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North Carolina needs more sunshine on its business subsidy programs

The first thing any personal finance expert will tell you is that before you make any decisions on how you budget your money, you first figure out how much you are spending and where it is going. Although many of us don’t heed that advice for our own purposes, we might expect the people minding our government budgets to have a good handle on that information.  

Yet, few states, including North Carolina, have budgeting, data collection and reporting procedures in place to measure what they are getting in return for their funds or even to make an informed guess at the total fiscal out-go.

In the ongoing controversy over North Carolina’s economic development decisions and business subsidy programs, this lack of accurate information has fueled disagreements over what paths the state should be pursuing.

Happily, a recent study by research staff at the North Carolina’s General Assembly has just filled this gap by projecting what the state spends annually on all types of economic development programs, whether they are subsidies in the form of tax incentives or direct spending on programs, such as Job Development Investment Grants or SmallBusinessTechnologyDevelopmentCenters. The figure was a whopping $1.29 billion per year!

This is a significant amount of investment by the state, which in itself validates the attention that has been paid to these development efforts.  

This “Economic Development Inventory” (or “EDI”) report is an important first step, but more can be done to improve transparency and accountability in economic development. Analysis that looks at the state’s economic development programs by trends, priorities and impact would be a welcome addition for future reports.

My colleagues and I at the Corporation for Enterprise Development conducted a preliminary reexamination of the EDI report’s data. Our analysis revealed trends that are critical to understanding the substance of North Carolina’s economic development strategy. Chief among these trends is that tax-based subsidies are the fastest growing piece of the economic development pie. Tax incentives currently represent 90% of the state’s economic development spending in 2006-2007, up from approximately 77% in 1995-1996

Economic development is a growing state priority, since its “budget” for tax-based measures and General Fund expenditures roughly doubled since 1996. Comparing tax incentives for economic development against other state expenditures such as Smart Start ($200 million) and the Earned Income Tax Credit ($50 million) also shows the relative importance of this policy area.

If you break out the varied strategies that constitute the state’s development tool kit, industrial development (largely business attraction) is the largest on-budget expenditure category. Agriculture and community economic development spending categories appear to receive the least funds.

And, in a comparison of spending by functional categories across the last 10 years, “on-budget” programs for regional assistance and industrial development appear to have grown, while programs for technology development and industrial training seem to have shrunk.

By making this Inventory a regular biannual event, North Carolina has an opportunity to step to the forefront and become a national leader in best fiscal accountability practices for economic development expenditures. The Inventory could also be improved to look at spending by strategic area, such as agricultural development versus entrepreneurship versus training. Analysis that looks at recruitment/attraction efforts compared to retention/expansion activities would also be useful for future reports.

A full commitment to measurement and evaluation would lead to an upgrade of the state’s current oversight of economic development programs by providing attention to improving the fit between purpose and clear, measurable goals and by instituting a quality Management Information Systems (MIS) that would allow deeper and more rigorous sunset reviews and evaluations. 

There are many promising tactics for improving our business incentive efforts (local hiring preferences, better investments in worker skills, for instance), but before the state can improve the system it needs a much clearer idea of what is happening now.

But from the data we do have it is obvious that tax-based subsidies are a major development tool, and that is a situation that is primed for complexity, unfairness and preferential treatment. State policymakers and the citizenry should explore getting rid of all these tax loopholes in exchange for a cut in the business tax rates for all firms. This would create a much more level playing field for all types of business enterprises. Plus, you would now have to bring these “hidden,” long-forgotten tax “entitlements” into the sunshine of good government. 

William Schweke is Vice President of Learning and Innovation at the economic policy think tank, CFED [1]. “At What Cost?”  CFED’s review of the General Assembly report, is available at www.cfed.org [1].