NC Budget and Tax Center

Supporting Home-Grown Entrepreneurs A Better Job Creation Approach

Supporting homegrown startups and young, fast-growing in-state companies is likely to be a more effective strategy for states to create jobs and build a strong economy than across-the-board tax cuts and other attempts to lure businesses from elsewhere that many states pursue today.

A new report released by the Center on Budget and Policy Priorities titled “State Job Creation Strategies Often Off Base highlights findings from new research showing that the vast majority of jobs are created by businesses that start up or are already present in a state. The report’s authors conclude that “many state policymakers pursue economic development strategies that are bound to fail because they ignore these fundamental realities about job creation.”

When states pursue tax cuts, they divert resources needed to help home-grown startups and young, fast-growing companies deliver maximum job growth and to build a climate that supports their growth.

Never has the cost of tax cuts to job creation been clearer than in North Carolina where state leaders’ pursuit of income tax cuts has reduced dollars targeted to help entrepreneurs in North Carolina build out their ideas and grow their enterprises. State support for community development finance institutions that support small business development in underserved communities has declined, direct investments in main street revitalization in small towns and cities, and rural economic development and infrastructure have also been significantly restricted in recent years. Meanwhile, North Carolina has failed to pursue many of the best practices in other states that take the best research and development to scale, promote innovative community economic development planning locally through targetted grants or most basically to sufficiently support the best business ideas in local communities that can achieve more inclusive economies. At the same time, public investments that are the foundation of a quality life—investments in good quality schools, parks and recreation—have eroded in our state putting at risk key foundations of entrepreneurship and innovation.

This new research in the report uses improved data to better inform our understanding of which businesses create jobs, and where they create them – calling into serious question the value of large-scale tax cuts and the various other tax breaks states typically offer businesses to move. Among the facts that counter ineffective tax-cut strategies:

  • About 87 percent of private-sector job creation from 1995 to 2013 in the median state was “home grown.” The job creation came from startups, the expansion of employment at existing establishments, and the creation of new in-state locations by businesses already headquartered in the state.
  • Large income tax cuts that a number of states have enacted or are proposing are especially poorly suited to helping startups and other rapidly growing firms, in part because these businesses often have little income in their early years.
  • The most commonly cited reason among entrepreneurs for starting their companies where they did was that it was where they lived at the time. Eighty percent of these entrepreneurs lived in the city where they started their companies for at least two years prior to starting their business. A survey by Endeavor Insight consulting firm concluded that founders of fast-growing companies decide where to live based on personal connections, the talent of the local workforce, and quality-of-life factors. Only five percent of these successful entrepreneurs even mentioned taxes as a reason why they founded their companies where they did.
  • To promote and assist job-generating entrepreneurship, states would be wise to invest in schools and colleges, improving workers’ skills, and maintaining communities that are attractive to residents who want to start a business. Successful entrepreneurs report these factors were key to where they founded their companies.

Bottom-line: Homegrown startups and fast-growing firms already in the state are much more important sources of job creation. Public investments that help build a skilled workforce and improve the quality of life for local residents are better bets for supporting real economic progress.

 

NC Budget and Tax Center

Forbes prints inaccurate claims about unemployment insurance changes in North Carolina

A recent opinion piece in Forbes Magazine wrongly claims that steps North Carolina took to reduce how much unemployment insurance provides to jobless men and women – and make it harder to collect – are somehow helping North Carolina’s economy.

Nothing could be further from the truth.

The article, written by North Carolina’s rightwing Civitas Institute and one of its business partners, heralds the underreported tax cut bonanza in the unemployment insurance as driving workers into employment and employers to create jobs.

In reality, North Carolina’s overhaul of unemployment insurance devastated a system meant to protect the economy from lower consumer demand that happens when job losses mount through no fault of workers.

As policymakers sought to pay down the debt incurred because of historic job loss during the Great Recession and an insufficient Trust Fund resulting from years of tax cuts, they pursued a lopsided approach. They called on jobless workers to pay far more through cuts to their unemployment insurance payments, reducing the number of weeks they could collect UI, making the system harder to access, and  limiting  job training or workforce development opportunities.

The result:  North Carolina went from being not particularly generous _  the middle of the pack among all states _ to downright stingy, at the bottom.

In the third quarter of 2015 (the latest data available):

  • Just 11% of the state’s unemployed receive unemployment insurance which ranks us last in the country
  • The state’s average weekly benefit was $233.69 — 46th in the country. Average weekly benefit as a percent of average weekly wage was 27 percent — 44th in the country.
  • The average duration for collecting UI was 11.5 weeks – dead last in the country.

