Throughout the tax reform debate, we’ve been hearing a lot about the importance of improving North Carolina’s economic competitiveness as a route to bringing down the state’s exceptionally high unemployment rate. With the jobless rate stuck near 9 percent, unemployment is clearly a central policy challenge facing our state’s lawmakers. But lawmakers are getting it wrong when they assume that North Carolina’s unemployment is the result of poor economic competitiveness relative to other states. And it’s certainly no reason to support deep tax cuts like those embodied in all of the proposals put forward by the House and Senate.
The plain truth is that North Carolina is already competitive in attracting and growing businesses in the state. In fact, the CEOs and consultants who make corporate location decisions have repeatedly ranked North Carolina near the top of the nation for its business climate and attractiveness to investment in survey after survey. The U.S. Chamber’s own Enterprising States ranking puts North Carolina 12th for innovation and entrepreneurship.
The results are plain to see: North Carolina’s economy compares pretty favorably to our neighboring states (all of which have lower tax rates). Our state is leading or in the middle of the pack in nearly every major indicator of economic competitiveness—poverty, household income, and even annual per capita economic growth.
Turns out that the unemployment rate is actually the only measure of economic success in which North Carolina is notably lagging its neighbors. But contrary to the claims of legislative leaders, the state’s lagging jobless rate has virtually nothing to do with corporate or personal income taxes. Instead, it’s almost entirely due to long-term vulnerability and transformation in the state’s industrial base—specifically over-reliance on disappearing manufacturing jobs.
In 2000, more than 16 percent of North Carolina’s employment was concentrated durable and non-durable goods manufacturing industries—the most of any surrounding state. This included greater reliance on industries like textiles, apparel, and furniture, which proved most vulnerable to decline in the years since recessions of 2001 and 2007. As a result, North Carolina lost almost 42 percent of its manufacturing employment between 2000 and 2011, greater than the loss experienced by any other neighboring state. If North Carolina’s mix of jobs had more closely resembled our neighbors’ in 2000, then the unemployment rate would be lower today. In fact, we would have up to 108,000 more jobs than we do today if North Carolina had resembled the national average in share of total manufacturing employment.
In other words, North Carolina’s unemployment crisis is rooted in the need to rebuild or replace very specific industries, not an overall problem with lack of economic competitiveness compared to neighboring states.
It’s really hard to see how the state’s tax system is the best way to improve the state’s economy. In fact, tax cuts have repeatedly proven a poor strategy for economic growth and job creation in state after state—they don’t meaningfully influence corporate location decisions and they don’t improve economic growth or job creation compared to states that didn’t cut taxes.
What both the Senate and House tax plans do accomplish, however, is taking more than $1 billion revenue every year away from the very investments in job training, education, and quality of life that actually are responsible for North Carolina’s economic competitiveness—and will be essential for keeping our state competitive in the future.
Tax cuts are just a poor strategy for bolstering North Carolina’s economic competitiveness.