John Hood: Focus on job creation via tax reform

Dec. 25, 2012 @ 08:47 PM

RALEIGH — It’s about time for New Year’s resolutions. My recommendation for North Carolina politicians is to resolve to focus their attention, rhetoric, and legislation on reducing the ranks of the unemployed.
Before the onset of the Great Recession in 2007, there were about 220,000 North Carolinians classified as unemployed but actively looking for work. That yielded a “U-3” rate – the most common measure of unemployment – of 4.6 percent. As of October 2012, North Carolina’s U-3 rate was 9.3 percent. The actual count was about 440,000 unemployed North Carolinians, twice the pre-recession figure. A broader measure, the U-6 rate that includes both unemployment and underemployment, stands at a staggering 17 percent, also twice as high as the pre-recession rate.
Because new people enter the workforce every year, it will take robust annual job growth to make a noticeable dent in the problem. Current trends don’t bode well. North Carolina probably added only about 40,000 net new jobs in 2012. Economists are predicting between 60,000 and 70,000 net new jobs in 2013. Even at that rate, it will take many more years to bring unemployment down to its pre-recession level.
Some of the usual ideas you hear about strengthening North Carolina’s economy – such as refurbishing the state’s infrastructure – may well be advisable. Most of their economic benefits would come in the long run, however. Policymakers need both a long-term strategy and some short-term tactics.
The best tool available for creating jobs quickly is tax reform. Nationwide, there is a large and accumulating stock of financial capital. Investors and entrepreneurs are worried about federal fiscal and regulatory policies and uncertain about immediate prospects for growth. They are holding onto cash and targeting their new investments carefully. If we want North Carolina to be one of those targets, we need to send investors and entrepreneurs a clear signal that their after-tax return would be higher here than in competing jurisdictions.
There are several models for pro-growth tax reform. My colleagues at the John Locke Foundation suggest that North Carolina replace current state taxes on personal income, corporate income, retail sales, and estates with a single, flat-rate tax on consumed income. Such a system would end the current double or triple layers of taxation on investment income, taxing all household income once and only once, when it is used to purchase goods and services.
Our “first-best” proposal would be a consumed-income tax rate of 8.5 percent, with no additional state tax on sales, corporate income, or investment. Our economic consultants estimate that such a plan would boost job growth by 80,000 jobs in the first year of implementation alone. If enacting this “first-best” plan proves politically impossible, we suggest a “second-best” proposal of a 6 percent consumed-income tax and a reduced state sales tax. Such a plan would still boost projected job creation in 2013 by at least 15 percent, or 10,000 jobs.
Don’t like these options? Then propose one of your own. But let’s keep focused on the core issue: economic growth.

John Hood is president of the John Locke Foundation and author of “Our Best Foot Forward,” a book on North Carolina’s economy. It is available at Representations of fact and opinions are solely those of the author.