Tax Handouts to Business Unfair

This article first appeared in the Chapel Hill News, January 9, 2008.

North Carolina’s political leaders evidently spent $1.2 billion last year planning the state’s economy, according to the "Economic Development Inventory" recently released by the General Assembly’s Fiscal Research Division. The report outlines the myriad cash awards and legal manipulations used by lawmakers to "stimulate" the economy — all at taxpayers’ expense.

When most people think of this subject, the Goodyear and Google handouts immediately come to mind. But the practice of providing preferential treatment to some businesses over others runs much deeper than these highly publicized cash awards.

The bulk of the $1.2 billion does not come from the cash handouts written about in newspapers. The most favored method of state intervention is much less transparent because it involves manipulation of North Carolina’s highly complex tax code.

North Carolina lawmakers have carved up the tax code to create an intricate web of exemptions, deductions, credits and refunds to targeted industries under the guise of "economic development." Farmers, manufacturers and recyclers — among several others — receive highly favorable treatment under the tax code when they purchase equipment and supplies necessary to produce their goods.

Yet states such as North Carolina that relied more heavily on the agriculture and manufacturing industries saw larger economic setbacks in the last recession than states with a more diversified economy. In other words, targeted subsidies and tax breaks don’t improve the economy; they only impede progress.

While reducing (or better yet, eliminating) taxation on business inputs is good policy, it becomes bad policy when applied unevenly. Some select inputs are exempt from the sales tax when purchased by a business, others are taxed at a low rate while still others are taxed at the full sales tax rate. This uneven treatment of businesses puts some companies at a competitive disadvantage because more of their income is siphoned off in taxes rather than being invested in the growth of their business.

Government intervention has subsidized businesses that otherwise would not be profitable, making North Carolina’s economy more static and less adaptable to changes and new innovation.

A classic example of the mindset that government should be in the business of "saving jobs" through targeted incentives is N.C. Rep. Pryor Gibson (D-Anson). Gibson recently declared, "I’m positive it’s in our best interest to keep XYZ company with 1,000 jobs, even if they’re making buggy whips." Buggy whips? What Gibson really means is "It’s in my best interest to keep XYZ company with 1,000 jobs so they can vote for me come election time."

Propping up businesses that no longer produce a product or service that society values is the perfect recipe to halt innovation and economic growth. I suppose Gibson’s home is full of 8-track tape players and Beta Max recorders because of his desire to "save" those jobs.

The economy is a huge, dynamic entity often shaped by unforeseeable events, changing values and shifting priorities. A small group of lawmakers can never predict the flux and flow of changing consumer desires in an economy better than the millions of individual actors that comprise the market. Shouldn’t consumers decide which businesses succeed or fail?

The inevitable end in a system that empowers politicians, rather than consumers, over the market has been a disturbing blend of lobbyist-lawmaker alliances that reward industries with the most political clout rather than those most efficient at satisfying consumer demand. A better alternative would be to end the heavy hand of government planning via corporate handouts and targeted tax breaks, and use the savings to institute a low tax rate applied evenly across all businesses. This will allow entrepreneurs to innovate and create jobs in response to consumers, not government created "incentives."

It’s time for North Carolina consumers to demand control over their economy, not to rely on the whims of politicians who would still have us making buggy whips.