Tax reform alone can’t boost NC economy

  • Posted: Friday, June 14, 2013 9:35 a.m.

This is from a preliminary analysis of The N.C. Fair Tax Act, conducted by selected staff and faculty of the University of North Carolina.

By Brent Lane

It has long been easy for North Carolinians and non-citizens alike to underestimate the size and scope of the state’s economy. For decades North Carolina had the paradoxical distinction of simultaneously being the nation’s most rural population and its most industrialized. North Carolina’s image as the “small town state” was appropriate, as its traditional industries of textiles, tobacco and furniture sustained a relatively dispersed population.

Such breadth of distribution masks the true size of the state economy. During the past decade, when for the first time North Carolina’s population tilted from majority rural to majority urban, the state’s economy surpassed those of Georgia, Michigan and Massachusetts. By 2011 North Carolina’s estimated gross state product exceeded $400 billion, making it the 10th largest in the country. ...

With such scale comes complexity. North Carolina is home to more than 200,000 employer businesses and many more small businesses in a variety of legal forms. So while the state has invested heavily in economic development programs, direct assistance is possible to only a few thousand firms and high profile economic incentives go to just a few dozen companies annually. As a result even the greatest economic development success through these projects has only small direct effects on the larger economy.

By some highly visible measures the state has succeeded economically. Few states rival North Carolina’s track record in the recruitment and location of new industry. The state has been ranked No. 1 for “Best Business Climate” 12 out of the past 13 years by industry leader “Site Selection” magazine. In 2012, when North Carolina was once again at the top of that ranking, the N.C. Department of Commerce’s “Annual Sales Report” cited 146 projects announcements accounting for 16,487 new jobs.

It is important to recognize that in the nation’s 10th largest state economy, such “announcements” constitute only a fraction of the new jobs required each year by North Carolina’s rapidly growing workforce. Despite its well-publicized economic successes, for the past five years North Carolina has had one of the highest unemployment rates in the U.S. because job growth in the state has failed to keep up with workforce growth. ...

This situation is not simply attributable to a slow recovery from the 2008 recession. Job growth has lagged behind workforce growth in the state for nearly two decades, even during periods of relative prosperity nationally. Since the beginning of the current economic recovery in 2009, the state’s workforce has grown by an average of 56,000 annually, but jobs have grown by only an average of 36,000 per year. So even as employment in the state in 2012 has finally recovered to pre-recession levels, adding a net 15,000 jobs since 2008, its workforce grew by more than 240,000 over the same period.

With North Carolina’s population projected to grow by more than 1 million between 2010 and 2020, the state will need to add 700,000 new jobs over the next seven years to reduce unemployment to a goal of 5.5 percent. Adding 100,000 new jobs annually would require doubling the job creation rate North Carolina has achieved since 2000. Reliance on economic development efforts, however successful, has proven inadequate to the task. Proposed tax reforms such as those in North Carolina Fair Tax Act are intended to positively influence broad-based employment growth throughout North Carolina’s business community in a less intrusive, more efficient manner than targeted incentives and special exemptions in the current N.C. tax code.

The failure of numerous past reform efforts may have imbued tax reform with exaggerated import among legislators in its potential to positively affect economic growth. Evaluations suggests that while proposed reforms have the potential to contribute positively to future economic growth, the effects are not certain and cannot be quantified with confidence. Therefore tax reform should be seen not as a panacea to North Carolina’s economic ills, but as one of several fundamental policy concerns that affect every employer, employee and citizen. In that context, tax reform is a necessary, significant, but insufficient means to address our state’s economic growth challenges.

Brent Lane is executive director of the Carolina Center for Competitive Economies at the Kenan Institute of Private Enterprise, UNC Chapel Hill.

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