NC Budget and Tax Center

NC Budget and Tax Center

You may have heard that North Carolina’s business climate is nearing top-10 status according a new ranking by the Tax Foundation, a tax policy research organization that favors tax cuts. If that sounds strange to you, it should.  Many of the inputs that businesses look to in order to succeed have failed to rebound after the recession because of neglect from state policymakers.

The 2016 State Business Tax Climate Index has many flaws that have been highlighted by critics over the years. It is clear, however, that one way to zip up the ranking is to simply cut taxes, often in ways that primarily benefit large multi-state corporations. And this result in forgoing the kinds of investments needed to improve the economic climate that allows all businesses and all North Carolinians to prosper.

As I’ve noted in a prior post, proclaiming that North Carolina’s business tax climate has leapt from one of the worst to now one of the best largely as a result of tax cuts provides no insight regarding the fiscal and economic health of the state.

Here are five reasons that the Tax Foundation rankings are the wrong foundation for making tax policy in North Carolina.

  1. Ranking focuses on cherry-picked tax policies that the Tax Foundation doesn’t like, rather than on the range of factors that genuinely drive business investment decisions.

The Tax Foundation index simply chooses elements of tax policy it likes best – e.g. a flat income tax rather than a progressive income tax structure – without solid empirical evidence as to the impact of favored tax policies on states’ economic growth. A flat tax income tax, for example, which the Tax Foundation favors, doesn’t take a taxpayer’s ability to pay into account and largely benefits the well-off. A progressive income tax structure, by contrast, considers ability to pay but is not favored in the ranking. Furthermore, states with relatively lower tax rates are favored without considering the impact of lower tax rates on their ability to raise adequate revenue for public services. The Tax Foundation mixes these selected tax policies together and labels the result a state’s “business climate.”

This sole focus on a state’s tax structure leads to an index that mistakenly assumes taxes are the most important factor in shaping states’ business climates and tells us nothing about a state’s economic health – like whether schools are good, higher education is affordable, roads and rails are in good shape, or the workforce has the skills needed for 21st century business. Read More

NC Budget and Tax Center

A new report published by the Washington Center for Equitable Growth provides more evidence to the robust body of research that demonstrates the economic power of early childhood investments.  The report finds that public investment in voluntary, high quality universal prekindergarten education that is available to all 3 and 4 year old children in the United States would support broadly shared goals of generating faster and more widely shared economic growth.  It does so by improving children’s developmental achievements in the early years and educational and employment attainment in the out years.

The quality of the programming matters to achieving the greatest economic returns however.  The authors point to the standards that must be considered, not just in terms of the child’s experience, but inclusive of having the physical space to deliver a conducive learning environment to supporting the professional development and adequate compensation of the early childhood workforce.  Specifically, features of high-quality programming identified in the report are:  low child-to-teacher ratios, small class sizes, highly paid, well-qualified teachers and staff and instruction that is supportive and stimulating alongside services that meet not just the cognitive but the emotional, nutrition and health needs of children as well.

For North Carolina the results would be an estimated $8.7 billion in economic benefits and a return on investment of more than $7 for every $1 invested in the effort.  But as the report points out, it is critical to move beyond just budgetary impacts–and quantifiable returns–of early childhood investment to consider the value of delivering a high quality of life for every child and securing a competitive position for the state in the future.  It is these benefits, often difficult to monetize, that can have a catalytic impact on a state’s economic trajectory.

This new research, with specifics for how states can lead in implementing universal voluntary pre-K programs, should prompt deeper discussion in North Carolina.  In the current budget, the state continues to underinvest in prekindergarten in North Carolina providing fewer slots for 4 year old children than were served before the Great Recession started.  Growing the economy equitably demands an accessible pre-K program in North Carolina.  State leaders would be smart to invest today  to reap the greatest benefits in the future.

NC Budget and Tax Center

With the sounds of Small Business Saturday in the air, it’s a good time to take stock of how main street businesses in North Carolina have fared over the last several years. The end of the Great Recession certainly improved the prospects for small businesses, but the recovery here in North Carolina has had a decidedly big-business bent. Most small businesses have not seen the level of growth that their larger competitors have enjoyed during the recovery, a clear sign that we have not done enough to help Main Street to prosper.

