RALEIGH – A new study by UNC-Chapel Hill researchers has demonstrated that one of North Carolina’s original incentives programs, the Lee Act tax credits, steered most of the $2 billion in credits to companies in the state’s 10 wealthiest counties over the past decade.
The finding should come as no surprise, for two reasons. First, this is only the latest in a series of studies of the Lee Act that have come to a similar conclusion. Indeed, in 2007 the General Assembly replaced the original program with a new one, called Article 3J, that was explicitly intended to direct more incentive credits to poorer communities.
The second reason why the finding should come as no surprise, however, will likely be the explanation when the new Article 3J also fails to steer corporations from urban to rural areas. Because state policymakers typically justify state incentives to keep North Carolina competitive with national and international competitors for corporate relocations and expansions, they can’t afford to block Charlotte, the Triangle, the Triad, and other urban centers from offering state tax credits given that these locations are often the only ones that meet an international firm’s needs and expectations.
In other words, the goal of making North Carolina competitive with other states and countries will always end up prevailing over the goal of redistributing economic activity within North Carolina.
That’s not to say that I think targeted tax credits are the best way to improve North Carolina’s competitiveness. Across the board reductions in tax rates are better, because they don’t favor some forms or sizes of businesses over others. The UNC study also found that nearly 40 percent of all the Lee Act credits went to just 2 percent of the participating firms.
Furthermore, North Carolina’s economic competitiveness is hampered not just by relatively high marginal tax rates but also by burdensome and capricious state regulations, among other factors. Regulatory reform would again benefit all businesses, large and small, without worsening the state’s current fiscal woes.
Still, the fact that so many Lee Act credits went to large firms in major metros is not evidence of bad faith or even of poor program design by lawmakers in Raleigh. It is, instead, a reflection of basic economic realities, realities that can’t be dispelled by government policy.
There are steps state government can take to improve the economic prospects of rural areas, but they don’t involve more redistribution or tax-credit shenanigans. In additional to statewide tax and regulatory relief, lawmakers should embrace true education reforms that allow more options for students in rural areas, including charter start-ups and vocational education. They should focus scarce highway dollars on the projects with the largest potential payoff in vehicle miles traveled, while streamlining the process for moving road and bridge projects through environmental-impact reviews. And they should avoid creating disproportionate regulatory burdens on industries, such as agriculture and food processing, timber and paper products, and mining that have a realistic chance of creating new jobs and economic opportunities in rural areas buffeted by declining employment in traditional industries such as furniture and textiles.
Above all, remember that every day, rural North Carolinians decide to move closer to urban centers to look for work. It’s a process that’s been underway for decades. It is likely to continue, regardless of what public policymakers think or do.
Hood is president of the John Locke Foundation