North Carolina and Small Business Friendliness

Depending on the way it is measured, at least half of all workers are employed by small business and these firms account for two-thirds of all net new jobs. Thus, incentivizing the growth and proliferation of small businesses should be a key component of any state’s economic growth policy. Unfortunately, according to a new study by Thumbtack and the Kauffman Foundation North Carolina ranks the worst in the Southeast (Florida has the same ranking but beats North Carolina with many tax advantages).

The North Carolina legislature has made some improvements on easing some taxes and licensing, but many regulations and tax hurdles remain.  When each state that touches your border has a friendlier environment for small business development, there is cause for concern and those in Raleigh should take notice.

The Progressives’ Agenda for North Carolina

As the North Carolina legislative session came to a close yesterday, Forbes recently wrote a summary of the progressive agenda within the Moral Monday crowd for the Tarheel state.  It seems that those protesting in Raleigh, not only want the state legislature to provide a laundry list of government programs for North Carolinians, but also have little regard for bankrupting the state.  The list of demands includes expanding Medicaid, state subsidized child care for all, and state-provided health insurance for all, which would require an almost ten-fold increase in the state corporate income tax.

The difficulties with this policy agenda are numerous, but the most troublesome reality of the Moral Monday protestors’ demands is the faith in government solutions to complicated economic and social issues.  I use “issues” purposely because once we start to call all these resources needs “problems” we open the door to a grand plan for top-down government solutions (and faith that this top-down approach will solve all “problems”).

A fundamental shift is needed, among both the protestors and the policy-makers they seek to influence, in their perspective on the nature what government can and cannot accomplish.  Additionally, economic growth in the state is the only means whereby workers can receive they resources needed to provide for their families and where firms can continue to invest in opportunities for future growth.  Commanding more tax revenue from North Carolina businesses with higher state income tax (on top of one of the highest federal income tax rates in the world), will drive firms to other states further hampering both the state economy and the state budget.

If the recent economic downturn has taught us anything, it should be clear that economic stability (growing firms and subsequent job growth and positive investment opportunities) are not guaranteed by government policy but are the result of profitable incentives and market-driven change.  Let’s set a policy agenda that results in stimulating economic opportunity instead of simply finding ways to extract resources from firms forcing them to look for opportunities elsewhere.

Mobility and Income (Inequality part two)

Matthew O’Brien of the Atlantic reviews a recent study by a group of Harvard and UC Berkley economists on intergenerational mobility in the United States.  The core finding from this research is that the ability for someone to move up the social scale in the United States (i.e. moving from the bottom twenty percent of households to the top twenty percent), is geographically limiting (and especially limiting in the South).  Specifically O’Brien summarizes:

“Kids born into the bottom 20 percent of households, for example, have a 12.9 percent chance of reaching the top 20 percent if they live in San Jose. That’s about as high as it is in the highest mobility countries. But kids born in Charlotte only have a 4.4 percent chance of moving from the bottom to the top 20 percent. That’s worse than any developed country we have numbers for.”

Thus, what matters for future income potential is not only where your family lands on the economic spectrum, but also where your family is living.  This may seem obvious due to the varying economic conditions around the country; but, tax differences, schools, labor markets, manufacturing jobs, etc., do not appear to make a significant difference.  So what does matter?

Again, O’Brien highlights several points the researchers find that help explain the geographic mobility differences across states and regions and one point stands out:

Family Structure. Forget race, forget jobs, forget schools, forget churches, forget neighborhoods, and forget the top 1—or maybe 10—percent. Nothing matters more for moving up than who raises you. Or, in econospeak, nothing correlates with upward mobility more than the number of single parents, divorcees, and married couples. The cliché is true: Kids do best in stable, two-parent homes.”

I recently wrote about the economic costs of the changing family structure in North Carolina.  It’s no surprise that kids have the best future possibilities if they remain in traditional two-parent families.  Statewide divorce rates certainly don’t explain all the difference in mobility between San Jose and Charlotte, but North Carolina’s divorce rate is 25% higher than the rate in California.  O’Brien rightly notes that redistribution policies will not solve the economic mobility problem faced by many North Carolinians, but it is also not simply about better schools or more jobs or an increase in the minimum wage.  Policymakers would do well to address issues that impact family structure, like education and incentives for marriage and the importance of raising children in a traditional family structure.  This leads to less crime, less mental illness, and greater academic achievement, which are all key variables in economic mobility.

North Carolina Tax Reform

The North Carolina Senate GOP recently revealed a plan for far-reaching tax reform.  This major reform will make several changes by lowering marginal income tax rates on both individuals and corporations, as well as begin to shift the burden of taxation to consumption rather than income.  These changes would be financed by a reduction in spending (long overdue) and an increase of taxes on services that are currently exempted.

This is the type of reform that is needed in a state with persistently higher unemployment than seen nationally, and a tax system that penalizes earning.

Moving a greater share of the tax burden to consumption is more efficient and more “fair” by any measure.  Critics argue that consumption taxes hurt those with lower income, yet this belief is based only on the current antiquated tax code.  Income taxes penalize all earners, and these taxes create a disincentive to earn (and for small business owners there is a disincentive in show a profit).  A system that forces any earner to hide and shelter their income is backwards.  In fact, consumption taxes are much more efficient.  They more you consume, the more tax you pay.  Thus, those who earn more income (and who also spend more of that income) will pay more in taxes.

Economists have argued for decades that consumption tax systems are more efficient because they push the individual tax burden into the future.  Younger tax payers will have more incentive to earn today, and then they will consume more in the future (especially after retirement).

Governor McCrory and the NC legislature should move forward on this reform and establish North Carolina as a national leader in tax policy change.

NC Tax Proposal – On the Right Track

There is controversy from the McCrory administration over the recent tax reform proposal by Senate Republicans, yet the proposed changes are a step in the right direction.  Taxation on consumption rather than income is more efficient, and it creates the right incentives to earn and to locate a business in the state, but McCrory’s top budget officer has concerns.

 

Reforms are sometimes difficult, but eliminating the income tax would go a long way toward stimulating the North Carolina economy.