Falling Behind in NC, NC Budget and Tax Center

Starved of capital, small businesses in rural NC are fading away

Roanoke Riverwalk along Plymouth, NC photo credit: J Stephen Conn via Flickr

Along the Roanoke River, economic developers and policymakers in Martin County were not strategically planning a pitch to land Amazon’s HQ, nor were they particularly confident that they could lure Apple to the quaint streets of Williamston. Local leaders have long embraced the fact that their economies depended not on the big splash of major retailers, but the formation, retention, and expansion of small businesses. It is in this context that the NC Rural Center’s report on Small Business Dynamism in North Carolina, detailing the long term decline of business formation in rural North Carolina, is particularly distressing.

In an effort to grasp the implications of a slower recovery in rural North Carolina, the report reveals that “dynamism” — defined as economic vitality spurred by new firm creation, increased employment growth, wage growth, and labor mobility — has faded steadily outside of urban and suburban counties. According to the NC Rural Center, between 2005 and 2015 rural counties have lost 4,289, or 7 percent, of their very small firms. These, according to the center’s definition, are firms with less than 10 employees — the heart and soul of economies like Martin County. This is starkly different than the increase urban counties saw during the same 10 years. The six core metro counties added 5,534 (+9%) firms with fewer than 10 employees. After the Great Recession, small businesses grew rapidly in urban counties, seeing an increase of 3,180 (+5%) firms with 10 employees or less, while rural counties lost 2,657 (-5%).

While the report argues that there are a number of potential reasons for the decline of businesses with fewer than 10 employees in rural NC, it identifies access to capital as a primary contributor. Access to capital is a vital part of any firm’s ability to “get started, keep going, and grow,” but particularly so for small firms. In an effort to explain the increasing scarcity of commercial lending, the report points to the loss of local bank branches (252 from 2010 to 2015), which hit rural North Carolina especially hard. The net reduction of five rural bank branch closures for every one urban closure has created a desperate shortage of commercial loan officers in places least positioned to withstand such a shock. These officers are best situated to understand the nuances of the local market and work directly with rural small business communities to provide financing tailored to fit their needs.

Predictably, lending declines emerged. The report revealed that from 2005 to 2010, rural small business lending decreased by 53 percent, or $1.4 billion dollars, in North Carolina. In the five years after the Great Recession (2010 -2015), urban counties only saw a 1 percent decrease in small business lending. However, rural counties continued to experience steep declines, a loss of $218 million dollars, or 17 percent. Rural Eastern N.C. business communities faced the economic shocks brought by hurricanes Matthew (2016) and Florence (2018), starved of capital for the past decade. Innovative minds in rural Western N.C. are finding it difficult to finance the transition of old manufacturing operations to ventures suited for their community and a 21st-century economy.

This report offers undeniable evidence that a “tax cut only” policy will not provide the support necessary to reverse the trends that are undermining the formation, growth, and retention of small businesses throughout rural North Carolina. Special attention needs to be devoted to solving the challenges around access to capital so that the state’s brightest minds and ideas can prosper in their beloved communities.

Read the report here.

 

NC Budget and Tax Center

Tax changes in Senate, House budget proposals continue to benefit richest North Carolinians

The tax decisions in the Senate and House budget this year — as with each year — determine what the state is able to invest in. For years, North Carolina legislative leaders have prioritized tax cuts for the few over investments in all of our well-being.

Our tax code can and should support smart public investments that would otherwise not be provided or accessible to all in our state. Our tax code also shouldn’t ask more as a share of income from those with the lowest income while giving breaks to the few and special interests if there aren’t demonstrated broad-based benefits to our state.

The House and Senate budget agree on many of the major tax provisions in the two budget proposals.

The Senate budget, however, makes even deeper cuts to the franchise tax in pursuit of its goal eliminate the franchise tax in the near future. The Senate proposal would also increase the standard deduction threshold higher than the House proposal, which would mean a greater revenue loss and only a modest difference in the experience of taxpayers. Both proposals include extensions of tax breaks for the aviation and motor sports industry, a tax break for those receiving economic development incentives. Both also include a shift to the ways in which sales are apportioned across states to determine sales taxes owed and the extension of a gross premium tax to prepaid health plans in light of the transition to Medicaid managed care. Both proposals comply with the by expanding online sales tax collections, but with different revenue estimates.

