How is North Carolina’s economy doing, really? | Triangulator | Indy Week
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How is North Carolina’s economy doing, really? 

Probably the foremost issue in next year's statewide elections, especially the race for governor, will be the health of North Carolina's economy. More specifically, it will be about whether the supply-side tax-reform experiment Gov. Pat McCrory and the Republican Legislature undertook in 2013 (and continued in 2015)—dramatically lowering and flattening individual and corporate income taxes while eliminating deductions and tax credits, a combination that critics alleged benefited the rich while depriving the state of revenue it needs to bolster infrastructure and education—has done what it was supposed to do.

That is to say, did the tax cuts better position the state for economic growth that will trickle down to all of its socioeconomic strata? The answer, of course, depends on whom you ask.

The governor's critics point out that even as the national unemployment rate has dropped to 5 percent, the state's rate is stuck at 5.8 percent and has spiked over the course of the year. Meanwhile, GDP growth is mired at a mediocre 1.4 percent, well below both the national and regional averages, college tuition is rising, wages are stagnant and protections for the poor and the environment have eroded.

But conservatives counter that things are, in fact, improving. Exhibit A: A report released last week by the right-leaning Tax Foundation—partially underwritten by the N.C. Chamber Foundation—suggests that McCrory's reforms have turned North Carolina's tax system into one of the country's most attractive.

The picture the Tax Foundation paints is that, prior to 2013, the state's tax burden was so high that it couldn't compete with its neighbors, but now it's the sixth-best in the nation. (This is according to the Tax Foundation's own business-climate index, which seems a bit self-referential.)

The biggest thing the Legislature did, says Jared Walczak, a Tax Foundation policy analyst, was restructuring the tax system.

"Tax systems tend to ossify around the existing economy," Walczak says—in this case, manufacturing and textiles. "It is very difficult for new individuals to fit into the market. How do you bring in new individuals? How do you have a dynamic and growing and diversified economy?"

A key to doing that, he says, is to put the right tax structure in place. The state now has that, he argues. And with a little patience, that tree will bear fruit.

"It does take time for economic development to take place," he says. But anecdotally, he adds, business owners say taxes are among their primary consideration. Moreover, North Carolina has seen accelerating in-migration in recent years, meaning people want to live here. And, he points out, state revenue this year beat projections by $400 million, so the tax cuts have hardly crippled state coffers.

"The measurement of improvement in the tax climate is not surprising," counters Alexandra Forter Sirota of the left-leaning N.C. Budget & Tax Center, "considering that they hand out their rankings to follow their idea of good policy."

In other words, all the Tax Foundation's report tells us is that the Legislature enacted policies the Tax Foundation likes, not that they are successful.

Low taxes, she says, "aren't the only thing businesses look for." They also want educated workforces, decent infrastructure, built-in consumer demand and high quality of life for their employees. Right now the state is putting all of its eggs into the tax-cut basket, she says, and short-changing the rest.

That's the bigger issue: The Tax Foundation's report entirely ignores the revenue side of the equation. As in, not a word about investing in the state's future or workforce. And while it's possible—though impossible to quantify—that the lower tax rates boosted the state's economy, "we do know that were it not for the tax changes, we would have been able to make greater progress on teacher pay," Sirota says. "One million working families would not have lost an important tax credit. We would have had a tax code that continues to ask companies to pay at a level that is reasonable."

Reach the INDY's Triangulator team at triangulator@indyweek.com.

This article appeared in print with the headline "A living wage for Wake workers"

  • A report says we have one of the best business climates in the country. Should we believe it?

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