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Governor's employment incentive scheme does not add up

 

By Robert F. Mulligan, Ph.D.

Published 8/18/02

 

Earlier this month, Governor Easley proposed an "N.C. Stimulus and Job Creation Act" to the General Assembly.  This proposal is rancid pork pure and simple.  The grants will be awarded, for up to fifteen years, by three political appointees of the governor, and will rebate between ten and eighty percent of state payroll tax witholdings to selected employers.  Recipients and grant amounts will be chosen by a three-person "Economic Investment Committee," consisting of the NC secretaries of commerce and revenue and the director of the Office of State Budget, Planning, and Management.  These three individuals will decide which companies will receive the incentive and which won't.  Even if the three are able to resist the irresistible temptation to reward those who reward their party with campaign contributions, the putative success of this program depends on promoting businesses that will grow in the future. 

 

The governor's press release makes it clear he would like to see the high-tech sector emphasized at the expense of "old manufacturing jobs."  However, this puts the state government in the business of picking tomorrow's high growth companies so they can get behind the winners.  That might seem like an easy task when the stock market is booming, but it becomes a lot more difficult in the financial environment we now face, after the speculative bubble has burst.  The high-tech sector remained glamorous until the middle of last year, after which it became obvious that it simply wasn't all it had been hyped.  If the state had attracted many more high-tech firms during the boom, we'd be facing an even greater increase in unemployment.

 

The second problem with the incentive scheme is that it merely channels money from the employee back to the employer.  In effect, workers' payroll taxes will be rebated to their employers.  Although this scheme will give unscrupulous politicians apparently tangible results to crow about, it won't focus any attention on real underlying problems.  Picture future governors pointing to specific firms which receive the incentive, and taking credit for the resulting jobs, but ignoring the high taxes and the shifting of costs to employees and other, unsupported firms.  Everyone in the whole state who works for an employer not receiving such a grant will be paying for this program.  The overall impact of the program will be negligible at first, but will be used to argue for expanding the scheme.  Ultimately higher income taxes must result, further harming the state's economy.

 

The governor's employment incentive scheme seems tailor made to expand – and increase in cost – almost without limit, as similar schemes have in other states.  A similar program in Kentucky ballooned out of control over the last decade from a mere $47,000 to over $30 million.  Governor Easley should be applauded for realizing something must be done about North Carolina's high unemployment and high uncompetitiveness – but he needs to go back to the drawing board regarding a solution.

 

What is the root cause of North Carolina's economic uncompetitiveness?  It's nothing more complicated than the state's oppressively high tax burden, among the highest in the U.S.  How can taxes be lowered?  Only by lowering government spending.  North Carolina's marginal income tax rate is 8.25 percent, among the highest in the U.S.  That compares with a very high marginal 7.00 percent in South Carolina, 6.00 percent in Georgia, and 5.90 percent in Virginia.  Florida and Tennessee don't have state income taxes at all, and manage quite nicely in comparison, though they raise revenue through a variety of other taxes.  North Carolina's marginal corporate income tax rate of 6.90 percent is also among the highest in the U.S., and compares with marginal corporate income tax rates of 6.00 percent in Georgia, Tennessee, and Virginia, 5.50 percent in Florida, and 5.00 percent in South Carolina. 

 

 

Robert F. Mulligan of Cullowhee is assistant professor of economics in the College of Business at Western Carolina University.

 

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