The Pulse

State budget takes wrong turn on economic development

By: - October 7, 2014 1:22 pm

The 2015 state budget for creating jobs and growing the economy doubles down on the wrong turn taken by the legislature on economic issues over the last year. First it was the decision to continue to last year’s ill-advised tax cuts for the wealthy instead of investing in job training and education—the real building blocks of sustainable economic growth. Then it was the decision to privatize the business recruiting activities of the Department of Commerce—despite evidence from other states these initiatives produce more scandals than jobs—and eliminate regional planning initiatives that helped small communities coordinate their economic development efforts.

And now the state budget completes this trifecta of poor choices for economic development by spending more of our state’s limited resources on programs that are both ineffective at creating jobs and are overwhelmingly targeted to the wealthiest urban areas of the state instead of the more distressed areas in rural North Carolina.

Economic development incentives—cash given to companies in exchange for job creation—are not the best strategy for growing the state’s economy. All too frequently, they have been found to be costly, inefficient, and ineffective at generating meaningful job growth, except in the rare cases when they are used alongside other state supports to targeted industries—like Biotech and textiles here in North Carolina.

Unfortunately, the state budget creates two new business subsidy programs. The first is a $20 million “catalyst fund” designed to “sweeten the pot” at the end of negotiations with prospective companies to successfully secure their location and/or expansion in North Carolina. Given that incentive deals have often proven ineffective, the good news is that this program has not yet been enacted into law, since funding for the “catalyst fund” in the budget was contingent on enactment of a separate piece of legislation that never passed.

While the “catalyst fund” has the same accountability measures as the state’s Job Development Investment Grant program—requiring companies to hit promised job creation targets before receiving public subsidy—the same cannot be said of the $10 million film incentives grant program designed to replace the film tax credit, which expired this year. As a result, the new film program gives no-strings-attached cash to firms with no way of holding them to their promises of investment and job creation. While the film industry has created quality jobs in the state, we should all question the wisdom of giving public dollars to private companies with no accountability and no guarantee that they will create the jobs they promise to.

Additionally, North Carolina’s history with such incentive programs shows that these investments are not targeted to low-income communities. For example, policymakers awarded more than triple the amount of incentive dollars to the wealthiest 20 counties compared to the 40 most distressed counties from 2007 to 2013.

At the same time that the budget shifts resources towards ineffective and unaccountable incentive programs, it cuts money from programs that clearly benefit poorer regions in the state. The state eliminated all funding the Support Center, which provides small-business lending in low-and moderate-income communities where major banks will not lend. Since 1990, the Support Center has provided capital, business services, and policy research to aid start-ups and existing businesses, and has created or retained 363 jobs across the state since 2010.

This completes last year’s efforts by legislators to completely defund all state-supported nonprofits providing job and business development assistance to the state’s economically distressed communities.

Additionally, lawmakers cut $1.3 million from the Limited Resource Communities Grant program. This new program created last year to partially replace the work done by the N.C. Rural Economic Development Center, which was dismantled to make way for a new state agency—the Division of Rural Economic Development. While the new Rural Development Division received an additional $1.25 million in funding in 2015 (a largely positive development), the overall funding for the division is still much less than the funding that previously went to the Rural Center, leaving a significant gap in the resources available to low-income communities.

The 2015 budget represents a wrong turn on economic development.

This is the third post in a series that takes a detailed look at the final budget passed by North Carolina lawmakers during the 2014 legislative session. The first post provided an overview and examined how North Carolina’s investments post-recession have not bounced back nearly as much when compared to previous recessions. The second post explored the inadequate early childhood education budget. See the rest of the series here.

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