one group from others.

Central Planning & Cronyism: High corporate taxes, high corporate welfare

Taking more resources from producers and households to be directed at the whim of the political class is proven way to slow economic growth and empower politicians.

So where is the debate in North Carolina? In vetoing the budget, Cooper castigated the legislature for passing a franchise tax cut. It would let all companies here keep $252.2 million in 2020-21.

The franchise tax is a double tax on corporate assets, not income. As such, it allows the state to tax business expenditures, including on capital and equipment, things that would be fully deductible under the corporate income tax. North Carolina is one of only 16 states with a franchise tax.

Nevertheless, Gov. Cooper objects to cutting this double-tax on corporations. It’s consistent with his dislike of cutting corporate taxes in general. In his 2017 State of the State address, he referred to corporate tax cuts as “the altar” on which we “sacrifice education.”  He declared, “We cannot sacrifice education at the altar of even more corporate tax cuts or giveaways that are mostly for the wealthiest.”

Meanwhile, the Republican majority in the legislature has cut corporate and personal taxes over several years. They took North Carolina from having the highest corporate and personal income tax rates in the South to having the lowest personal income tax rates in the South (among states with personal income taxes) and the lowest corporate tax rate in the nation (among states with corporate income taxes).

So regarding corporate tax cuts, Cooper and the legislature are in deep disagreement. What about corporate welfare? Very much simpatico.

The governor and legislature were in rare agreement when it came to passing massive incentives for “transformative” corporate projects, such as Amazon’s or Apple’s. Legislative budget-writers have made sure the state’s corporate incentives programs, such as the Jobs Development Investment Grant (JDIG) and One North Carolina (OneNC) grant programs, are flush. The governor is making ample use of them, announcing nearly $70 million in the last three months to 35 different companies.

So the debate in North Carolina is centered on Redistribution, Pro-Business vs. Central Planning & Cronyism. Either politicians in Raleigh allow businesses to keep more of their own resources and then direct other people’s taxed resources to a select handful of corporations, or they take more resources from businesses for use at their own discretion, including to direct it to a select handful of corporations.

The Freedom & Growth combination is not in the debate, although the General Assembly has adopted many empirically sound options for increasing freedom and economic growth: cutting taxes, cutting regulations, and reining in spending. The result is five straight years of surpluses.

The question for the governor is obvious: how can he bash corporate tax cuts while seeking accolades for corporate giveaways?

The question for the General Assembly is how can they get so much right on freedom and growth policies yet cling to corporate welfare. As Roy Cordato put it in our Policy Position on Economic Growth,

This schizophrenic approach to economic policy is like trying to increase the speed that a boat is traveling by investing in a bigger and more powerful motor (tax and regulatory reform policies) while simultaneously tossing a heavy anchor over the side (economic development policies). Sure, the boat may continue to move forward, and indeed it may increase its speed if the force of the new engine is greater than the drag of the anchor. But clearly, the new engine would work even better if the anchor is lifted completely.

The returns from freedom- and growth-minded reforms show that North Carolina has a very powerful motor. With his high-tax preference, the governor would be a limiting governor on this engine.

Instead, it’s time to lose the corporate welfare anchor and enjoy the ride.

Jon Sanders is an economist studying state regulations, that spreading kudzu of invasive government and unintended consequences. As director of regulatory studies and research editor at the John Locke Foundation, Jon gets in the weeds of all kinds of policy… ...

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