NC Budget and Tax Center

Commentary, NC Budget and Tax Center

The ballooning cost of recent state tax cuts is one of the key stories of 2014. While state leaders argued over how to pay for increasing teacher salaries, it was easy to forget that the 2013 tax cut package was a huge part of the reason that funds were so hard to come by. The 2013 tax cuts, which largely went to the wealthiest North Carolinians, are forcing us to make unnecessary choices between funding schools or roads, healthcare or economic development, local governments or state services. It didn’t have to be this way and, as the charts presented here clearly show, the costs of the 2013 tax cuts are becoming increasingly clear.

Many proponents argued that the 2013 tax cuts would stimulate new economic growth and, as a result, the cost of reducing rates would be largely offset because there would be more economic activity to tax. The idea that tax cuts will actually increase revenue is based on a simple intuition popularized by Art Laffer. Laffer’s thought experiment holds that lowering the cost of doing business will cause people to invest and spend more, so the total economy will grow, which will ultimately result in government collecting more revenue. Like many exercises in theoretical economics, the “Laffer Curve” is just a mathematical equation. It looks nice on a napkin, and has an pleasantly simple logic, but the real world is often allergic to this kind of treatment and refuses to behave as theorists’ models expect. Unfortunately, the consequences of putting faith in the Laffer Curve are anything but theoretical. As this economic experiment on North Carolina continues, the results are not looking good for the subject.

2014 End of Year Charts_tax cuts dig a hole

While sober analysis always showed that the 2013 tax cuts would reduce revenues, the hole keeps getting deeper every time we look at it. As can be seen in the chart above, initial estimates projected a roughly $500 million reduction in state tax revenues for the 2014-15 fiscal year. Estimates released this month have the cost rising to almost $900 million and, according to our analysis, the bill could top $1 billion. Thus far this fiscal year, actual tax collections have been lower than was expected even with the cost of the tax cut included. The December state revenue update shows that we are $190 million short of projections. We will know the real fiscal impact after sales taxes from the Christmas shopping season known and income tax returns are filed next year, but all indications to date are that the 2013 cuts will blow an enormous hole in current and future state budgets.

2014 End of Year Charts_underfund the recovery

The result of the ballooning revenue shortfall, is that state spending has not recovered to pre-recession levels. When the economy collapsed in 2008, it dramatically undermined state revenues, forcing a series of unusual measures to try to fill the gap. Under normal conditions, the return to positive economic growth brings in more revenue, allowing departments and divisions in state government to address needs they had put off during the squeeze. As can be seen above, this is the pattern for each of the last three recessions dating back to the early 1980’s. Each recession initially forced North Carolina to spend less than was anticipated when revenues fell, but spending bounced back within a few years allowing North Carolina to get back to business. Policy choices in the recent recovery are a departure from previous budgetary practice. We have usually seen reduced state spending during the initial downturn, followed by accelerated investing during the recovery to make up for lost ground and restore the state’s public service infrastructure. We are seven years removed from the onset of the Great Recession and, because of the 2013 tax cuts, state revenues remain roughly 10 percent below their pre-recession levels.

All of this means undercutting the future of North Carolina. The state still has a backlog of expenditures that were put off during the recession, positions unfilled, buildings overdue for repair, roads and bridges that need fixing or expanding, local governments who have lost state support for key services, and much more. We also face an increasingly competitive global marketplace. Many of the people who lost their jobs during the recession still need help retooling their skills and the challenge of preparing children to survive in the 21st century economy keeps getting more complex. As the legislative session gets started in 2015, remember that the choice to reduce taxes on the most fortunate among us is a major reason that key investments for the rest of North Carolina are not being made.

Commentary, NC Budget and Tax Center

Economists and politicians both talk about job numbers a lot. Of course the number of jobs is a vital indicator of how well the economy is working, but simply knowing how many jobs there are does not tell the whole story. Understanding the health of the labor market also requires knowing how many of the new jobs can pay for the necessities of life, support a family, and provide the basis for a long-term career. One of the most distressing aspects of the last few years is how many of the middle-class positions lost during the recession were replaced with low-wage employment, part time work, and jobs with few opportunities for career advancement.

2014 End of Year Charts_recovery based on low wage jobs

Probably the most glaring problem with the current recovery is how few decent-paying jobs have been created. As can be seen in the chart above, the majority of jobs created since the start of the recession do not pay a living wage. There are both long and short term trends that are at play here. Many industries that supported middle class wages in North Carolina, most notably manufacturing, use more machines and fewer people, eliminating lots of jobs in the process. Many of the jobs created since the recession are in service sectors that generally pay much lower wages than the blue color jobs that have been lost. This shift toward low-wage jobs is undermining the economic stability that many families in North Carolina had built over the preceding decades.

2014 End of Year Charts_recovery has not reduced poverty

This concern is bolstered by the fact that the current recovery has not done anything yet to reduce poverty, as can be seen above. Even as total employment grew over the past few years, the amount of poverty in North Carolina has actually increased, a sure sign that there are many working people who do not earn enough to escape poverty.  This runs counter to prior recessions when economic recoveries not only resulted in growth but also reduced hardship at the same time.

As noted above, we have both short-term and long-term issues to address. We still need more total jobs because wages remain depressed, in part, because there are still so many people looking for work that there is little upward pressure on wages in many industries. We can do more to ensure that North Carolina’s economic development programs are tied to wage standards so that the jobs we do attract will actually support a family. We still need to help mid-career people whose jobs disappeared during the recession, and are not likely coming back, also need help in transitioning into new occupations and careers. And certainly, long-term we need to prepare North Carolina’s children to negotiate an increasingly dynamic and competitive job market.

