Gov. Pat McCrory and some leading N.C. lawmakers have taken contrasting positions over taxes and economic development — two topics that are sure to bring many more arguments before budget negotiations or the legislative session are over.
McCrory stated in early January that he needs a new economic development plan with more money in order to recruit jobs to North Carolina. The state House responded by quickly filing the NC Competes Act, an economic development bill that would expand the existing Job Development Investment Grant program, but also enacts sales tax refunds for certain industries.
The Senate decided to take a different approach, filing a bill that would reduce the state corporate income tax rate, restructure the way corporate taxes are calculated, eliminate a special tax break for airline fuel, and shift a much larger percentage of the existing JDIG money to smaller counties that have traditionally not received the bulk of incentive funds.
Which one does the governor prefer? He liked the House plan because it gave him the money and the flexibility he wants to give money to corporations. He isn’t so keen on the Senate plan.
There’s one thing everyone is forgetting, and I haven’t heard it brought up in discussions. What about the next recession? If North Carolina decides to expand or continue the economic development game, taxpayers will be on the hook when times get tough. Since 1960, the country has gone through one or two recessions per decade, on average. The actual number of recessions the United States has experienced in the last 50 years is eight: one in the 1960s, two in the 1970s, two in the 1980s, one in the 1990s, and two in the 2000s. We haven’t had a recession in the current decade, and if history is any indicator of the future, we can expect at least one recession in the next five years.
It’s daunting to think about another recession when last year’s Commerce Funding Study stated additional money will be needed to meet JDIG obligations. A maximum of $160 million could be paid out over the next two years. That’s a lot of money that otherwise could be used to lower business costs on a broader scale, instead of paying specific corporations chosen by politicians.
Unfortunately, the issue of economic development is not going to go away any time soon. The reason there is so much debate is because there are multiple ways to look at economic development.
Should the government be responsible for recruiting business to the state? Do taxes have a significant effect on business growth or state competitiveness? Should the state lower taxes or give tax credits for certain industries?
These are all questions swirling around the legislature right now. Tax burden obviously has an impact on business decisions and the performance of the economy. If it didn’t, there wouldn’t be so many politicians infatuated with targeted tax breaks and corporate handouts.
In my opinion, the government’s role in the economy should be focused on benefiting everyone through policies such as low tax burdens and favorable regulatory climates. In other words, maximize the individual freedom that produces economic growth and prosperity, rather than give special breaks to selected companies.
While the governor and the House have taken the approach of giving money away in the form of tax credits and cash grants, the Senate decided to put more focus on lowering the tax burden and how the tax is calculated — a step in the right direction. The Senate plan would give North Carolina the lowest corporate income tax rate in the Southeast — a definite lower cost of business that would trigger growth and investment. But by no means is the Senate plan perfect. Senators still allow the JDIG program to exist, and they put more emphasis on rural counties. Even the corporate tax rate cut ought to be weighed against the need to shore up state savings reserves in preparation for the next recession.
My concern regarding economic development is for the uncertain times in the coming years. Everyone wants North Carolina to prosper, but at what cost? Knowing that a recession may be right around the corner, the state should make every effort to put cash in a savings account instead of giving it away to corporations. Securing the state’s fiscal house should be a top priority.
Sarah Curry is Director of Fiscal Policy Studies for the John Locke Foundation.