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Background

North Carolina's county governments divert hundreds of millions of dollars in taxpayer money to private businesses in an attempt to attract economic growth and job creation. These subsidies come in a variety of forms, including property tax exemptions, direct cash grants, land conveyances, and low-interest loans. These programs put county governments in the role of economic planner, where county commissions and planning boards, that face no real market incentives, have taken upon themselves to pick economic winners and losers.

Typical of such programs is one in Cabarrus County's "Economic Development Grant Program." It is advertised on the county web site that:

A Grant approved by the BOC may be an amount equaling up to 85% of the real and personal property tax actually paid on assets eligible for this Program. The minimum incremental increase in assessed value of assets shall be $1.5 million, except in those cases where the Grant is used to encourage the development or help ensure the success of certain targeted businesses and/or geographic areas, where the threshold shall be at the discretion of the Board of Commissioners.

These grants are awarded with two main goals.

The award of a Grant is designed to increase employment opportunities within the County as well as to increase the assessed valuation of the County.

Similar programs are in operation in most other counties in North Carolina. Furthermore, some of these grants are not only used as a way of enticing new investment. For example, Buncombe county recently transferred $84,000 from county taxpayers to a plastic card manufacturing company called Plasticard-Locktech International. This is a company that has already been manufacturing its cards in the county and was investing in a $4.4 million expansion. Apparently the $84,000 grant was awarded after the $4.4 million had already been invested. It was announced in October 2013 that the grant was approved. In the same announcement the marketing coordinator for Plasticard-Locktech announced that that "the $4.4 million expansion is almost complete." The $84,000 appears to be an after-the-fact reward for investments already made.

Analysis

While subsidies may benefit a targeted business or even entice a new business to locate its operations within a county, there is no such thing as a free economic development grant. These grants harm existing business and other taxpayers. Such policies do not generate net benefits for a county. Instead they are wealth transfers that hurt some and help others.

When a county decides to use tax dollars to entice a new company to set up shop in a community, that money must come from somewhere. Local businesses and their employees must pay more in taxes and other costs to support the subsidized industry. As a result, economic growth for those businesses not receiving subsidies is discouraged. In reality, the subsidies end up being a mechanism for transferring wealth from existing businesses to the subsidized businesses and the people who work for them. That is why they are often referred to as corporate welfare.

Higher taxes for the community at large are not the only way existing businesses must pay the costs of these subsidies. The subsidized entrants into the market add to the demand for workers and other resources including land, driving up costs for all businesses. As stated on the Cabarrus County web site, one of the express purposes of that program is "to increase the assessed valuation of the County." In other words, they want to drive up the cost of land and, consequently, property tax bills. These are important components in the cost of doing business generally. In this way, existing businesses are punished and discouraged from expanding.

An additional effect of the subsidies is to exempt the subsidized businesses from bearing the costs of infrastructure needs that their presence generates. These include the costs of road construction, police and fire services, and construction of new schools and other public facilities. It has also become clear that many communities will have to make additional investments in reservoirs and other new sources of water. Bonds will be floated to pay for all this, which will have to be paid back with future property and sales taxes. Many corporate welfare schemes enacted by localities will simply allow these new, subsidized businesses to be free riders. Again, this adds to the tax burden on the rest of the community.

Economic growth, not economic development

There is an alternative. Counties should abandon the idea of targeting specific firms or industries in order to "stimulate" so-called economic development. Instead, they should focus on policies that will bring about sustained economic growth — policies that will make investment attractive to all businesses and entrepreneurs. These policies will seek to keep property taxes, sales taxes, and business fees low. But beyond that, the policies should also focus on keeping land-use and other regulations to a minimum.

The state of North Carolina began to move in this direction with its approach to comprehensive tax reform in 2013. Besides implementing a low flat rate income tax with fewer special tax breaks, it began the process of dramatically reducing its corporate income tax rate while wiping out the special corporate giveaways that have become embedded in the system over the years. In this case counties and municipalities should look to the state as a role model. At the same time the state needs to abandon programs that provide matching funds to localities that engage in corporate giveaways. In providing these matching funds, the state becomes an enabler of bad local policy.

The primary role of local government is to provide for sound and reliable infrastructure services. The latter includes effective police and fire departments, efficient trash collection, a road system that is kept in good repair, a safe and instructionally effective school system, and a dependable sewer system and water supply that can accommodate economic growth.

The goal should be to create an environment that is conducive to investment and business activity, not for a politically favored few, but for all entrepreneurs.

The entire 2014 City & County Issue Guide, is available for download as a 3.6MB Adobe Acrobat file.
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