Removing Barriers in Nebraska Part Five: Economic Development vs. Economic Growth

For many years, Nebraska grew as an agricultural society, and neither citizens nor lawmakers saw any need to intervene in the state’s natural growth. However, in the years following World War II, improvements in farm technology led to job losses in agriculture, prompting the Legislature to intervene. The first state government office with the goal of recruiting industry to Nebraska was created in 1947[i]. 

Twenty years later, lawmakers repurposed this office into the Nebraska Department of Economic Development, with the goal to “plan, promote and develop the economy of the state and work for the fullest development of the state’s human, natural, and physical resources…” This also led to a much larger budget and wider focus[ii] than had been allocated to the first division established in the 1940s[iii]. 

Nebraska’s continued struggle with employment and population growth demonstrates the state should focus on economic growth, not development. Although often considered synonymous, these two concepts have very different goals that conflict with each other. In a modern economy, economic growth corresponds to a broad increase in the public’s standard of living, while economic development assigns privileges and benefits to specific groups, turning them into special interests. 

The economic inefficiencies created by these programs hinder economic growth by allocating resources and opportunities based on what public officials feel is necessary, instead of consumers and entrepreneurs. Nobel Prize-winning economist Friedrich Hayek once referred to the belief that governments could plan the marketplace as a false “pretense of knowledge,”[iv]and that no one group of people could really know enough to engineer a successful, free society from the top down.

Entrepreneurship is a primary driver of the quality of life Americans enjoy. These efforts by hardworking citizens can be measured in job and income growth figures, but also in the creation of new business firms.

Four out of five of Nebraska’s economic competitors are generating significantly more new businesses per year than Nebraska, and three of the five are generating higher rates of large firm births.  Iowa is the only state in the group lagging behind Nebraska in both measures. When compared to its economic competitors, Nebraska’s economic climate and policy structure do not seem to be as conducive to fostering new private sector entrepreneurship, even with aggressive economic development policies in place.

Policymakers often confuse being friendly to specific businesses as creating a robust business climate based on competitive markets. However, when government gets involved in subsidizing or favoring some businesses but not others, it does not create a level playing field.  Economic development policies that favor special interests not only draws resources into favor-seeking and lobbying, but also means the taxes on other, smaller, less politically-connected businesses must be higher to make up the difference. The money spent on these selective incentive type programs is better used to make broad-based reductions in taxes instead of picking winners and losers in the marketplace.

Rather than creating a stable policy climate to promote economic growth through entrepreneurship, Nebraska has instead actively tried to overcome its uncompetitive tax rates and burdensome regulatory environment through the widespread use of tax credits and targeted incentives to select businesses. According to a study by the New York Times^[v], Nebraska spends the most per capita on state incentives than any of its economic competitors, most of whom are experiencing lower tax burdens, higher firm birth rates, and higher rates of in-migration.

The use of selective business incentives, even in the most recent decades, have not changed the trajectory of migration in, or out, of Nebraska, instead taking away resources from taxpayers and entrepreneurs. In fact, the Department of Economic Development has spent more than $663 million since 2000 and $41 million last year alone. Nebraska’s two largest incentive programs, the Nebraska Advantage Act and the Employment and Investment Growth Act, carve away more than a third of the state’s corporate income tax base. Without these two programs, a flat corporate income tax of 5 percent would have raised as much revenue in 2013 as the current top marginal rate of 7.81 percent on taxable income greater than $100,000. It must be considered: in retrospect, how many firms and jobs would have been created if the state instead used this revenue to reduce tax rates for all Nebraska’s individuals and businesses?

The best approach to economic growth is to create a level playing field for all businesses, with simple but understandable rules and laws, broad-based policies, and taxes that apply to all[vi]. Research clearly shows[vii] the following strategies work when trying to increase jobs or economic growth:

(1) Foster connections and learning among entrepreneurs;

(2) identify and celebrate successful local entrepreneurs;

(3) reduce professional and occupational licensing;

(4) simplify tax codes and payment systems;

(5) revise state law governing non-compete agreements;

           (6) streamline zoning approval processes and offer clear guidelines; and

           (7) welcome immigrants. 

It’s important to note that the process of entrepreneurship, experimentation, and innovation results in higher economic output over time, which explains the growth of Arizona, Colorado, Florida, and Texas. Giving out selective business incentives only to big firms, or advantaging some firms or industries over others, takes resources away from entrepreneurs, increases the size and scope of government, and results in a higher  tax burden for all Nebraskans.

It is clear from reviewing the policies of Nebraska’s faster-growing competitors that a more welcoming business tax climate is a far better way to encourage entrepreneurship and business growth than picking winners and losers in the marketplace; however, Nebraska’s high tax burden has made it a challenge for policymakers to avoid using tax incentives to attract and retain businesses. Policymakers should take the opportunity to reform Nebraska’s selective business incentive policies in favor of a well-structured tax code with a broader base and lower rates to encourage economic growth.

In addition to comprehensive tax reform, policymakers should also examine the impact of excessive regulation on entrepreneurship, which will be discussed in our sixth and final brief in our Removing Barriers in Nebraska series.
 

Removing Barriers in Nebraska Part Six: How Red Tape is Harming the Good Life will be released on September 28, 2016. Click here to return to the series main menu.