RALEIGH – The biggest tax on job creation in North Carolina isn’t levied by the Department of Revenue. In fact, it isn’t levied by any single state department. It’s levied by dozens of state agencies, large and small, every day.
The biggest tax on our economic development is North Carolina’s antiquated, unwieldy, and expensive system of regulation. It raises the cost of buying land, breaking ground, forming contracts, hiring labor, acquiring raw materials, buying energy, shipping goods, and retailing services. For many businesses – particularly start-ups without much hope of yielding an immediate, taxable profit – unwise regulation costs them more that the state’s high income-tax rates do.
These higher costs might be worth paying if North Carolinians received commensurate health and safety benefits for the higher prices and lower wages these state regulations impose on us. But such benefits often prove illusory.
In fact, as John Locke Foundation analyst Daren Bakst wrote in a recent research paper, in many cases North Carolina law doesn’t even require regulatory agencies to show that the projected benefits of the new rules they impose will be higher than the projected costs. In other words, it’s not that advocates of these regulations cheat to pass a cost-benefit test. There’s no test in the first place.
While comparative data on state regulatory burdens are spotty, at best, there are at least three good reasons to believe that North Carolina’s regulatory system costs too much for too little gain, and that reforming it would boost our state’s competitiveness and prosperity.
First, North Carolina business leaders consistently point to regulation as an impediment to growth. In past JLF surveys of executives on issues of economic competitiveness, regulation always showed up at or near the top of the list of concerns. And anyone who talks to those who work in heavily regulated business will be sure to hear about senseless rules and unreasonable regulators come up in the conversation.
That doesn’t mean, of course, that North Carolina should repeal a regulation just because a business finds it burdensome. Some regulations are necessary to protect our rights and do meet a cost-benefit test. The point is that politicians shouldn’t pretend regulations are costless just because the price tag doesn’t show up on the state’s books. That’s kind of the point – it’s easier to raise regulations than it is to raise statutory tax rates because the latter show up on the budget, and thus more visible.
The second reason to believe North Carolina’s regulations are out of line is that, as Bakst showed in his study, there are many checks on government regulation that are commonly used in other states and at the federal level but not present in North Carolina. For example, our state doesn’t require agencies to assess whether a regulation is likely to have a disproportionate effect on small businesses. The federal government has had such a process for 30 years, and 35 states require it.
Finally, you can find a compelling rationale for regulatory reform in North Carolina by zeroing in on the effects of one of our state’s most sweeping and costly regulations of the past decade: the so-called Clean Smokestack Bill of 2002. The legislation required electric utilities to reduce emissions associated with the formation of ground-level ozone. At the time, proponents said the new rules would cost $2.3 billion to comply with while producing significant improvements in North Carolina’s air quality.
Instead, as JLF economist Roy Cordato has just demonstrated, the real cost of the Clean Smokestacks Bill will be at least $3.2 billion, and will soar beyond that once the cost of converting coal plants to natural gas is included.
As for the benefits, Cordato carefully examined air-quality trends before and after the bill’s start date in both North Carolina and neighboring states, none of which passed a similar rule. He found no significant difference in the trend. North Carolina’s air has gotten cleaner in recent years, but so has everyone else’s – and North Carolina’s air quality had been improving at a similar rate before the Clean Smokestacks Bill was ever passed.
In short, this one regulation has jacked up North Carolina’s energy prices by hundreds of millions of dollars a year for no good reason.
Writ large, that’s the problem with North Carolina’s regulatory system. It’s a job-destroying tax that doesn’t fund anything worth investing in. North Carolina can’t afford such self-inflicted wounds, not with 11 percent unemployment and bleak prospects for a vibrant economic recovery.
Let’s get somewhere in the neighborhood of a clue, folks.
Hood is president of the John Locke Foundation