Tax Policies Constrain North Carolina's Economic Ranking | Eastern North Carolina Now

   Publisher's note: The author of this fine report is Karen McMahan, who is an columnist for the Carolina Journal, John Hood Publisher.

    RALEIGH     A new report on economic competitiveness from the American Legislative Economic Council shows North Carolina is ranked 23rd among the states on the 2012 ALEC-Laffer Economic Outlook Rankings.

    While that's a slight improvement over last year's 26th place, the Tar Heel state still ranks lower than the 21st position it held in 2008, 2009, and 2010.

    The Economic Outlook Rank is a forecast based on a state's current standing in 15 equally weighted policy variables, each of which is influenced directly by state lawmakers. Some of the variables examined are top marginal personal and corporate income tax rates, property tax burden, sales tax burden, estate/inheritance tax, state minimum wage, and right-to-work laws.

    A major contributor to North Carolina's lackluster performance is its estate tax, one of the most economically damaging, anti-growth tax policies, according to the report's authors. North Carolina ties for last among the states in that category, as one of only 22 states still levying a death tax. More states are considering a repeal of their estate/inheritance tax laws.

    ALEC, a nonpartisan organization advocating federalism and limited government, gave low scores to North Carolina for its policies on personal income taxes, both on the rate and the progressivity in tax liability. The state is ranked 36th for its 7.75 percent Top Marginal Personal Income Tax Rate. For each $1,000 increase in personal income, the tax liability rises by $11.06, placing North Carolina 33rd.

    North Carolina also receives a poor grade for the number of public employees as a share of population. With 580.6 public employees per 10,000 population, the state is ranked 36th.

    Two variables in which the state ranks first are Right-to-Work and State Minimum Wage, both of which are considered pro-growth policies. North Carolina is one of 22 right-to-work states, meaning employees at a unionized workplace can keep their jobs even if they choose not to join the union and not pay dues. The state's minimum wage is $7.25, the same as the federal.

    Tax policies affect economic growth

    In the 5th edition of ALEC's "Rich States, Poor States," Arthur B. Laffer, Stephen Moore, and Jonathan Williams highlight state policies that contribute to economic growth and those that constrain prosperity.

    Critics on the Left, including the N.C. Budget & Tax Center, have claimed that individuals and businesses do not respond to higher taxes by relocating to states with more attractive tax climates. But data from the past decade show that high tax states consistently underperform low tax states.

    One measure of performance is population growth and migration. On net, 2010 census data cited in the ALEC report show that the 10 states with the highest tax burdens as a percentage of personal income have seen a net migration of nearly 4.3 million individuals to other states, while the 10 states with the lowest tax burdens have experienced net in-migration.

    Economic growth is another factor. Nine states currently have no personal income tax. The average growth of state and local tax revenues for all states over the past decade has been 51.04 percent. However, the nine states with no personal income tax have seen their state and local tax revenues grow 81.7 percent faster than the 44.88 percent growth rate in the nine states with the highest personal income tax rates.

    A higher tax burden also hurts employment growth. Nonfarm payroll growth has also been higher for the no personal income tax states at 5.36 percent, while the U.S. average has been 0.51 percent. But the nine states with the highest personal income tax rates have seen negative growth at -1.68 percent.

    North Carolina's cumulative nonfarm payroll growth from 2000-10 has been negative: -0.9 percent, ranking it 29th among the states. The state's cumulative growth in personal income per capita has been 25.7 percent, placing it near the bottom at 46.

    From 2001-10, the average growth in gross state product has been 46.61 percent for all states and 42.06 for the nine states with the highest marginal personal income tax rates. The nine states with the lowest marginal personal income tax rates have seen GSP growth at 58.54 percent.

    The economic effects of right-to-work laws also are dramatic, according to the ALEC report. Average GSP growth for the 22 right-to-work states that include North Carolina has been 52.83 percent compared to just 41.72 percent for the 28 forced union states. The average personal income growth of 49.99 percent in right-to-work states has outpaced both the U.S. average (43.71 percent) and the 28 forced union states (38.78 percent), even when adjusting for each state's cost of living.

    With the election of many more fiscal conservatives in 2010, the authors say there has been "real change in the way state governments approach the fundamental issues of taxes and spending." They caution lawmakers that policy changes do not occur in a vacuum, meaning a higher tax state will suffer when its neighbors move to a more favorable tax climate.

    A case in point is Tennessee, which is considering a constitutional amendment on income taxes and also is looking to repeal its estate and inheritance taxes. As a result, Tennessee's 2012 Economic Outlook Ranking is 12th, much higher than North Carolina's 23rd.

    State Rep. Julia Howard, R-Davie, senior chairman of the House Finance Committee, told Carolina Journal that state lawmakers will not address comprehensive tax reform, including the estate tax, until 2013. "We had three meetings on the estate tax but concluded there would be no advantage at this time to repealing it, given the base we have now."