RALEIGH — A state government that relies on federal bailouts, temporary tax hikes, and other gimmicks to pay as much as one-third of its bills fails to set the stage for strong economic growth in North Carolina. The John Locke Foundation’s top budget expert offers that analysis as he reviews new state unemployment data.
“We’ll see healthy job growth in North Carolina when more business owners and entrepreneurs are convinced they can hire workers without fear of massive tax hikes and other job-killing policies in the months ahead,” said Joseph Coletti, JLF Director of Health and Fiscal Policy Studies. “Right now, North Carolina leaders are not taking the steps that would put those entrepreneurs’ minds at ease.”
The prospect of a tax hike next year is clear to any observer who looks at North Carolina’s state budget picture, Coletti said. “No one can dispute that lawmakers have dug themselves a hole of at least $3.3 billion for the next budget year,” he said. “How? They relied on federal stimulus money, so-called ‘temporary’ tax increases, and other one-time changes to cover that much of the state budget.”
Add state pension and health care obligations into the mix, and North Carolina’s government falls $7 billion short of its obligations for the next budget year, Coletti said. “We’re talking about a structural deficit that amounts to about one-third of the state’s General Fund budget,” he said. “It’s hard to see any business owner ignoring the threat of a major tax increase next year to help plug the hole.”
The N.C. Employment Security Commission’s latest report lists the state’s unemployment rate at 9.8 percent for July, down two-tenths of a percentage point from June’s rate of 10.0 percent.
North Carolina unemployment dipped under 10 percent after 16 consecutive months in the double-digit range. North Carolina’s unemployment rate is still three-tenths of a percentage point higher than the national average of 9.5 percent. The state rate has exceeded the national unemployment rate since February 2008.
North Carolina cannot rely on the excuse that other states face the same types of budget woes, Coletti said. “Yes, every state has been forced to deal with the economic slump, but some have addressed their problems in better ways than others,” he said. “The National Conference of State Legislatures tells us North Carolina’s budget hole as a share of the general fund budget is the worst in the Southeast. Nationwide, this state ranks No. 5 in its budget gap. Only New Jersey, Nevada, Arizona, and Maine face larger holes.”
This fact is just one more reason for business owners and entrepreneurs to think twice about building or expanding business in the Tar Heel State, Coletti said. “Along with some of the region’s most uncompetitive tax rates, this news about the state’s budget gap doesn’t boost confidence in North Carolina’s merits as a place to do business.”
Targeted tax breaks and corporate giveaways cannot hide the bigger picture, Coletti said. “Gov. Beverly Perdue and legislative leaders continue to trumpet new jobs tied to targeted incentives, but they ignore the jobs that never have the chance to come to North Carolina because entrepreneurs worry about the state’s long-term outlook,” he said. “That’s not to mention the existing North Carolina businesses that can’t expand because they pay higher taxes to cover tax breaks the state has awarded to their competitors.”
Despite the drop in the unemployment rate, seasonally adjusted employment decreased in July by 19,400 workers to a total of 4.069 million, according to the ESC. Unemployment decreased by 16,100 workers, with more than 440,000 workers now listed as unemployed. The state rate in July 2009 was 11.0 percent.
State government leaders could take steps to encourage more business owners and entrepreneurs to make the investments that will generate new jobs, Coletti said. “This does not mean the governor, N.C. Commerce Department, and legislative leaders picking winners and losers,” he said. “It does not mean targeting tax breaks and incentives to particular companies and industries. What it does mean is scaling back spending so that North Carolina government lives within its taxpayers’ means.”