Recommendation #5: No Corporate Welfare Payments

This article is the fifth installment in a series of recommendations currently being released on a weekly basis. Next week will conclude the series by detailing how much the state can save by temporarily abstaining from buying land.

Freeze Corporate Welfare Handouts

Savings: Up to $142 million

Should the state of North Carolina be handing out millions in taxpayer dollars to corporations during a budget crisis?

The fiscal year 2008-09 state budget authorizes roughly $142 million in discretionary corporate welfare. The Civitas Institute believes this is an inappropriate use of state funds and the money should be used to help fill the current year budget gap.

The General Assembly of North Carolina has created several “economic incentive” programs that essentially disburse taxpayer money to corporations in return for their promise to invest in either a new facility or expand existing operations in North Carolina. Most of these incentive programs include requirements placed upon the receiving corporations to invest a certain amount of money and create or maintain a certain number of jobs.

Corporate Incentives: Do They Work?
Critics argue that economic incentive programs are simply state government bribing companies to locate in North Carolina, a system commonly known as “corporate welfare.” Such economic incentive programs are tantamount to an admission that North Carolina’s business climate – in particular, tax rates – is not sufficiently attractive to entrepreneurs. Therefore, the government must step in and offer special tax breaks or direct cash awards to companies in return for their investments. (A list of economic incentive programs is included below.)

On the surface, the economic incentive system may appear to be a wise investment – creating jobs that may not otherwise exist. The reality, however, is not so simple.

Granting special treatment to certain specific corporations puts politicians in the position of picking winners and losers in the economy. It distorts the allocation of resources throughout the economy as entrepreneurs become concerned with pursuing government favors, rather than competing to efficiently provide goods and services that meet the needs of consumers. Any system that subverts the desires of the consumers in favor of political whims makes an economy less dynamic, and thus less prosperous.

Moreover, the practice of corporate favoritism also places companies that lack political clout at a competitive disadvantage. Imagine two companies offering similar products, both with similar cost structures. One of these companies receives significant government handouts or tax breaks while the other receives no such favors. How is this fair?

Further, the practice of targeted government favors to specific corporations is a common tool in the practice of political posturing. When the favors are handed out, it makes for great ribbon-cutting ceremonies and free publicity for the Governor who is “creating” jobs. What is not publicized are the jobs lost by those companies put at a competitive disadvantage by such favoritism, or the added tax burden placed on taxpayers to pay for the incentives. Similarly, the Governor does not hold any press conferences when companies that received government handouts go out of business and hundreds of workers lose their job.

Conclusion
Legislative economists estimate North Carolina’s budget shortfall could reach $1.6 billion. These developments make a compelling case why lawmakers should suspend their unfair practice of corporate welfare. Doing so would free up as much as $142 million this year to help fill the budget gap and avoid other more painful budget cuts (some of the economic incentive money may be required to pay out to fulfill prior agreements). Some of the recommendations listed below represent a complete freeze of the FY 2008-09 appropriations, while others merely represent holding the program’s appropriations to last year’s level.

ECONOMIC INCENTIVE PROGRAM	COMPLETE FREEZE OR ROLLBACK	ESTIMATED SAVINGS
One North Carolina Fund	Complete freeze of FY ’08-09 Appropriation	$38.5 million
One North Carolina Small Business Fund	Complete freeze of FY ’08-09 Appropriation	$4.6 million
Green Business Fund	Complete freeze of FY ’08-09 Appropriation	$9.4 million
Rural Economic Development Center	Rollback to FY 2007-08 Appropriation	$54 million
Economic Development Loan Program	Rollback to FY 2007-08 Appropriation	$1.5 million
Job Development Investment Grant	Complete freeze of FY ’08-09 Appropriation	$29 million
Biofuels Center of North Carolina	Complete freeze of FY ’08-09 Appropriation	$5 million
TOTAL		$142 Million