The National Center for Policy Analysis, headquartered in Dallas, and the Canada-based Fraser Institute have put out a new version of the “Economic Freedom Index,” which examines tax, regulatory, and other policies to compare how friendly jurisdictions are to free markets and entrepreneurship.
As is the case in a number of such comparisons, North Carolina doesn’t look horrible – but we suffer in comparison to our neighbors and to where we used to be.
It wasn’t that long ago that North Carolina was a low-tax state with a relatively congenial tax and regulatory climate. That began to change in the mid-1980s with a series of increases in income, sales, and business taxes. In 1989-90, the legislature passed a large increase in motor fuels taxes to fund highway construction. In 1991-92, in the midst of a budget crisis, lawmakers raised incomes, sales, tobacco, and corporate taxes. From the mid-1980s through the mid-1990s, local governments followed suit with sizable property tax and fee hikes.
Political reaction led to Republican gains at the state and local levels, and some alleviation of the tax burden. It was a brief respite. As the 1990s drew to a close, cities and counties began to push property-tax rates up, again. In 2001 and 2002, the state legislature passed more than $1 billion in new taxes.
Overall, our politicians have managed to move North Carolina away from the ranks of low-tax, highly competitive states. We are now about average, or worse, depending on the measurement.
The new NCPA/Fraser Institute study (a .pdf file) confirms this trend using data beyond just tax rates. Overall, the 2002 report gives North Carolina an “economic freedom score” of 7.4 – just above the national median of 7.3. All of our Southeastern neighbors rank higher than we do, indeed most are among the most free and competitive economies in the country: Tennessee (2nd), Georgia (tied for 7th), Alabama (tied for 11th), Florida (tied for 17th), South Carolina (17th), and Virginia (17th). You might be surprised to find such states as Massachusetts, Pennsylvania, and Connecticut looking better than we do, as well.
Now, North Carolina isn’t “low” by national standards in economic freedom, just as we are not yet one of the highest-taxed states in the nation (though our marginal tax rates on income, an important factor in incentivizing investment and entrepreneurs, are way high). There’s no need to exaggerate the problem. We still have a lot of things going for us. But North Carolina is, once again, in the unenviable position of having to look northward to Virginia, westward to Tennessee, and southward to South Carolina, Georgia, and Florida for ideas on how to manage our fiscal affairs.
As a good, patriotic native of the Tar Heel State, I’m embarrassed.