NC Budget and Tax Center

A pathway to poverty: 3 reasons why Tennessee is a bad role model for North Carolina’s economic future

In the current debate over tax reform, legislative leaders frequently hold up Tennessee as a role model for improving North Carolina’s economic competitiveness and ensuring future prosperity.  But as a new Budget and Tax Center brief reveals, once we look below the surface, the Volunteer State has exactly the wrong kind of economy to emulate—Tennessee models a pathway to poverty, not a pathway to prosperity.

Here are 3 reasons why Tennessee is a bad role model for North Carolina’s economic future:

1. Tennessee’s economy is not performing as competitively as advertised.

 Despite a couple years of post-recession job growth that surpassed North Carolina’s, Tennessee’s economy has not performed as competitively as advertised over the long-term.  The Volunteer State had by far the slowest employment growth rate (4.4 percent) of any neighboring state from 2001 to 2011 (the most recent complete for which data is available), including North Carolina (which saw 8.3 percent employment growth).  In the years of recession and sluggish recovery since 2006, North Carolina has actually seen 0.2 percent nonfarm employment growth, while nonfarm employment in the Volunteer State contracted by 2 percent. Only over the last two years has Tennessee begun to (slightly) outpace North Carolina in employment growth (2 percent to the Tarheel State’s 1.8 percent), but this does not represent a significant economic or competitive advantage.

2.       Tennessee’s economy is generating low-wage jobs that pay poverty-level wages.

What job growth Tennessee has experienced has mostly occurred in low-skill industries that are paying workers too little to keep families out of poverty. Over the past decade, private employment growth in industries paying below the state’s $30,202 median wage grew an average of 3 percent, while dropping by almost 5 percent in industries paying above this threshold. Even more troubling, this trend appears to be accelerating. Since 2006, Tennessee’s employment in higher-wage sectors has dropped by 7 percent.

Additionally, Tennessee’s workers were paid lower wages than North Carolina’s workers across all earnings groups in 2011, including the median wage, which was $1,000 less in the Volunteer State. Lower-skill workers in Tennessee in industries that pay below-median wages earned, on average, $67 less in wages in 2011 than their counterparts in North Carolina. Higher-skill workers in Tennessee paid above the median wage earned about $3,100 less than their equivalent Tarheel State workers.

These across the board lower wages go a long way toward explaining why Tennessee’s median household income ($41,700 in 2011) is $2,000 less than North Carolina’s ($43,916), and its 18.3 percent poverty rate is worse than North Carolina’s (17.9 percent). These are certainly trends that North Carolina should not seek to emulate.

 3.       Tennessee’s tax policies make poverty worse by shifting tax load to working families

Tennessee’s regressive tax policies have exacerbated the challenges faced by workers in the state’s poverty-wage economy by requiring low-income families to pay more in taxes as a share of their income than the wealthiest state residents. Tennessee has no personal income tax, and as a result, the state is much more reliant on sales taxes to fund schools, health care and other services that form the foundation of a strong economy.  In fact, Tennesseans pay higher sales taxes as a proportion of their income than residents of any surrounding state—$46.42 for every $1,000 of personal income, compared to North Carolina’s $35.58, which is right at the national average.  Since lower-income families spend a greater portion of their total income on food, rent, health care and other basics  than high-income families,  sales taxes have a disproportionate impact on those least able to pay them.

The poorest 20 percent of Tennessee taxpayers—those making less than $17,000 per year—pay 11.2 percent of their income in taxes, while the wealthiest 1 percent—those making an average of $945,900 per year—pay just 2.8 percent of their income in taxes. The majority of Tennesseans, who earn an average of $57,000 or less, end up paying at least three times more, in percentage terms, than what the wealthiest pay in taxes.

Although proponents of Tennessee’s tax system claim that the lack of a personal income tax means lower taxes for all taxpayers, this is clearly not the case. The lowest income taxpayers in Tennessee end up paying more as a share of their income than the richest taxpayers. Combined with the boom in low-wage employment, the tax shift that results from no personal income tax ensures that low- and moderate-income families don’t have enough to get by. Clearly, Tennessee’s economy is a bad role model for North Carolina. It provides a pathway to poverty, not a pathway to prosperity.


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