Read more

NC Budget and Tax Center

Latest job numbers reveal the regional winners and losers in the NC economy

Last month’s labor market data show a trend of steady growth in urban North Carolina while rural parts of the state are recovering much more slowly. This marked growth in metropolitan statistical areas such as Charlotte-Concord-Gastonia and Raleigh buoy the state’s number of employed and are driving down the collective unemployment rate. However, according to April’s labor market data, the state’s concentrated showers of growth have not rained prosperity on all.

There are seven metropolitan and five micropolitan statistical areas that have seen double-digit employment growth since the start of the Great Recession. Most of these statistical areas are clustered along urban corridors and have apparently benefited from being part of connected economies. Conversely, there are seven isolated micropolitan statistical areas that have not recovered from the downturn. They have seen their employment levels decrease by double digits since December of 2007. Forty-five counties have lost a total of 67,000 jobs since the beginning of the Great Recession. As many of these counties are situated in the state’s coastal plain, higher temperatures and a warmer Atlantic Ocean make it more likely that destruction from stronger and more frequent hurricanes will create recurring economic shocks that further confound recovery.

Here are a couple of indicators illustrating some of the dramatically different regional outcomes:

  • Metro and Micro employment growth: Raleigh (33%), Charlotte-Concord-Gastonia (29%), Oxford (24%), Wilmington (22%), Durham-Chapel-Hill (20%), Boone (19%), Asheville (18%), Burlington (18%), Pinehurst-Southern Pines (16%), Greenville (14%), Dunn (12%), and Brevard (10%) all have seen double-digit employment growth since December of 2007.
  • Employment loss: Seven micropolitan statistical areas have lost jobs since the beginning of the Great Recession. Henderson, Lumberton, Wilson, Roanoke Rapids, Laurinburg, Rockingham, and Forest City have seen their employment decrease by double-digit percentages.  Forest City, in Western N.C., fared the worst, losing 17 percent of their jobs since December of 2007. However, the other six micro areas are clustered in the Sandhills and northeastern North Carolina, areas prone to damage from late-year hurricanes which create compounding challenges for economic recovery.

The bottom line: Our collective prosperity in North Carolina is inexorably tied to everyone; from the fishermen off the Outer Banks to schoolchildren in Robeson County. Tax cuts will not solve the economic challenges that require proper investment in infrastructure and resilience-based policy that prepare us for shocks, both economic and natural, that are likely to visit our state.

For charts showing numbers for all counties and micro/metro areas and for county-level data downloads, visit www.ncjustice.org/LaborMarket.

For more context on the economic choices facing North Carolina, check out the Budget & Tax Center’s weekly Prosperity Watch report.

William Munn is a Policy Analyst with the Budget & Tax Center, a project of the NC Justice Center.

NC Budget and Tax Center

Four important ways in which the Senate budget proposal comes up short

Yesterday, the North Carolina Senate released its proposed biennial budget for the next two years. The budget falls in line with the spending target that leaders in both chambers agreed to earlier this session, but includes tax law changes that the House proposal did not.

Together with funds statutorily committed to the State Capital and Infrastructure Fund, which are not reflected in the total budget amount, the $24.6 billion budget is nearly three percent higher than the FY 2019 budget that runs out this July. By at least three key measurements, however, the proposal comes up woefully short in meeting basic state needs.

  1.  Senate budget proposal shows a decrease in spending from pre-recession levels.

Despite North Carolina’s rapidly growing population — one of the fastest in the nation — the current proposal is 5.5 percent less than the pre-recession budget. This is reflected in our abysmally low rankings for per pupil spending, among other areas, despite the small year-over-year increases that legislative leaders tout.

