September 22, 2008
RALEIGH — North Carolina earns a D grade for its Taxpayers’ Return on Investment, a new measure that compares states’ tax burdens to their performance in education, road quality, health, and crime, along with income and population growth. A new John Locke Foundation Spotlight report explains that grade.
Click here to view and here to listen to Joseph Coletti discussing this Spotlight report.
“North Carolina has long had one of the top state and local tax burdens in the Southeast and still does,” said report author Joseph Coletti, JLF Fiscal and Health Care Policy Analyst. “Residents of the state pay twice as much in state and local taxes, adjusted for inflation, as they did in 1983.”
“A high tax burden could be justified if it resulted in better performance for the state in health care, education, roads, crime, and income and population growth,” Coletti added. “But North Carolina’s higher tax burden, to my surprise, has not produced a positive return on investment for taxpayers. Every other state in the South, with the exception of Georgia, has achieved a much better grade for its Taxpayers’ Return on Investment than North Carolina’s D.”
Coletti’s report is designed to help North Carolinians determine whether state government is offering a good “bang for the buck.” “States that invest taxes well should have better performance on health, education, roads, and crime than states that do not make good investments,” he said. “Better performance, in turn, should spur faster income and population growth.”
North Carolina fares worse than most of its neighbors, Coletti said. “An overall D grade puts North Carolina just ahead of Georgia, but well behind Virginia’s and South Carolina’s B grades, Tennessee’s A-, and Florida’s A grade as the top-ranked state,” he said. “Arkansas, which had the same tax burden as North Carolina in 2001, earned a C+, Mississippi and Alabama earned B- grades, Louisiana earned a B+, while Texas earned an A and tied for second overall among the 50 states.”
The ratings reflect more than just tax burdens, Coletti said. “While states with lower tax burdens earn most of the top grades and those with higher tax burdens earn some of the lowest grades, the policy differences are important,” he said. “North Carolina’s road system performance deteriorated between 2001 and 2006, while Arkansas and Florida showed significant improvement and Texas roads improved slightly. More than half of the other 50 states also saw greater crime-rate reductions than North Carolina from 2001 to 2006.”
North Carolina’s increased education spending has yielded few results, Coletti said. “Gov. Mike Easley’s efforts in education seem to have produced little effect as North Carolina improved less than all but nine other states in the country,” he said. “Reading scores on the National Assessment of Educational Performance fell 2.2 percent between 2002 and 2007. Math scores improved, though not as much as in most other states. To put this in perspective, North Carolina clearly outperformed South Carolina at the start of the decade and was on par with Virginia, but by 2007 trailed Virginia and was on par with South Carolina.”
North Carolina’s tax burden has “retreated slightly” since temporary sales and income taxes adopted in 2001 finally expired, but the state still compares poorly with most neighbors, Coletti said. “State and local governments in other states have, on average, reduced the burden they impose on taxpayers.”
“The combination of a higher in-state tax burden and lower burdens in the rest of the country has put North Carolina at or above the national tax-burden average with increasing frequency and weakened the state’s competitiveness within the United States and internationally,” he said. “North Carolina’s tax burden is higher than the average burden in the region but on a par with New England and Great Lakes states.”
Even with a relatively high tax burden, other factors have helped North Carolina secure high rankings in some measures of states’ business climates, Coletti said. “It’s likely that low labor and energy costs played the most important role as Forbes magazine recently rated North Carolina the No. 4 state for business,” he said. “Unfortunately, legislators and others have targeted the very areas in which the state has comparative advantage — such as labor, land, and energy costs — for new rules that can make the state less competitive. In other words, North Carolina’s high tax burden among Southern states may not be offset by lower costs in other areas much longer.”
The new Taxpayers’ Return on Investment measure could help North Carolina find ways to spend money more wisely, Coletti said. “Florida and Texas provide good examples of states with lower tax burdens, but better growth and performance than North Carolina,” he said. “Higher taxes do not automatically translate into better outcomes.”
“City, county, and state government officials should focus again on basics such as roads and crime, allow more choice in education and health, and stop diverting money from the purposes for which it is intended.”
Joseph Coletti’s Spotlight report, “Taxpayers’ Return on Investment: North Carolinians get little value for their tax dollars,” is available at the JLF Web site. For more information, please contact Coletti at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].