State governments are always searching both for new revenue sources and new programs to fund. New revenue is necessary to finance expanded programs, which in turn are necessary to keep voters happy and incumbents safely in office. This is cynically described as bribing the voters with their own money, which is particularly apt, because properly understood, this is a cynical process. Voters, however, generally do not want to pay higher taxes. Partly because incumbents recognize that economic growth can both increase the tax base and support tax increases, and because of the insatiable desire to fund additional programs, most politicians recognize the desirability of creating a favorable business environment. That was the motivation behind last year’s N.C. Stimulus and Job Creation Act, empowering a committee of political appointees to award payroll tax rebates to new businesses that relocate to North Carolina.
One of the many flaws in the Stimulus Act is that it ignores all the companies that are already in North Carolina and already employing North Carolinians. Not only do North Carolina businesses receive no benefit from the Stimulus Act, but they could conceivably be driven out of business by competitors that relocate because of the payroll tax subsidy. It would be a lot fairer to provide an equal rebate to everybody in the form of a tax cut, but to cut taxes, we have to cut the state budget.
What features do businesses actually look for when deciding to relocate? An adequate and well-maintained infrastructure, good schools, good health facilities and other emergency response functions, and low crime, which are all things provided by government. But one other thing businesses look for is low taxes. This places a premium on efficiency. State governments need to avoid doing things they do poorly or expensively, and voters have every right to insist on getting the biggest bang out of their hard-earned tax dollars. The trouble with government programs that aim to create a favorable environment for business, is first, that they face conflicting objectives: better services and support and lower taxes, and second, that they insinuate government into business decision-making, an arena to which government is especially poorly adapted.
What is the root cause of North Carolina’s glaring economic uncompetitiveness? It’s nothing more complicated than the state’s oppressively high tax burden. How can state taxes be lowered? Only by lowering the state budget. North Carolina’s marginal income tax rate is 8.25 percent, among the highest in the United States. That compares with a very high marginal 7 percent in South Carolina, 6 percent in Georgia, and 5.75 percent in Virginia. North Carolina’s corporate income tax rate of 6.9 percent is also among the highest in the United States, and compares with 6 percent in Georgia, Tennessee, and Virginia, 5.5 percent in Florida, and 5 percent in South Carolina. Combined state and local tax incidence in North Carolina is significantly higher than in any neighboring state except Georgia. This makes it very difficult for a corporation to locate in North Carolina, as opposed, say, to South Carolina or Tennessee.
It is essentially wrong-headed to think that our state government can guarantee future prosperity by attempting a limited program to lure businesses to relocate. The best a state can be expected to do, is simply stay out of the way and let the private sector function. Economic development policy should be guided by the following principle: create an environment friendly to entrepreneurs and that will attract the fastest-growing businesses. Create an environment attractive to political favor-seekers, and they will come running to feed at a trough that can never be kept sufficiently full.