Publisher's note: Agenda 2012 is the John Locke Foundation's charge to make known their wise political agenda to voters, and most especially candidates, with our tenth installment being the "Economic Growth," found in the Budget, Taxation, and the Economy section, and written by Dr. Roy Cordato, Vice President for Research and Resident Scholar at the John Locke Foundation. The first installment was the "Introduction" published here.
For decades, North Carolina has pursued an "economic development policy." The Department of Commerce is completely dedicated to this concept and its website emphasizes, "The N.C. Department of Commerce is the state's leading economic-development agency, working with local, regional, national and international companies." Economic development policy has come to mean state efforts to pick winners and losers by using tax breaks and direct subsidies to promote specific businesses and industries deemed worthy by government officials. It is a form of crony capitalism. On the DOC website, the agency boasts about the specific industries that it targets for special consideration, including tourism, film, sports development, telecommunications, biotechnologies, health care, and financial services. This is a model of state central planning of the economy and it should be abandoned.
North Carolina's entire "economic development policy" should be replaced with "economic growth policy." Unlike economic development policy, economic growth policy would not focus on one business, industry, or region of the state over another but would adopt policies to maximize economic growth rates for the state. It is overall economic growth that creates employment opportunities drives down unemployment rates, creates real prosperity, and lifts people out of poverty. A well known saying is that a rising tide lifts all boats. Creating the conditions for economic growth will create such a rising tide. Targeting favored businesses and industries in the pursuit of economic development sloshes water around, lifting some and sinking others. By replacing the decisions of entrepreneurs and investors in private markets with the decisions of politicians and bureaucrats, resources are misallocated, inefficiencies are created, and the state's economic growth potential is reduced.
Key Facts
• North Carolina's economic development policies have led the state to create dozens of special tax breaks and subsidies for favored industries (see table in the Corporate Income Tax section).
• The mindset guiding economic development policy has been one where "experts" in the state bureaucracy believe they can effectively decide what kinds of businesses and industries are right for the state and then centrally direct resources toward the chosen companies. By definition, these resources are being directed away from other opportunities that market participants would have chosen.
• Economic growth policy would seek to remove government from the resource allocation picture entirely, creating an environment that encourages private sector entrepreneurship.
• True entrepreneurship, which is about spotting opportunities for profit in the market, is what lifts economies out of recessions and creates jobs.
• While North Carolina tends to track the national average in unemployment during boom times, it tends to do worse than the nation during recessions and recovery periods (see graph opposite, particularly 2001-2003 and 2007-present). The only way to improve this trend is to end North Carolina's current policies that that discourage entrepreneurship and investment, such as high marginal tax rates and burdensome regulation.
• North Carolina's tax system penalizes investment and entrepreneurship by double and, in some cases, triple taxing the economic returns to these activities.
• North Carolina's energy policies harm economic growth by raising energy costs for businesses. Because energy is an input into all production activities, the policies raise the cost of doing businesses across the economic spectrum.
Recommendations
1. Repeal all economic development policies granting special favors to particular businesses or industries, including the One North Carolina Fund, Job Development Investment Grants (JDIG), and the Golden LEAF Foundation.
2. Eliminate tax biases against investment and entrepreneurship by adopting a low, flat rate consumed income tax (see section on income tax); abolishing the corporate income tax; and abolishing the estate tax.
3. Pursue an energy policy that focuses on cost and reliability rather than renewable energy sources and conservation. Start by repealing the state's renewable portfolio standard and all special subsidies and tax breaks for renewable energy.
Analyst: Dr. Roy Cordato
Vice President for Research and Resident Scholar
(919) 828-3876 •
rcordato@johnlocke.org
