North Carolina’s Business Tax Climate: We’re number 1! …or is it 41? …or 3?

The Tax Foundation released its annual report today ranking each of the fifty states according to the organization’s State Business Tax Climate Index.  The index claims to measure the relative “competitiveness” of a state’s tax system, and North Carolina did not fare well this year.  The state dropped two spots in the past year to rank number 41 off all fifty states.  A lawmaker reading the report would almost certainly conclude that North Carolina must be overburdening businesses.

Yet, this Tax Foundation report comes on the heels of Forbes ranking North Carolina as the third-best state for business and careers in the nation.  North Carolina earned its near-top spot from Forbes due to having the third-lowest business costs (labor, energy, and taxes) and third-best business regulatory climate in the nation.  And back in March of this year, the business-funded Council on State Taxation released a report ranking North Carolina as having the lowest state and local business taxes of all fifty states.

If all of these organizations are attempting to measure whether a state’s tax code is friendly to business, why are the numbers so inconsistent?  The truth is, as economist Peter Fisher has shown, that the various organizations that aim to rank the states according to business tax climate or competitiveness simply do a poor job of measuring what actually impacts real-world business growth.  That is why thirty-four states can claim to be in the top ten for their state business climate, according to five widely cited business climate indices, and why anti-tax crusaders can denounce forty-two different states for being ranked among the bottom ten.

Measuring a state’s capacity for economic growth is an incredibly complex undertaking, and no organization can rightly claim to have uncovered the correct formula.  Thus, it would be wise for policymakers to ignore these rankings and focus on making pro-growth, pro-jobs policies that are supported by a foundation of sound research and analysis.

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