State needs better business brand

Jul. 11, 2013 @ 10:31 PM

Liberal politicians, activists and commentators have spent months prodding, baiting and criticizing Republican Gov. Pat McCrory and the Republican-led state legislature. While occasionally goading their targets into making unwise comments, the obstructionists have failed to keep North Carolina’s new conservative leaders from pursuing fundamental reforms of the state’s failed public policies.

Frustrated and desperate, liberals are resorting to increasingly silly and circular claims. A recent tactic has been to persuade left-leaning media outlets to cover their Moral Monday protests at the legislature, and then cite that media coverage to prove that conservatives are hurting the state’s brand with potential corporate recruits.

Time for some realism. Investors, entrepreneurs and business executives don’t make multi-million-dollar decisions on the basis of Huffington Post screeds and MSNBC tirades. They put their money where it is most likely to generate the highest, sustained after-tax return.

Liberal critics argue that if the North Carolina General Assembly enacts a tax bill with dramatic reductions in marginal tax rates, a resulting lack of state spending on public schools and universities will deter rather than attract new business to the state. Their argument rests on the notion that, until now, North Carolina has bested lower-taxed states in recruiting top-flight corporations precisely because we were spending more taxpayer money.

The only value to this claim is that it makes the claimants feel better about themselves. On the merits, the argument is incorrect in every way.

First of all, who says that North Carolina has been besting its competitors at attracting top-flight corporations? The residents of Virginia, Georgia, Florida, and Texas — all populous Southern states with more Fortune 500 company headquarters and lower jobless rates than North Carolina can boast — would beg to differ with this assertion.

Obviously there is more to building strong economies and attracting companies to a state than having low tax rates. But just as obviously, states that manage to deliver necessary government services at a lower cost have a leg up in the competition for business investment and job creation. Each of these Southern competitors imposes lower marginal tax rates on investment and corporate income than North Carolina does. They all have smaller, less costly governments, too. Even if the General Assembly were immediately to enact the Senate’s ambitious tax bill, North Carolina’s overall tax burden would likely remain higher than that of Virginia, Georgia, Florida and Texas — but at least those taxes would be raised with lower marginal rates on broader tax bases, a policy friendlier to economic growth than our current approach.

But what of North Carolina’s high business-climate rankings from Site Selection magazine and other groups? Critics of the new conservative majority in Raleigh tend to cite these ratings without studying them. The ratings are heavily influenced by economic-incentive policies, of which North Carolina has become an aggressive — one might even say desperate — purveyor. It is weird, to say the least, to construct an argument that state taxes aren’t important to economic growth by citing national rankings that place a high premium on targeted tax incentives.

As it happens, there is strong evidence that targeted incentives aren’t particularly effective in promoting sustained growth, because they can’t make up for an underlying tax system with high marginal rates. The very fact that North Carolina has ranked well on such business-climate measures despite having, objectively, a poor climate for business growth (i.e., one of the weakest economies in the nation for years) leads me to believe that those business-climate measures aren’t very good. Perhaps I’m just being too literal.

Whatever else may be said about the 2013 legislative session, fiscal conservatives have no reason to fear that reforming and reducing North Carolina taxes will hurt the state’s brand with out-of-state investors, executives and entrepreneurs. When combined with additional pro-growth reforms of the state’s regulations, infrastructure and education system, tax reform will send a clear signal that North Carolina is finally ready to compete with Virginia, Georgia, Florida, Texas and other, healthier economies.

John Hood is president of the John Locke Foundation.