One of North Carolina’s most experienced and insightful economic development experts, retired CFED wonk and former Senior Fellow Bill Schweke, forwarded the following brief essay in response to the series in Raleigh’s News & Observer on North Carolina’s rather amazing generosity in dispensing tax breaks and other giveaways to businesses in the name of “economic development.”
JUST SAY “NO”
By William Schweke
The more things change, the more they stay the same. The new series in Raleigh’s News & Observer (“The Missing Money”) provides a near perfect illustration of this adage in the field of taxes, subsidies, and business attraction.
Like most states desperate for new jobs during the Great Recession, the price tag for the state’s package of general tax loopholes and company-specific, tailored incentives has increased significantly, during the past few years, with very little pushback from critics.
Indeed, the debate has tended to be framed as follows:
- “I agree with your criticism, but everybody’s doing it. Playing this game is absolutely necessary.”
- Alas, when the battle is between the “good” versus the “necessary,” the “good” always loses.
The N&O articles document the high costs in public funds diverted from other better investments (“opportunity costs” in economist lingo), accountability and transparency concerns and conflicts of interest.
In short, very little has changed since my retirement from the economic development field a couple of years ago.
Past exposés by the Toledo Sun and scores of other news outlets have told basically the same story.
And in my opinion, things are worse.
Feeling a bit quixotic – cue the song “To Dream the Impossible Dream” – here is my take on seven steps the state should take to clean up this mess:
- Communicate with the public about how a good investor – public or private – sometimes says “no.” It is not hard in these days of fierce competition among the states to overbid.
- Set a standard for your minimal rate of return and stick to it.
- Upgrade the quality and add depth to your data bases and periodic evaluation reports.
- Recognize that tax competitiveness is only one goal for a modernized tax system. Others include: Revenue adequacy, a broadened base and low rates and reductions in the number and costs of loopholes.
- Don’t reinvent the wheel. Draw upon the earlier studies and commissions on modernizing North Carolina’s tax structure.
- Concentrate on the real pillars of economic development and stimulate them: the discovery/commercialization process, entrepreneurial initiative, education and training, local and regional leadership, international trade, world class universities and infrastructure, an adaptive culture in the workplace and local communities, predictable and professional regulation.
- Learn from the latest economic growth models in developed and emerging economies. They are all “endogenous” (i.e. “homegrown”.)
It will take courage, communication, pragmatism to pull this off. North Carolina has done it before, however, and it can do it again.