Accolades touting North Carolina as the number one state in the union for business investment are testimony to the state’s conservative fiscal leadership and focus on preparations for challenging economic conditions. And though the state legislature should take a bow for the most recent recognition, it should also step back to reconsider the continued use of corporate incentives that favor a few over the many.
Earlier this week, the cable business news network CNBC ranked North Carolina as the top state in the nation for business investment and also described the state’s economy as the strongest in the nation. The other states identified for top honors were Washington, Virginia, Colorado and Texas.
Writing for the cable network, CNBC reporter Scott Cohn wrote, “The Tar Heel State has always been a contender in CNBC’s annual competitiveness ranking, rarely finishing outside the top 10 since the study began in 2007. The state finished a close second last year. But 2022 is the year it has be able to climb to the top.”
Mr. Chon and the report authors attributed the state’s success to the ability and willingness of the legislature and Governor Cooper to put “aside their very deep political divisions to boost business and the economy.”
While there may have been some willingness on the part of the legislature’s Republican leadership and Democrat Governor Cooper to work for certain goals, primarily incentives for major industrial development, the real cause for the state’s competitive success goes back ten years.
Prior to 2010 when the state was under the guidance of the Democrat party, North Carolina’s economy was in constant turmoil. During the first decade of the 21st century the state’s budget was constantly being tweaked to accommodate surprises such as unbudgeted health expenses that the state’s Health and Human Services would spring at the end of each fiscal year. There were other surprises that the state had to adjust for annually such as unfunded pension and state employee health care plans and an underfunded unemployment insurance program.
To cover these unexpected expenses the legislature would dip into a variety of funds, particularly the state highway trust fund, “borrowing” highway reserve funds with the proverbial promise that the moneys would eventually be repaid.
By the end of the first decade, as the state’s economy was reeling from the 2007-08 recession, the state found itself over $2 billion in the red to the federal government for funds borrowed to cover growing unemployment insurance.
In 2010, just as the census was completed and new gerrymandered districts were being introduced, North Carolina voters decided a change was in order and the legislature’s leadership flipped to conservative Republican, an historic event considering that the last time Republicans controlled both legislative chambers was 150 years earlier.
From 2010 to 2012 the legislature increased payroll taxes across the state to recoup the funds needed to pay off the state’s indebtedness to the federal government, doing it in just over two years, almost one year ahead of schedule.
Taking a cue from that experience, the legislature set a course to assure that the state never again was in debt to the federal government and in process, not in debt to its citizens.
Over the past ten years the Republican legislative leadership has introduced and maintained disciplined conservative fiscal management that has held every agency and state department accountable for expenditures.
At the same time the legislature was demanding accountability, it took on the task of setting up a process to fund the state’s “rainy day” fund to better prepare the state in the case of disasters such as hurricanes or even the pandemic, thereby assuring there is ready cash available if needed immediately.
The result of this one effort has garnered the state additional accolades as having one of the most financially sound emergency funds in the country, now amounting to over $6 billion, approximately 20% of the state’s operating budget.
Because of this conservative fiscal management that has the resulted in an almost pay-as-you go process, the state’s coffers have remained strong, allowing the legislature to pass the savings to the taxpayers. Over the past ten years state has been able to lower personal income taxes from 7.75% to 4.99%, a 36% reduction. In that same period, corporate taxes have dropped 6.9% to 2.3%.
These are all good indications that the state’s leaders understand the value of good financial stewardship. But there is still work to be done to make the state more accountable, particularly in the area of corporate incentives.
In Mr. Cohen’s CNBC piece he, along with the surveyors grading the state’s economy, points approvingly at financial efforts to incentivize investments from outside firms such as Apple, which received $846 million in incentives, or the $1.2 billion incentive package to entice a Vietnamese electric car manufacturer to the state.
These incentives are indicative of an attitude that government, in this case state government through the offices of economic development, can better determine who or what companies should be awarded and which ones should be ignored.
The purpose, theoretically, is to bring companies into communities that have the greatest need - low wealth communities- but that is not what is happening.
Paige Terryberry, senior analyst for fiscal policy at the John Locke Foundation, recently reported that most corporate welfare, her description of corporate incentives, is going to the wealthiest counties in the state and not ending up in low wealth areas.
According to the John Locke analyst, Gov. Cooper pledged $1.3 billion in corporate incentives in 2021, which amounts to $536,432 per job to be created by the companies receiving the state funds. And, according to the John Locke analysis, most of these jobs are located in already successful communities.
As Ms. Terryberry notes in her recent article, North Carolina’s business climate is already attractive and will become more so if the current schedule set by the legislature is maintained, eliminating the corporate income tax by 2029.
If the state wants to be truly corporate and business friendly, it need only simplify its tax and regulatory codes and remove unfair incentives that favor the few at the expense of the many.