It is difficult to argue, with a straight face and without crossing fingers behind your back, that the tax climate in North Carolina is not a stumbling block to economic improvement. As the election season flows with gathering speed towards its Nov. 6 conclusion in the General Election, that argument is heard more loudly, and with greater urgency, from candidates who champion more free market and less government hindrance (sometimes called government help by those on the left).

Republican gubernatorial candidate Pat McCrory, for example, during his first debate with Democrat Lt. Gov. Walter Dalton last Wednesday, said “the best incentive for new jobs in North Carolina” is to avoid leading the pack in the Southeast with high sales, corporate and income taxes.

But the Tax Foundation, a nonpartisan research organization, just released its 2013 State Business Tax Climate Index,  and it shows North Carolina isn’t just shooting itself in the foot with tax policies that hamper its competitiveness, but anchors the state firmly in the Somber Seven at the bottom of the heap — 44th worst of the 50 states. The state’s ranking remained unchanged from the 2012 list.

North Carolina has managed to tumble well below every other state in the  Southeast, and the authors of the study tell why that is a crucial, but alarming, development.

“It is important to remember that even in our global economy, states’ stiffest and most direct competition often comes from other states,” Tax Foundation economist Scott Drenkard wrote in the report. “The Department of Labor reports that most mass job relocations are from one U.S. state to another, rather than to an overseas location.”

So now, even folks in the once depressingly struggling states of Mississippi, Louisiana, and Arkansas can say, with some economic authority, “Thank goodness for North Carolina.” Those states rank 17, 32, and 33, respectively. Florida is 5, Tennessee 15, Alabama 21, West Virginia 23, Kentucky 24, Virginia 27, Georgia 34, and South Carolina 36.

North Carolina is mired in the bottom with states known for high-hurdle tax policies: Maryland 41, Iowa 42, Wisconsin 43, Minnesota 45, Rhode Island 46, Vermont 47, California 48, New Jersey 49, and New York 50.
If states, like people, gain reputations by the company they keep, North Carolina needs to find some better friends rather than getting lumped into this cheerless assemblage. The annual tax index is, after all, viewed with interest hundreds of thousands of times annually by business leaders, government policy makers and taxpayers.
The Tax Foundation, like Pat McCrory, Republican lieutenant governor candidate Dan Forest and others campaigning this election season, vigorously dismiss the notion that state tax credits, incentives and subsidies are the yellow brick road to state economic enhancement. They advocate broad-based tax reform, instead.
Indeed, the Tax Foundation report spotlights the North Carolina example of Dell Computers to warn that such foolishness is actually “a dangerous proposition.” North Carolina signed off on more than $300 million in state and local incentives to recruit Dell to the Winston-Salem area in 2004. The plant opened in 2005.

Former state Supreme Court justice Bob Orr, executive director at the North Carolina Institute for Constitutional Law, unsuccessfully challenged the Dell deal in court as unconstitutional because lawmakers manipulated state tax code to grant special tax preference to just one entity. While the case was defeated in the court of law, Orr’s opposition to sweetheart subsidies partly on the belief that large, out-of-state corporations have no loyalty to the local community, got much better reception in the court of public opinion, especially after Dell pulled up stakes and went away after only four years.

“Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate. A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state’s competitiveness,” Drenkard and co-author Joseph Henchman wrote in the Tax Foundation report.

As for the Tar Heel State, there are obvious tax policies that stick out like the proverbial sore thumb, according to the report. North Carolina ranks 29 in corporate tax, 43 in individual income tax, 47 in sales tax, 5 in unemployment insurance and 36 in property tax. Those were among the more than 100 tax provisions on which the Tax Foundation collected and synthesized data to come up with its rankings. Compared to 2012, North Carolina dropped two places in the corporate tax category, improved two places in the unemployment insurance tax slot, and remained the same in the other three tax rankings.
On the other end of the spectrum, the Top 10 states in the 2013 Index are Wyoming 1, South Dakota 2, Nevada 3, Alaska 4, Florida 5, Washington 6, New Hampshire 7, Montana 8, Texas 9, and Utah 10.”Many of the top ranking states states do not have one or more of the major statewide taxes, such as a personal or corporate income tax or a sales tax,” according to the Tax Foundation. “Wyoming, South Dakota and Nevada, for example, have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax.”

Tax policy experts at the John Locke Foundation have called for abolishing North Carolina’s corporate income and estate taxes, and to reduce the state’s high personal income tax rates to make the state more competitive. The foundation also supports eliminating the special tax breaks and subsidies for favored businesses and industries.