Tax cuts still aren’t telling the story supporters want

At his Tax Day press conference, Governor McCrory repeated the often-heard claim that the effect of cutting taxes on the state’s economy speaks for itself. Last year’s tax cuts may be speaking, but they’re not telling the story its proponents hoped—for the very good reason that tax cuts are just a poor strategy for promoting business growth and long-term job creation.

Here’s the Governor on Tuesday:

“Businesses are relocating to North Carolina because of the changes we made in our tax code and that speaks for itself.”

This claim does not bear up under serious scrutiny. In fact, decades of evidence support the opposite—taxes don’t drive business location decisions. Rather, the public investments that taxes make possible are the most important factors in determining where companies decide to locate—investments like an educated workforce, infrastructure, strong industry clusters, and proximity to research and development institutions.

So let’s examine the evidence Governor McCrory presented, starting with Lee Controls—a New Jersey-based company that recently relocated to Brunswick County and cited tax reform as one of the major reasons for their move. The company is promising to create just 77 jobs over several years. While creating even one new job moves the state in a positive direction, the fact remains that trying to dig North Carolina out of the job losses from the Great Recession is going to require more employment growth than can be generated by one 70-job project at a time.

Now there may be a few more examples out there of companies that decided to locate in North Carolina due to tax cuts, but taken together, they just haven’t been enough to meaningfully move the needle in terms of aggregate business growth or job creation.

Remember, the main point of attracting new businesses to North Carolina (and expanding the ones we already have) is to ensure greater job creation. So if we’re not creating a meaningfully different rate of job creation, then all the firm location decisions in the world won’t make the tax cuts effective.

And the evidence is clear from the state’s recent employment reports:  job creation since the tax cuts went into effect —or even since the legislation passed–hasn’t been all that special compared to previous years, or to the national average.

If something special were happening in North Carolina because of tax cuts enacted in 2013, we would have expected to see faster job growth over the past 8 months than we saw over the same period in previous years.  But we don’t. North Carolina’s payrolls added fewer jobs over this period in 2013 than in the years before. Specifically, in the eight months since July 2013, NC created 30,100 net new payroll jobs—less than the 55,100 new jobs the state created from July 2012 to February 2013 and the 43,900 new jobs from July 2011 to February 2012.

This poor record shouldn’t be surprising. After all, tax cuts have rarely produced the kind of job growth that has been promised. The states that cut taxes the most during the 1990s ended up experiencing slower job growth in the 2000s than the states that didn’t cut taxes at all. And more recently, the state of Kansas enacted even deeper tax cuts in 2011 than we did last year, and saw a slower rate of job creation over the past three years than the national average.

The reasons that tax cuts—particularly cuts to a state’s corporate income tax rate—are not effective at generating significant job creation are relatively straightforward. Most importantly, businesses care more about the overall demand for their products and access to customers than they do about taxes when they make decisions about opening new facilities and adding employees. In fact, taxes make up just 2 percent of most corporate cost structures. Payrolls, transportation costs, and capital plant are much more important to most corporations than taxes. As a result, the local assets that reduce those costs, including labor skill levels, transportation infrastructure, industrial infrastructure, and, increasingly, proximity to technological innovation and research, are usually much more important to firm location decisions than taxes.

And although it’s true that some less-capital intensive and skill-intensive companies may value low taxes over these other assets, these companies typically pay low wages while they’re here and are more likely to leave North Carolina for the next lower-cost location they can find.

Even worse, there’s no guarantee that the multinational corporations that benefit from this tax cut will actually invest those benefits back in the state.

Additionally, the tax cuts on those businesses that pay personal, rather than corporate, income tax are unlikely to lead to significant job growth. That’s because these businesses are already exempted from paying taxes on payrolls, so adding a new employee is already tax free. Moreover, most of these companies don’t have a business model that calls for significant employee expansion (like mom-and-pop restaurants), or are still early-stage companies that aren’t yet earning profits or paying significant income taxes.

The evidence about tax cuts is certainly speaking but it’s not telling the story proponents want to hear—tax cuts remain a poor strategy for spurring long-term, sustainable job creation.

4 Comments

  1. Alex

    April 17, 2014 at 4:36 pm

    Looks like new York is following the McCrory plan now also :

    “Last Monday night, state legislators in New York did the unthinkable: they cut taxes. Let me reiterate that. New York lawmakers cut taxes, while passing a $140 billion budget, instead of increasing them. While some tax reform measures included in the 2014 budget come in the form of property tax rebates and a three-year phase out of the utility tax surcharge, the most notable tax cut involves the Empire State’s corporate income tax.

    For the first time since 1917, manufacturers will no longer be responsible for paying corporate income tax in the state of New York. Prior to the passage of the 2014-2015 state budget, manufacturers owed 5.9 percent of their earnings to the state. In addition to eliminating the corporate income tax for manufacturers, non-manufacturing corporations will see their rates decrease from 7.1 percent to 6.5 percent – the lowest it has been since 1968. What the passage of the budget has effectively done is take Governor Andrew Cuomo’s Start-Up NY initiative, which would create select tax-free zones, and apply it throughout all of New York. Thus, this provides all businesses with the same opportunity that initially was going to be awarded to areas hand-picked by the governor.

  2. Alan

    April 17, 2014 at 5:50 pm

    So its OK for the other “people” in society, (the corporations) not to pay any taxes, and get a free ride? I’m all for offering reasonable incentives for investment & job creation, but must the entire tax burden be shifted to everyone else to fund these government handouts (some would call it welfare)? You can’t call corporations “people” and expect them not to contribute.

    Only in GOPLand do tax cuts mean more jobs.

  3. gregflynn

    April 17, 2014 at 7:58 pm

    For the record, New York City has personal and corporate income taxes that are in addition to and separate from New York State taxes.

  4. LayintheSmakDown

    April 19, 2014 at 8:36 pm

    The high hiring figures that came out the other day contradict this post. NC is leading the nation in job growth, and hmmmm it is not a coincidence considering the better business environment that the tax cuts have made.