Saving it forward: state lawmakers, while focused on cutting costs and bad regulations, should take advantage of a better economy and job market to bolster the rainy-day fund.

• Author: Hood, John
• Position: Free & Clear

Businesses are on a constant quest for value. They seek the greatest possible return at the lowest possible cost. So if states and localities wish to foster economic growth, they need to offer an attractive value proposition to the entrepreneurs, managers and investors who make business decisions.

You might think my statement so obvious that it need not be made. Respectfully, you are mistaken. In Raleigh and elsewhere, there is a political faction that argues the cost of doing business is not particularly relevant to economic development. Its adherents argue that governments need only concern themselves with the volume and generosity of the services and amenities they deliver. North Carolina shouldn't even bother to compete with lower-cost jurisdictions in the rest of the country or around the world, they say.

While you'll occasionally find an executive who claims not to care about such pedestrian concerns as how much they pay in taxes or how much time and money it takes to comply with regulations, most business leaders disagree. They vote accordingly with their ballots, their budgets and their feet.

Value arises from the interaction of costs and benefits. To be sure, if higher tax and regulatory burdens are accompanied with clearly superior public services, that might well benefit the economy in question. In reality, there does not appear to be a consistent relationship between service quality and cost. Many places with expensive government don't have better schools, roads or crime rates. Many economical governments compare well in delivering these services.

Of the roughly 120 studies on the subject published in peer-reviewed academic journals since 1990, most found that higher taxes corresponded with lower rates of state economic growth. Only 15% of the studies found that higher state spending was associated with stronger economic performance. Even for education and infrastructure, the empirical findings are mixed. Most studies found insignificant or even negative economic effects from state spending on them. This doesn't mean, of course, that schools and roads aren't valuable. The findings suggest that the taxes required for states to spend more than the national average on these services do more economic harm than any resulting service improvements enhance economic good.

North Carolina policymakers have taken these insights to heart. In 2011, a newly elected Republican legislature refused to extend some $1 billion in tax increases...