20 Changes For 2010: Jobs

The first two recommendations in the Civitas Institute 2010 Agenda: “20 Changes for 2010: A Primer for State Reform” focus on policies that will promote job creation.

The Problem: High Unemployment and Slow Job Growth

In Dec. 2009, unemployment in North Carolina hit a 30-year high of 11.2 percent, which ranked 7th highest in the nation. The high placement in unemployment rankings reflects a decade-long trend. Annual unemployment rates here have been above the national average every year since 2000. Conversely, North Carolina’s unemployment rate exceeded the national average only once within the 25 years prior to 2000.

Similarly, North Carolina’s job growth has lagged behind regional job growth rates this decade. From January 2000 to December 2009, North Carolina expanded jobs at a rate of 2 percent, well below neighboring Virginia’s 10.5 percent, Florida’s 7.8 percent and Georgia’s 5.6 percent. Moreover, North Carolina job growth was less than half that of the South Atlantic region¹ rate of 4.8 percent.

North Carolina’s ability to create jobs has been hampered by several failed policies. Tax rates that are highest in the region and among the highest in the nation create a disincentive for entrepreneurs to relocate or expand in North Carolina. In a misguided attempt to offset high state tax rates, lawmakers have opted for a steady stream of targeted tax breaks and corporate welfare handouts to a select group of politically-connected companies. Such a practice creates an uneven playing field and establishes unfair competitive advantages for the privileged firms.

The mix of high overall state tax rates combined with political favoritism in the marketplace is a failed recipe for job creation.

Solutions:
1). Ease tax burden on small businesses
An overwhelming 85 percent of voters said they would approve of a 10 percent tax cut to every small business, according to the April 2009 Civitas Institute poll. Moreover, 60 percent of voters said small businesses are better able to create jobs, compared to only 9 percent who replied “government” is better able to create jobs.

• Small businesses create the majority of new jobs in North Carolina and across the nation.
  • Businesses of less than 20 employees, in fact, account for roughly 60 percent of new job growth in North Carolina.
• North Carolina has one of the highest small business tax rates in the nation.
  • Most small businesses are organized as “pass-throughs” such as S-corps, partnerships and LLC’s. Pass-through businesses file under the personal income tax rate, prompting many economists to label the top marginal income tax rate the “small business tax.”
  • North Carolina’s small business tax rate is highest in the South Atlantic and is 12th highest nationally.

Recommendation:

• North Carolina should create a special rate on pass-through businesses of 5 percentin order to be regionally competitive.
• The new rate would encourage more small business creation and growth, providing a major jumpstart to new job creation.

2) Stop corporate welfare and level the playing field for all businesses
Voters were asked in a May 2009 Civitas DecisionMaker poll: “In order to create jobs, is it better to give targeted tax breaks and cash incentives to a few large companies or give across-the-board tax cuts to all small and medium-sized companies? An overwhelming 87 percent replied “across-the-board tax cuts,” compared to only 7 percent who said “targeted tax breaks.”

 

• According to the General Assembly Fiscal Research Division “Economic Development Inventory” study, North Carolina extended roughly $1 billion in targeted tax breaks in 2007-08, along with tens of millions more in direct handouts to politically-favored corporations.
• This practice is unfair and punishes small businesses that can’t afford lobbyists to broker sweetheart deals with government.
• North Carolina’s corporate tax rate is among the highest in the southeastern U.S.²
  • Sen. Dan Clodfelter (D – Mecklenburg) noted in a November 2009 Senate Finance Committee meeting; “the existing tax system in North Carolina undercuts our competitive position and acts as a deterrent to new business investment and especially to the creation of new jobs.”
• A 2008 Organization for Economic Co-operation and Development (OECD) study examined the impact of various taxes on economic growth, and concluded that “Corporate taxes are found to be most harmful for growth.”

Recommendation:

• Reduce the corporate tax rate and eliminate several targeted tax breaks and corporate welfare handout programs such as the  Job Development Investment Grant program (JDIG) and the One North Carolina Fund.
  • A 2007 bill (SB 1112) proposed a similar measure, estimating a "revenue neutral" tax rate to be financed by closing several targeted tax breaks. 
  • A lower corporate tax rate would put North Carolina in a much more "competitive position."

 

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¹According to the Bureau of Labor Statistics regional definitions, South Atlantic region here refers to the states: Delaware,  Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and West Virginia
http://www.bls.gov/news.release/laus.t01.htm

² Here the southeastern part of the U.S. includes: North Carolina, South Carolina, Virginia, Tennessee, Georgia, Mississippi, Louisiana, Kentucky, Arkansas, Alabama, West Virginia and Florida. Among these states, North Carolina’s corporate tax rate is third only to Louisiana and West Virginia.