News: CJ Exclusives

Ongoing Employment Woes Should Prompt Change in N.C. Tax Policy

JLF budget expert analyzes 13th straight month of double-digit unemployment

RALEIGH — New state data show North Carolina entering its second year of double-digit unemployment. The John Locke Foundation‘s top budget expert says evidence of continued employment woes should prompt elected officials to scrap policies that hurt job creation.

“One day after tax day, the most obvious change involves tax policy,” said Joseph Coletti, JLF Director of Health and Fiscal Policy Studies. “North Carolina has one of the highest tax burdens in the Southeast, one of the worst business tax climates in the country, and tax rates that stand out for all the wrong reasons. Our tax climate makes us less competitive regionally when entrepreneurs are looking for places to start a business and when existing companies are looking to expand.”

“Lawmakers did nothing to help the situation last year when they raised taxes by $1 billion a year, largely through a sales-tax increase and partly through an income-tax surcharge,” Coletti added. “These tax increases are not the steps North Carolina should take if it wants to create the conditions for job growth.”

The N.C. Employment Security Commission’s latest report lists the state’s unemployment rate at 11.1 percent for March, down one-tenth of a percentage point from February’s record-setting rate of 11.2 percent.

February marked a full year of unemployment in excess of 10 percent. March marks the beginning of a second year of double-digit unemployment. North Carolina now ranks No. 10 in the nation in unemployment.

Ideas Gov. Beverly Perdue unveiled last week to boost the state’s economy fall short of the mark, Coletti said. “It’s good that the governor realizes the state needs to make changes,” he said. “Unfortunately, the changes she’s seeking with her $17 million plan wouldn’t have the same impact as across-the-board cuts in North Carolina’s regionally uncompetitive tax rates.”

Perdue wants legislators returning to Raleigh in May “to approve or expand about a dozen tax incentives, grants, and other provisions,” according to the Associated Press. In some cases, Perdue’s ideas would be counterproductive, Coletti said.

“One of the key problems with North Carolina’s current economic development policy is its reliance on targeted tax breaks for selected companies,” he said. “These targeted tax breaks allow the government to choose economic winners and losers. When the government decides one company should get special tax treatment, every other taxpayer in the state is forced to pay the bill for that special treatment.”

Among the taxpayers left footing the bill are entrepreneurs and small business owners who have not won government support, Coletti said. “If you make an investment government leaders like, they might be willing to offer you a tax break,” he said. “Otherwise, you are left both to face normal market competition and to pay an additional tax burden because of government gifts to favored companies.”

Seasonally adjusted employment increased in March by 18,000 workers to a total of 4.05 million, according to the ESC. Unemployment decreased by almost 2,800 workers, with more than 507,000 workers now listed as unemployed. Unemployment has increased by more than 34,000 people in the past year. The state rate in March 2009 was 10.3 percent.

Lawmakers returning to Raleigh next month can take steps to help move the economy in the right direction, Coletti said. “As the doctors like to say: First, do no harm,” he said. “Don’t raise taxes. Resist the temptation to seek new ways of taking money out of taxpayers’ pockets. Businesses must find the money someplace to offset lost sales or higher taxes, and the biggest variable cost is the number of employees they have. Workers in the state can’t afford for state government to give entrepreneurs and business owners more reasons to put off doing business in North Carolina.”

The General Assembly also should avoid the mistake of substituting small, targeted tax credits for real tax reform, Coletti said. “Whether expansion of an existing tax credit or creation of a new one makes sense or not, neither option has the same impact as an across-the-board decrease in marginal tax rates,” he said. “Lowering the rate encourages all types of new economic activity, the type of activity that leads to new jobs.”