Before the changes went into effect, the story wasn’t nearly so bad.  The measures:

  • The state had a 39% of unemployed workers receiving unemployment insurance in the second quarter of 2013 which ranked us 24th
  • The state average weekly benefit was $301.06 –   25th in the country.
  • The state average benefit duration was 15.9 weeks – ranking us 31st.

In 2013, the Tax Foundation, a conservative organization that policymakers often quote, ranked North Carolina’s UI system fifth most favorable to business in the nation. Only Arizona, Oklahoma, Delaware and Louisiana scored higher. That was BEFORE the unemployment insurance changes.

Today, employers contribute to the system just one penny for every $100 of wages paid and the average tax rate of 2.2 percent is below what the US Department of Labor determines to be adequate.

Perhaps most troubling in the arguments of those inclined to ignore economic realities is the suggestion that the system was rife with fraud and was discouraging people from seeking jobs.  The facts are otherwise. Read more

NC Budget and Tax Center

Not the conversation you read about in today’s paper

The 2016 Economic Forecast Forum held signs that the policy discussion may be starting to take the long-term economic challenges facing the average North Carolinian and poor communities more seriously. Hosted by the NC Chamber of Commerce and NC Bankers Association, the annual forum is not always the first place you expect to hear arguments for more public investment and taking stagnant wages seriously, so it was nice to witness yesterday.

The morning panel in particular delivered a nuanced discussion of how to balance taxation and the need for public investment, done with honest recognition of how people and communities are getting left behind in the current economy.  Distinguished economists offered their thoughts on how North Carolina can continue to compete and central to that was a grappling of how to make the economy work for more people. They took the obligatory moments to laud cuts to marginal tax rates, say some broadly polite things about the 2013 tax cuts, and muse on the possible benefits of privatization. But more notably, particularly for the venue, was the recognition that public investments do play a positive role in the economy, that stagnant or falling wages and high poverty rates hold us all back and that communities must have more tools to build a viable economic future.

Governor McCrory ended the day with themes that echoed some of what had been discussed in the morning. The Governor touted recent tax cuts, and implicitly claimed credit for the jobs created during the recovery, among other key points for the stump this year. However, amidst the prepared lines, McCrory also recognized that we still don’t have enough jobs, wages aren’t growing, and we need to upgrade a lot of public infrastructure. The governor made the most impassioned plea for more public investment while pitching the $2 billion ConnectNC Bond, which will be on the March 15th primary ballot. Perhaps even more strikingly, Governor McCrory recognized that if the bond is approved, it won’t meet the infrastructure needs of a growing state.

Among the messages that I left with that I hope we all carry with us into 2016: Read more

NC Budget and Tax Center

No boost to NC employment from unemployment insurance changes

You will hear a lot this week about the Carolina Comeback as various groups gather to put forward their forecasts for the state’s economy and look back on the past year.  It is clear, however, that the economy is still not working for everyone:  there are too few jobs for the state’s workforce, wages remain below pre-recession levels and economic hardship remains elevated.  Combined, these forces are holding back a successful economic future for us all in North Carolina.

A recent report from the Economic Policy Institute makes clear that one of the primary policy decisions that its proponents claim are improving North Carolina’s economy has instead likely hurt our state’s economy.  Unemployment insurance changes in North Carolina, among the most significant changes adopted anywhere in the country, have not led to boosts in employment. Among the author’s key findings:

  • North Carolina’s prime-age employment-to-population ratio was above the national average but fell to 2 percentage points below the national average when cuts were made to unemployment insurance.
  • North Carolina’s employment growth has lagged the national average after states cuts to unemployment insurance by 2.82 percentage points.

An unemployment insurance system serves not only as temporary wage replacement for those seeking work but stabilizes consumer spending so that businesses continue to see demand for goods and services.  The choice by North Carolina policymakers to reduce the number of weeks and amounts of unemployment insurance for workers who have lost their jobs through no fault of their own undermines the stabilizing power of this program and hurts us all.

NC Budget and Tax Center

Major decision tomorrow on jobs and wages

On December 16th,  the Federal Open Market Committee of the Federal Reserve Bank will meet to consider whether to raise interest rates.  This decision to raise interest rates has real implications for the well-being of North Carolina’s working families.  Yet often the policy decisions of the Fed are not accessible to working families or the organizations that work with them.

As Robert Reich shares in this explainer, the Fed’s monetary policy has very real implications for jobs and wages.  And in fact, many data points right now point to ongoing challenges in the labor market that make a move to raise interest rates counterproductive to efforts to improve working families well-being.

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In a recent piece by the Economic Policy Institute, analysis of the oft-ignored role of the Federal Reserve Bank and monetary policy to the well-being of working families makes clearer just how important this upcoming decision is and the mandate of full employment overall for the health of our economy.

It is one that should be front and center as North Carolina contends with employment levels still below pre-recession levels and falling wages.