Anyone who is willing to work hard should not have to live in poverty, but that basic American promise isn’t going to keep itself. Public policy helped to build the middle class, and a lack of public policy vision can destroy it. If we don’t honestly look at what policy changes are needed to ensure that hard work pays, the economic damage of the recession will become a permanent reality for many North Carolinians.

NC Budget and Tax Center

The American Immigration Council released last week a summary of the emerging research on the positive economic potential of the Executive Action on Immigration. These national findings for stronger economic growth, increased tax revenue and higher average wages for all workers suggest state-level benefits, particularly in North Carolina, will be positive– albeit modest– as well.

Here are some additional reasons why North Carolina is poised to particularly benefit economically from immigration action that provides temporary status to parents of children born in the United States and expansion of the Deferred Action for Childhood Arrivals (DACA) program providing work authorization for children raised in the United States.

  1. One of the major drivers of estimated improvements to GDP growth resulting from the immigration action is growth in the labor force. The benefits of an increased labor force to North Carolina would be significant given that the state’s labor force has actually declined over the past year despite the population growing. Data on the labor force participation rate of the total foreign-born population (not just those without documents) showed participation rates were nearly 10 percentage points higher than for the U.S. born population.
  1. North Carolina had a high application rate for immediately eligible youth under the previous Deferred Action for Childhood Arrivals. 60 percent of those immediately eligible applied in NC. If this expanded program generates similarly high application rates, the result will be a greater number of residents in North Carolina benefiting from work authorization and the economy benefiting as well. One factor that continues to limit the economic benefits in North Carolina of DACA is the fact that these students, despite being educated in NC public schools, are not eligible for in-state tuition at post-secondary institutions. This runs counter to practices in 17 other states where laws permit certain students without documents who have attended and graduated from secondary schools to pay the same tuition as their classmates at public post-secondary institutions thus increasing their earning potential.
  1. Revenues are down in North Carolina as a result of the tax plan put in place in 2013. Executive action on immigration won’t solve the problem of a tax code that is inadequate but it would increase tax compliance and earnings that are subject to income taxes. The Center for American Progress estimates that if those benefiting from the executive action on immigration were able to receive temporary work permits, an additional $197 million in revenue would be collected over five years.

North Carolina stands to benefit from the Executive Action on immigration and should ensure that those eligible are able to apply so that the full economic potential of this federal policy can be realized.

NC Budget and Tax Center, Poverty and Policy Matters

When the Wall Street house of risk came crashing down in 2007, it wrecked local economies across North Carolina. Business finance dried up, people and businesses bought less, home values took a hit, and so employment dropped, sharply. Along with the rest of the U.S., we have seen the worst days of the recession pass and some stability and growth return. Business credit is still tight, consumer spending looks to be getting stronger, and the housing market is definitely on the rise again, but employment has been very slow to grow.

We’ve heard a lot about the “Carolina Comeback” recently, and expect to hear even more during 2015. The story generally goes that slashing state taxes and spending has resurrected an economy that was broken by federal policy, not to mention a century of democratic rule in the legislature. The problem with this story is that the comeback is a national one, most of which has nothing to do with changes to North Carolina policy.  A far better explanation, as can be seen in the charts below, is that the current recovery is neither robust nor unique to North Carolina, but instead follows the national and regional trajectory.

2014 End of Year Charts_slowest recovery in generations

Compared to the previous three major recessions, the current recovery has been stubbornly sluggish. It took more than five years for our state to get the jobs that were lost during the recession back, where the damage from the previous three recessions was repaired in less than half that time.

If the first chart looks familiar, it should. National employment trends over the last several recessions look very similar to what we have seen in North Carolina. This brings us to the second problem with the Carolina Comeback myth, it is not a Carolina story.

2014 End of Year Charts_regional job growth

As can be seen below, North Carolina employment has generally followed the same trend as other states in the southeast. From 2000 on, the share of working age people who have employment has declined, with a particularly sharp drop in 2008 and 2009 as the Great Recession hit. Over the last few years, employment growth in North Carolina has been modestly stronger than most states in the Southeast, but even after these comparatively strong years, North Carolina remains decidedly middle of the pack.

All told, there just isn’t much real evidence of a distinctly Carolina Comeback. The recovery has been agonizingly slow in North Carolina as it has been across the country. Credit and blame do not have a home address, they knock on many doors and visit many living rooms. We have a lot to do as a state and as a country to adapt to the 21st century economic system. Moving into 2015, we should focus on what can be done to address the problems that remain, rather than trying to wish them away with nice sounding phrases.

NC Budget and Tax Center

Every holiday season there is renewed attention to the hardship that many of our neighbors face. While this focus is often temporary and disconnected from an examination of the causes and consequences, it is always an opportunity to make more concrete the data on poverty that too often falls flat in policy debates.

It is the stories of parents working two and three jobs to afford modest gifts at Christmastime and the job losses or medical debt that have pushed families further into poverty that feature prominently in the media coverage of the season and prompt people to act through charitable contributions. These stories are just a fraction of the daily experiences of 1.7 million Tar Heels who are living on less than $23,000 or less than half of what it actually takes to make ends meet. Charity alone won’t fix the structural issues—low-wage jobs, no jobs and with our state’s economy, public policy changes are needed.

So how can policymakers and other leaders be motivated to care and address these hardships through policy change? There are a number of organizations in North Carolina that host poverty simulations for a day, a sanitized and temporary look at hardship for those not accustomed to go without but whom often have the power to make things better. The idea is that by better understanding the reality of hardship, better policy choices can be made.

An on-line tool, SPENT, created by the Urban Ministry of Durham provides a similar data-based experience for the user interested in digging deeper into the structures that support (or don’t) struggling families. It presents the impossible choices that families living in poverty face like whether to pay the gas or electric bill or take a job that pays only slightly more than child care. Here are some other data found in this tool: Read More