Tax breaks dominate economic development

June 5, 2008

Tax incentives account for 90 percent of North Carolina's economic-development spending, which has nearly doubled since 1996, a new study says.

The report from the Corporation for Enterprise Development, based in Washington, D.C., follows a recent report funded by the state.

The Economic Development Inventory, released in January by the Fiscal Research Division of the N.C. General Assembly, sought to identify all state-funded economic development programs and their funding trends, and estimated total spending at $1.29 billion last year.

The new report from the Corporation for Enterprise Development report lauds the inventory initiative, but says more could be done to improve transparency and accountability, such as expanding the initiative's scope to chart spending by program categories and tracking trends over time.

"Before the state can improve the system, it needs a much clearer idea of what is happening now," Bill Schweke, report co-author and vice president of learning and innovation for the group, says in a statement.

"By making the system transparent, North Carolina has an opportunity to step to the forefront of this issue and become a national leader in fiscal accountability around incentives," he says.

Currently, Texas and Illinois are the only states with institutionalized reporting processes.

Certain types of firms may be gaining unfair advantage through state tax subsidies, which favor large companies over smaller ones and distort competition among similar-sized firms, the report says.

And the state's heavy emphasis on tax incentives leaves out alternatives to the "business attraction contest."

Instead of relying so heavily on tax breaks to lure out-of-state companies to North Carolina, the state could benefit by investing more in existing businesses through workforce and small-business development programs, and by funding research that nurtures innovation and technology, the report says.

Clearer categorization of economic-development programs also would help the public track state spending priorities, which in recent years seem to have shifted away from the technology industry toward industrial development, the report says.

The report was previewed recently before the North Carolina Joint Select Committee on Economic Development Incentives, which unanimously recommended making the Economic Development Inventory an annual requirement.

The committee has also agreed to consider the report's suggestions for expanding the inventory's scope.