Tax hikes make no sense as state struggles with high unemployment

June 18, 2009

RALEIGH — North Carolina lawmakers would do nothing to help the state’s unemployment problem, if they move forward with proposed tax hikes in the final state budget. That’s the assessment of a John Locke Foundation expert analyzing May unemployment data.

Click here to view and here to listen to Joseph Coletti discussing North Carolina’s latest unemployment data.

The N.C. Employment Security Commission’s latest report lists the state’s unemployment rate at 11.1 percent for May, up 0.4 percentage points from the adjusted April rate of 10.7 percent. After a one-month dip, the rate continued the month-by-month climb that’s been documented for more than a year. The latest unemployment rate is the highest North Carolina has recorded since the state started keeping seasonally adjusted data, according to the ESC. North Carolina ranks No. 7 among the 50 states in unemployment.

“The latest numbers remind us that North Carolina needs jobs,” said Joseph Coletti, JLF Fiscal Policy Analyst. “It’s unfortunate that legislators are considering up to $1 billion in tax and fee increases next year. Gov. Bev Perdue apparently wants them to consider even larger increases. Higher taxes would hurt the state’s opportunities for improving job growth.”

Two new personal income tax brackets cause special concerns for job creation purposes, Coletti said. Taxpayers who earn more than $200,000 a year would face additional state income taxes. “North Carolina already has the highest marginal personal income tax rate in the Southeast and one of the highest rates in the nation,” Coletti said. “If the General Assembly’s negotiators adopt the new income tax hikes included in the House budget plan, North Carolina would stand out from its neighbors for the wrong reasons.”

Lawmakers interested in adding North Carolina jobs should consider recent history in Maryland, Coletti said. “When Maryland legislators enacted a 6.25 percent tax bracket for millionaires, one third of the state’s millionaires disappeared from the tax rolls,” he said. “With the higher rate, Maryland is now collecting $100 million less from those high earners.”

Proposals on the negotiation table in North Carolina would raise the top marginal rate to 8.5 percent. “It would be hard to find a better way to tell skilled professionals, CEOs, owners, and investors that they’re not welcome in North Carolina,” Coletti said. “These are the people who create most of the new jobs in our economy. Without them, North Carolina will have a harder time lowering its unemployment rate.”

Seasonally adjusted employment decreased by more than 28,000 workers to a total of less than 4.06 million, according to the ESC. Unemployment increased by 17,000 workers, with more than 508,000 workers now listed as unemployed. The number of workers who were unemployed, but actively seeking work, remains at an all-time high, according to the ESC.

Unemployment has increased by more than 242,000 people in the past year. The state rate in May 2008 was 5.9 percent.

With the state’s July 1 budget deadline looming, continuing unemployment problems should prompt lawmakers to think twice about adding to North Carolinians’ tax burdens, Coletti said. “In the past week, the John Locke Foundation has unveiled a ‘Can-Do Budget‘ that outlines ways the General Assembly can fund essential state government functions without making debilitating service cuts or raising tax rates,” he said. “Budget negotiators should be able to find ideas in that document that would help them take harmful tax hikes off the table, especially when we now have a half million people out of work who are actively seeking jobs.”

“Until North Carolina’s elected officials stop pursuing policies that stifle innovators and entrepreneurs, the state will struggle to regain its economic footing,” Coletti added. “Now is a good time for lawmakers to stop setting up barriers to business growth. Let’s hope the latest unemployment numbers will remind them that raising hundreds of millions of dollars of new taxes during an economic downturn is a bad idea.”

For more information, please contact Joseph Coletti at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].