Small Business Saturday Blog Post - NC Growth by Firm Size 2009-2015

As can be seen to the left, the fastest growth in employment during the recovery has occurred in larger businesses. The biggest businesses (more than 1000 employees) have expanded their collective workforce by more than 15% since 2009, the next largest set of establishments (between 500 and 1000 workers) by almost 12%. In contrast the smallest businesses in North Carolina have struggled to take advantage of the current period of prolonged economic growth.

The growth gap between larger and smaller businesses that we’ve seen in North Carolina has not happened to the same degree in many other states. Large firms have added jobs faster than smaller companies over the last six years nationwide, but the difference in North Carolina is much more pronounced. Growth for the largest US companies was twice that of the smallest, while here in North Carolina the largest companies lapped the smallest group five times.Small Business Saturday Blog Post - NC and US Growth by Firm Size 2009-2015

This imbalance is an economic problem because small businesses are the veins circulating capital through local economies. Owners with roots in a community often source more locally, spend more of their earnings nearby, pay better, and invest in their communities. All of that helps to keep money flowing around and creating jobs. None of this is to denigrate how many large companies can help communities, but when local businesses don’t prosper, growth doesn’t always translate into deeper economic health.

Recent economic results call for a different approach to supporting small businesses. Instead of continuing to focus on cutting the corporate income tax, which mostly helps big companies, we should be plowing more resources into programs that help small businesses get loans, find new customers, and retrain their workers. The General Assembly did take a few steps in the right direction this last session, like appropriating funds to The Support Center which makes loans to small companies. But, particularly compared to the tax breaks lavished on large companies over the last few years, the assistance provided to small businesses has not been up to scratch.

So when you hit the shopping trail this season, head to your local small businesses first, particularly if they pay their workers well, offer benefits, and are invested in your community. Big box stores have their place, and some are good corporate citizens, but it’s the small businesses in North Carolina that could use a boost.

NC Budget and Tax Center

New research out the Carsey School of Public Policy at the University of New Hampshire shows the powerful anti-poverty effect of the federal Earned Income Tax Credit in states.  North Carolina, it turns out, has seen one of the greatest shares of its population benefit from this policy in the country.

A full 3 percent of the overall population would have been poor in North Carolina were it not for the federal EITC. Such a growth in poverty would have further held back the economy from reaching its full potential as working families struggle to maintain spending and make investments in their careers and families that can boost the economy.

The boost to the economy from the economy occurs in the short- and long-term.  Children in families that receive the EITC also are more likely to do better in school and have increased lifetime earnings.

Here are some of the key findings from the report for North Carolina: Read More

NC Budget and Tax Center

The Governor has announced that another $600 million tax cut for businesses will be implemented after the state has reached an arbitrary balance of $1 billion in the Unemployment Insurance Trust Fund through drastic cuts that have harmed jobless workers by reducing the accessibility of the program, eliminating support for skills training and shrinking the critical wage replacement function of the program.

After jobless workers contributed more than two-thirds of the dollars to get North Carolina to this moment in lost wage replacement, now must be the time to re-balance the choices made in 2013 to reflect the principles of a sound unemployment insurance system.

That means recognizing that the economy needs jobless workers to maintain their consumer spending at a basic level in order to sustain demand for businesses goods and services.  Without temporary wage replacement, the ripple effect through the community of North Carolinians (who have lost their job through no fault of their own) not being able to shop for groceries, pay utility bills or mortgage payments or put gas in the car to get to job interviews holds back our communities from a strong recovery and growth.

As we have written about in the past, the Unemployment Insurance Trust Fund was ill-prepared for the Great Recession after policymakers cut taxes for employers in good times.  With the announcement today, North Carolina appears poised to make the same mistake: underfunding the program in good times leading to ineffective stabilization of the economy in bad times when jobless workers lose their jobs through no fault of their own.

In the meantime, jobless workers today still face a labor market with too few jobs for those who want to work, limited skills training opportunities and a system that is increasingly inaccessible.  North Carolina had just 13 percent of jobless workers receiving unemployment insurance in the second quarter of 2015 down from 39 percent in the second quarter of 2013 and ranking us 49th in the nation. Our economy needs a system that works for jobless workers and employers alike: the current approach continues to do neither.