News: Charlotte Exclusives

N.C. Employment Woes Highlight Flawed Incentives Policies

JLF analyst reacts to eight straight months of double-digit unemployment

North Carolina’s continuing struggles with unemployment paint a poor picture of the state’s strategy for attracting new jobs — especially the policy of awarding targeted tax breaks to favored companies. That’s the assessment of the John Locke Foundation‘s chief budget analyst.

“Once again, North Carolina earns the dubious distinction of owning one of the nation’s worst unemployment rates,” said Joseph Coletti, JLF Fiscal Policy Analyst. “And the new numbers we’re seeing today do not include the 900 people losing their jobs because Dell is closing its plant in Winston-Salem. State leaders chased those Dell jobs just a few years ago with promises of as much as $280 million in targeted tax breaks.”

The N.C. Employment Security Commission’s latest report lists the state’s unemployment rate at 10.8 percent for September. That rate is unchanged from August. The state has had double-digit unemployment for eight months. The state’s unemployment rate peaked at 11.1 percent in May, according to the ESC.

“In tight economic times, Gov. Beverly Perdue and her business recruiters are likely to scramble for more opportunities to give tax breaks away to companies that promise new jobs,” Coletti said. “These jobs won’t even have to be high-paying jobs. One company recently qualified for state and local incentives for parachute manufacturing in Person County, even though the wages tied to the new jobs would be 25 percent lower than the county average.”

“Chasing more companies with targeted tax breaks is doubling down on a bad bet,” Coletti added. “Instead of throwing good money after bad, the governor and state lawmakers should look at how poorly their system of targeted tax breaks has worked for North Carolina.”

A job-growth strategy based on the incentive of targeted tax breaks ignores some basic problems, Coletti said. “People who push these tax breaks seem to think the best way to boost the economy is for an elected official or government bureaucrat to choose existing companies that are likely to succeed,” he said. “We see how well that strategy worked in the case of Dell. We also should see that an economic development policy relying on political decisions is open to favoritism and abuse.”

North Carolina would benefit from a simpler strategy that treats all companies fairly, Coletti said. “If lawmakers want to offer a true incentive — not just a targeted tax break — they would lower tax rates for all businesses, reduce regulatory burdens, and stop setting rules that create economic winners and losers.”

Seasonally adjusted employment increased by almost 9,700 workers to a total of 4.04 million, according to the ESC. Unemployment also increased by 2,800 workers in the past month, with more than 491,000 workers now listed as unemployed. Unemployment has increased by more than 182,000 people in the past year. The state rate in September 2008 was 6.8 percent.

Those numbers have yet to convince state leaders that their current policies are off track, Coletti said.

“Gov. Perdue told North Carolina reporters this week that her visit to Asia is a ‘major economic development trip’ and that ‘it’s important to the future of North Carolina,'” Coletti said. “Unfortunately, she’s not going to Japan and China to talk about lowering state tax rates and reducing regulatory burdens. If anything concrete comes out of this trip, it’s likely to be some sort of tax break targeted toward specific Asian companies that our state government officials are choosing to succeed.”

The message is clear for other business owners and entrepreneurs in North Carolina, Coletti said. “Those business owners will continue to face one of the largest tax burdens in the Southeast,” he said. “Plus they’ll have to pay the price for the government’s decisions to use tax breaks to lure selected companies to the state. That’s the wrong message for our government to send as it seeks the recipe for economic growth.”