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Agenda 2014 Urges Realistic Economic Analysis

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June 2, the John Locke Foundation announced the release of its new Agenda 2014. The document is a compilation of policy recommendations for decision makers in North Carolina. Unlike previous versions, this one actually applauds the legislature for recent decisions that should have a favorable economic impact.

Perhaps the most important theme recurring through the recommendations was the need to sever dependencies on the federal government. As analyst Sarah Curry points out, it is not a question of if the federal government will put an end to making grants from its own debt – “whether it’s due to sequester, shutdown, or unsustainable spending” – but when. She therefore recommends that legislatures work on strategies to transition to financial independence without catastrophe.

Last year, North Carolina spent through $20.8 billion in federal grants, marking a 47 percent increase in federal dependency over the last ten years. “According to the most recent NC Auditor’s report, the state has received an average 42 percent of its total budget from the federal government over the last ten years, with the exception of 2010 and 2011, when the American Recovery and Reinvestment Act (the so-called “stimulus”) helped to boost federal funding to over 50 percent of the state’s total budget,” observes Curry.

Another practice highly criticized is the use of power to grant favors to a connected few. Liberalism, before it meant going to San Francisco and wearing flowers in your hair, was a founding doctrine for this country. It meant simply that government should grant no special privileges. Dr. Roy Cordato objects to the notion that prosperity can be achieved by the “transfer resources from the vast majority of North Carolina taxpayers to businesses that the agency determines are worthy of its largesse.”

Cordato charges that, in spite of claims that the cronyism behind “economic development incentives” has been eradicated by the enforcement of performance measures; the practice is still a variation of the theme of central planning that historically fails. Command-and-control systems, Cordato points out, are based on the tenet that, “freely made decisions of entrepreneurs cannot be trusted [as well as those of the] ‘experts’ in the state bureaucracy.”

Industries targeted by the state’s Department of Commerce for crony favors, whether in the form of cash grants or tax breaks, include “tourism, film, biotechnologies, healthcare, and financial services.” Jon Sanders notes the state’s subsidies for the film industry, “greatly increased after 2009 when the governor and state officials were embarrassed to be outbid by Georgia’s revamped film incentive for the Miley Cyrus feature, ‘The Last Song.’”

Recent studies have shown that subsidies to the film industry have a negative economic impact. In North Carolina, the actual return on each dollar invested has been estimated to be as low as nineteen cents. In April, the Fiscal Research Division of the General Assembly critiqued a NC State University study indicating a $1.42 return on the dollar. It reported “a series of misunderstandings of the state’s tax laws, invalid or overstated assumptions, and errors in accounting.”

Further criticizing the practice, Sanders faults the program’s refundable income tax credits. “The refundability provision is likely unconstitutional because it is an open-ended draw on the state Treasury without appropriation by the General Assembly.”

Is it better to make oneself poor to give the poor a fish, or to make oneself rich to employ a poor man so he can buy his own fishing gear and riggings? Cordato puts it this way, “A rising tide lifts all boats. Creating the conditions for economic growth will in turn create a rising tide. Targeting favored businesses and industries in the pursuit of economic development sloshes water around, lifting some and sinking others.”

More injustice is identified in the state’s tax system, which has historically “carved out” favors for the connected. As Curry observes, “Tax breaks for select companies and higher taxes for certain activities complicate the tax code and feed wasteful lobbying.” She continues to explain that blatantly unfair tax systems distort the economy, economic distortion being equivalent to a lessening of potential for prosperity. While the General Assembly is commended for recently modifying the corporate tax code to remove disincentives for entrepreneurship, productivity, and investment; analysts at the JLF believe more must be done.

Another way the state picks winners and losers is through regulation. Sanders points out regulation is often hurled by cronies at their competitors. “Providers already in the field reap benefits from restrictions and hurdles to entry placed on future potential competitors, including licensure fees (often recurring), mandated credit-hours of academic instruction (time and money), passage of a qualifying exam or exams (including exam fees), and supplemental education (more time and money).” State licensure is mutually lucrative for corporate mooches and those they lobby, but it knocks the little guy, who “generally lacks his own compliance and legal staff” out of business. To correct for this, Sanders recommends that the legislature subject regulation to cost-benefit analysis, sunset clauses, and more “no-more-stringent” limitations.

Sanders also shares some commentary on the state’s regulation of vice. He recalls in 2009-10, “a succession of scandals in North Carolina’s Alcoholic Beverage Control (ABC) system – including exorbitant salaries, nepotism, and lavish parties for ABC board members and staff hosted by liquor representatives.” Privatization would surely generate more revenue for the state than the measly offerings the boards have produced, but the boards answer to Prohibition Era concerns that state-run alcohol sales somehow foster a stronger moral fiber in the community. To that, Sanders quips, “Studies have shown that the rate of consumption is not dependent upon who sells the alcohol.”

Sanders also objects to the state granting itself a monopoly on gambling. As evidence that state lotteries are poor taxes, he notes lottery sales were around $486 per adult in the top-gaming counties, nine of which were “among the most economically distressed counties in the state.” Besides taking advantage of the downtrodden, the lottery does not generate more money for education, it replaces what legislators take out of the education budget for more lavish activities.

The full report is available through johnlocke.org.

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