NC Budget and Tax Center

Last year’s tax cuts undermine new state economic development plan

Earlier this month, the North Carolina Economic Development Board released a new strategic plan for creating jobs and growing the state’s economy over the next decade. The plan listed a number of admirable and important policy goals, including supporting innovation and entrepreneurship, promoting rural prosperity, and strengthening community-level opportunities for economic revitalization.

Unfortunately, last year’s tax cuts and budget cuts have greatly undermined the state’s ability to achieve these goals going forward.

In order to accommodate the $525 million in revenues lost to last year’s tax cut package and still balance the state budget, lawmakers made deep cuts to many core investments—including long-standing state support for nonprofits engaged in economic and community development work.  In the current biennium, the portion of the state budget responsible for these important initiatives—Commerce-State Aid—was cut by $38 million, a 64 percent reduction.

And even this overall reduction masks the true damage to the state’s ability to invest in meeting the new economic development objectives laid out in the strategic plan. The real damage comes from the specific initiatives that were singled out for cuts or outright elimination.

Innovation and entrepreneurship were badly damaged last year when the lawmakers eliminated funding for the N.C. Biofuels Center—the entity tasked with helping grow cleantech businesses in North Carolina’s emerging energy sector—and cut funding for the N.C. Biotech Center by a third. The Biotech Center, of course, is the world-recognized organization responsible for building the state’s life sciences and biomanufacturing industry—a key economic engine for the Research Triangle. In response to these cuts, the Biotech Center eliminated its entire workforce development division—surely a step backwards in trying to train a workforce necessary for the innovative biotech firms of the future.

Additionally, the cuts to initiatives supporting rural economic development will only make it that much harder to spread prosperity to the state’s rural areas. Perhaps the biggest blow to rural regions came with the elimination of funding for the N.C. Rural Economic Development Center. While a handful of the Rural Center’s functions will be shifted over to a new Rural Economic Development Division within the Department of Commerce, the total funding for rural development will actually drop from $16.6 million to $11.3 million, a 30 percent reduction.

Worsening the blow, the budget also completely eliminated funding for 10 nonprofit initiatives serving economically-distressed minority communities that have historically been excluded from much of North Carolina’s economic gains over the past 50 years. This includes the Institute of Minority Economic Development and its Women’s Business Center, which provide entrepreneurs with technical and financial assistance on business plans, loan applications, and branding strategies. It also includes the Association of Community Development Corporations, the Community Development Initiative, and the Indian Economic Development Initiative. At least one of these 10 nonprofits will close.

In making these cuts, lawmakers gambled that cutting taxes would help the economic development more than these proven initiatives. Unfortunately, given the poor track record of tax cuts in boosting state economies in the past, it appears likely that this is one gamble that won’t pay off. Instead, it looks the decision to cut taxes will have simply starved North Carolina’s state budget of the revenue it needs to promote these critical economic development initiatives and achieve the goals laid out in the new strategic plan.

Instead of last year’s ill-advised tax cuts, lawmakers could have made additional investments in the types of initiatives that can help the state meet it’s the workforce development objectives laid out in the new economic development plan.  Specifically, lawmakers could have created and funded a subsidized jobs program modelled after Minnesota’s successful Emergency Employment Development initiative, which provides assistance to local businesses to hire the long-term unemployed. This would create 10,000 private sector jobs at a cost of just 110 million. Another $50 million would add additional investment in the Basic Skills Plus initiative to help implement bridge programs for adults seeking basic education and industry-specific credentials at all community colleges. Lastly, the state could have restored the Worker Training Trust Fund—originally established to help unemployed and dislocated workers gain new skills for the job market, but eliminated in HB4, the bill that also cut unemployment benefits.

Tax cuts are a poor strategy for growing North Carolina’s economy, and even worse, they simply starved the state of the revenues needed for achieving the economic development goals laid out in the new strategic plan.

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