 

  1.   Spending as a share of the state’s economy continues to decrease.

With an expanding economy (frequently and mistakenly cited by legislators as a tax cut success), we would expect spending to increase to keep up with the growing population in our state and to help fuel growth as our state continues its slow recovery from the recession. But with fewer dollars as a result of the General Assembly’s commitment to tax cuts since 2013, insufficient dollars are available for areas like early childhood education, protecting natural resources like water, and ensuring that our most vulnerable have access to even the most basic resources.

  1.   The Senate budget proposal shows increasing reliance on over-collection of revenues and agency reversions.

Tax provisions included in the budget, while resulting in slightly more revenue on net each year, would continue to cut taxes for most businesses and individuals while expanding the sales tax and raising a gross premium tax on Prepaid Health Plans. The result is that the budget relies less on General Fund revenue for expansion and instead on revenues coming in ahead of projection and agencies not expending all funds allocated to them.

This reliance on unsustainable, one-time funds raises concerns for North Carolina’s future, particularly as the state takes on the significant transition of major public systems like the transition to Medicaid managed care. It is even more concerning given the growing need to plan for climate change-related disasters and the potential of an upcoming recession.

  1.   The Senate budget worsens the already upside-down tax code, placing a greater burden on those with low incomes.

The tax changes included in the Senate budget will not fix the upside-down tax code. The changes raise the standard deduction for taxable personal income subject to the income tax (a benefit to all who don’t itemize) and provide windfall to corporations through franchise tax cuts. In so doing, the budget proposal misses the opportunity to deliver a more targeted bottom-up tax cut to working families and stop cutting taxes that flow primarily to (mostly out-of-state) corporate shareholders.

North Carolina could better meet the needs of a fast-growing state and render its tax structure less regressive by re-introducing a graduated personal income tax rate that features marginal tax rates which increase based on increased ability to pay and lifting corporate tax rates back up to better match rates in neighboring states.

Suzy Khachaturyan is a Policy Analyst at the Budget and Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

“Raise the Age” law will require significant new appropriations

North Carolina was the last state in the U.S. to end the automatic prosecution of 16- and 17-year-old juveniles as adults when the General Assembly passed the Juvenile Justice Reinvestment Act (JJRA) in 2017. As a result, 16- and 17-year-olds charged with non-violent crimes on or after Dec. 1, 2019, will be considered to be under the jurisdiction of the juvenile justice system, pursuant only to specific exceptions.

Often referred to as “Raise the Age,” the JJRA is overseen by the Juvenile Jurisdiction Advisory Committee, a group comprised of court counselors, judges, human services professionals, law enforcement, juvenile law experts, and others with years of experience related to juvenile justice tasked with bringing recommendations to ensure the effective implementation of JJRA. Successful implementation hinges on the adequate funding of the JJRA.

The Juvenile Jurisdiction Advisory Committee recommended state funding for successful implementation of the act as follows:

  • Juvenile Justice: $47.6 million in FY 20; $62.7 million in FY 21; and $57.3 million annualized.
  • Administrative Office of the Courts: $2.9 million in FY 20; and $2.8 million annualized.
  • Office of the Juvenile Defender: $122,000 recurring beginning FY 20.
  • Conference of District Attorneys: $125,589 recurring and $3,752 non-recurring beginning FY20.
  • The Committee also recommends funding the courts’ existing deficiencies $15.1 million in FY 20; and $14.5 million annualized.

The breakdown includes funding for court services, detention operation, educational and vocational training and related career planning and support, and Juvenile Crime Prevention Councils. A signature component of the Raise the Age approach, Juvenile Crime Prevention Councils (JCPC) bring community leaders together to review the needs of juveniles in the county who are at risk of delinquency or who have been adjudicated delinquent. JCPCs review existing services and make determinations about service and resource gaps to address youth needs, and evaluate program performance in order to ensure appropriate and effective resources exist to meet identified needs of system involved youth, with the ultimate goal of preventing interaction with the both the juvenile and adult criminal justice systems.

So far, proposed budgets fall short of full funding for Raise the Age. Read more