Saving it forward
You might think my statement so obvious that it need not be made. Respectfully, you are mistaken. In Raleigh and elsewhere, there is a political faction that argues the cost of doing business is not particularly relevant to economic development. Its adherents argue that governments need only concern themselves with the volume and generosity of the services and amenities they deliver. North Carolina shouldn’t even bother to compete with lower-cost jurisdictions in the rest of the country or around the world, they say.
While you’ll occasionally find an executive who claims not to care about such pedestrian concerns as how much they pay in taxes or how much time and money it takes to comply with regulations, most business leaders disagree. They vote accordingly with their ballots, their budgets and their feet.
Value arises from the interaction of costs and benefits. To be sure, if higher tax and regulatory burdens are accompanied with clearly superior public services, that might well benefit the economy in question. In reality, there does not appear to be a consistent relationship between service quality and cost. Many places with expensive government don’t have better schools, roads or crime rates. Many economical governments compare well in delivering these services.
Of the roughly 120 studies on the subject published in peer-reviewed academic journals since 1990, most found that higher taxes corresponded with lower rates of state economic growth. Only 15% of the studies found that higher state spending was associated with stronger economic performance. Even for education and infrastructure, the empirical findings are mixed. Most studies found insignificant or even negative economic effects from state spending on them. This doesn’t mean, of course, that schools and roads aren’t valuable. The findings suggest that the taxes required for states to spend more than the national average on these services do more economic harm than any resulting service improvements enhance economic good.
North Carolina policymakers have taken these insights to heart. In 2011, a newly elected Republican legislature refused to extend some $1 billion in tax increases despite repeated entreaties by then-Gov. Bev Perdue and some lobbies to do just that. As a result, the cost of government in North Carolina went down. In 2013, Gov. Pat McCrory and the General Assembly enacted a bill reforming and reducing state taxes by at least $700 million a year. The cost of government declined again.
Critics argue that these decisions haven’t really improved the value proposition for business because of damage done to state services. So far, at least, there isn’t much evidence supporting this allegation. Since the passage of the 2013 tax reform, North Carolina employers have added 175,000 net new positions. That’s a job-growth rate of 4.3%, higher than the averages for the nation (3.6%) and the Southeast (3.7%). The broadest measure of the labor market, U-6 unemployment and underemployment, fell last year by 2.6 points to 12.1% in North Carolina — another faster-than-average rate of improvement.
Not all economic comparisons are flattering to the Tar Heel State. Income growth has been relatively weak, for example. Nor should we be satisfied simply to surpass a national average that is itself unimpressive. North Carolina policymakers should do much more to reduce the cost of doing business here while increasing the productivity of government services.
That need not mean another new round of large state tax cuts in 2015, however. In fact, I’d argue against it. The national economic recovery, weak though it may be, is getting long in the tooth by historical standards. Prudence dictates that McCrory and the General Assembly factor the possibility of a recession into their short-term fiscal planning. Even a mild one in 2016 or 2017 would likely create a state budget gap of between $1 billion and $2 billion as revenue falls short of projections and expenses rise for Medicaid and other countercyclical services. North Carolina’s current rainy-day fund totals less than $700 million. I’d put as much money as possible into the state’s savings account this year and next, just in case.
Fortunately, tax cuts aren’t the only way to make us more cost-competitive. Regulations cost many businesses as much as taxes do, if not more. The General Assembly has already enacted regulatory-reform measures in each of the last four sessions. But there’s more to do in 2015. House Bill 795, for example, would update the State Environmental Policy Act to remove duplicative or unnecessary reviews of major construction projects. Another piece of legislation, House Bill 760, would streamline a variety of regulatory procedures and impose a new cap on the state’s renewable portfolio standard, which forces electric utilities in North Carolina to purchase high-cost power from solar facilities and other alternative-energy suppliers. Both bills have passed the House and now await action in the Senate, where members also have several regulatory-reform measures in mind.
We should take additional steps to enhance economic growth in North Carolina while hedging against the fiscal impact of recession. Both can be done simultaneously.