RALEIGH – Among the least-surprising news you will read this month is that North Carolina’s professional economic developers are seeking to block any reform of the state’s convoluted, ineffective system of economic-development incentives.
After a new study from the University of North Carolina’s Center for Competitive Economies showed (once again) that the state’s tax credit program had little measurable effect on business health and relocation decisions, the economic-development community said, in effect, “what’s all this nonsense about measurement?” The N.C. Economic Developers Association asserted that tax credits have “marketing value” that may not confer tangible benefits but “are vitally important … in contributing to a positive business atmosphere.”
This is the classic plea of anyone who comes up short in evaluation. “You just don’t see all the good work I’ve been doing,” the employee or vendor says earnestly. “All you seem to care about is what you can measure.”
Well, no, some potential amenities or benefits may well be difficult to measure. But when it comes to government programs intended to create jobs and economic opportunities, measurement is fairly straightforward and entirely necessary. The available evidence suggests that North Carolina’s approach to tax incentives is wrongheaded. We impose a relatively high marginal tax rate on business profits and investment income, then give what amounts to rebates or discounts to select firms.
As a result, the shareholders and workers of some firms bear little incidence of state business taxes, while many others – typically smaller ones and those with longtime roots in North Carolina – bear a disproportionately high incidence.
I sense a broad consensus among policy analysts right now that the state would be better off simplifying the code, eliminating some of the special credits and exemptions, and lowering marginal tax rates to compensate. Such a system would be fairer, easier to administer, and more likely to foster long-term business growth by moving policymakers away from trying to pick economic winners and losers.
Let’s face it: profit-seeking investors who do this for a living have had a hard time picking winners lately. Public officials with little professional expertise or personal money on the line are highly unlikely to do any better, and will almost certainly do worse.
Most economic developers, however, are not really evaluated on the basis of long-term economic growth and opportunity. They are compensated as they make “deals,” as business location announcements are made. Often, their compensation is tied to the value of the incentive package they help to negotiate. A simpler, fairer system for apportioning the tax burden would confer benefits on most North Carolinians. But the economic-development profession would take a hit, at least initially. So they will oppose reform.
When you get beyond the partisan sniping and sound bites, you find that many political controversies boil down to conflicts between the general public interest, as represented by the average taxpayer or citizen, and the power of particular lobbies or constituencies who have a vested interest in the status quo. On tax reform, health care, school choice, and a host of other issues, most North Carolinians would benefit from policies that increase their freedom or reduce the cost of choosing among competing options. But those who control the current system, who enjoy monopolies or competitive advantages granted by existing laws and subsidies, have a strong incentive to obstruct change. Therefore, they obtain the knowledge and clout necessary to prevail. The general public, largely unrepresented in the day-to-day tussle of politics, is outmaneuvered, out-organized, and outgunned.
One of the greatest impediments to economic development in North Carolina is the clout of the economic developers.
Hood is president of the John Locke Foundation