N.C. Business Climate Unworthy of Praise
Brian Balfour
In a recent meeting of the N.C. Chamber’s Government Affairs Conference, House leaders made the claim that North Carolina consistently ranks among the nation’s best business climates. This claim, and the “evidence” used to support such a claim, does not stand up to scrutiny. To support their argument, two sources are typically used, an annual study by the Council on State Taxation (COST) and Site Selection Magazine:
- The COST report stands out in stark contrast to other reliable measures of business climate:
- The Tax Foundation, a Washington, D.C., nonpartisan research group, ranks North Carolina 40th in their 2008 State Business Tax Climate Index – by far the worst ranking in the Southeast.
- The Small Business & Entrepreneurship Council likewise rated North Carolina 39th in terms of “friendliest policy environment for entrepreneurs” in their 2007 Small Business Survival Index. No other Southeastern state ranks lower than 13th on this list.
- Suffolk University’s Beacon Hill Institute rates North Carolina 30th in their 2007 State Competitiveness Index.
- Economic trends show North Carolina lagging regional and national growth rates.
- Site Selection Magazine is a publication targeted to “economic developers” and location consultant types. In other words it is a cheerleader for corporate welfare.
- State lawmakers should be embarrassed about being ranked number one on this list because it merely reflects the extent that North Carolina needs to bribe businesses to locate here.
SUMMARY: Legislative leaders have repeatedly relied on two sources to bolster their claim that North Carolina’s “business climate” is among the best in the nation. Upon further examination, however, these sources can not be relied upon to make such an argument.
Frequently cited over the last several years is an annual study released by the Council of State Taxation (in collaboration with Ernst & Young), which calculates North Carolina’s state and local taxes paid by businesses to be third lowest in the nation. This study, however, does not seem to be a reliable indicator of “business climate”:
- The COST study omits the retail sales tax in their calculations. North Carolina’s retail tax rate is higher than 31 states. How can a report that contains such a glaring omission be trusted?
- A study that claims Florida, Wyoming and Texas tax their businesses more heavily than Connecticut, California or Massachusetts should arouse a healthy dose of skepticism.
- The COST study is merely a snapshot of taxes paid in a given year, it does not capture the entrepreneurial activity not created due to North Carolina’s high marginal tax rates:
- The Ewing Marion Kauffman Foundation, a Kansas City based private foundation focusing on entrepreneurship, places North Carolina 36th in the “entrepreneurial activity” category of their 2007 State New Economy Index
- Overall job growth from 2001 to 2008 in North Carolina was second lowest among Southeastern states. The growth rate of 9.2 percent trailed well behind Florida (14.8 percent), Georgia (12.8 percent), neighboring South Carolina (10.6 percent) and the Southeast regional average (11.8 percent)
- North Carolina’s small business employment growth from 1999-2004 was only 9 percent – compared to 18 percent in Florida, 16 percent for Georgia and 13 percent for the Southeast region.
If North Carolina’s business climate is so outstanding, why is it not leading the Southeast, or among the national leaders, in growth? Moreover, why does the state feel the need to offer so many corporate incentives for businesses to locate – or simply stay – in the state?
Site Selection Magazine
North Carolina’s Department of Commerce proudly declares on its Web site that Site Selection magazine has ranked North Carolina as having the “best business climate” in the nation six of the last seven years. As it turns out, however, this ranking is nothing to be proud of:
- The Site Selection ranking primarily represents the amount of “economic development” activity in a state rather than its true overall business climate.
- The magazine features an index highlighting corporate handout programs for all 50 states.
- Included in their picks for “Top Ten Deals of 2007” is one from North Carolina (Google), while the Honda Aircraft deal at PTI gets an “honorable mention.” Both of these deals prominently featured economic incentives to “seal the deal.”
Site Selection’s “Business Climate” Ranking Methodology
Site Selection’s “best business climate” ranking is actually a measure of which states are engaged in the highest amount of corporate welfare activity. Here is how they develop the ranking: “Fifty percent of the total score is based on a survey of corporate real estate decision makers and fifty percent comes from data associated with actual project activity as tracked by our proprietary New Plant database.”
Neither of these criteria are accurate reflections of a state’s true “business climate”:
- Half of the score is based on a survey of corporate real estate decision makers. What do they rank as the most important issues?
- Three of the top ten answers are centered on economic incentives (#5 “Availability of incentives”, #7 “State & local economic development strategy”, #8 “Flexibility of incentives programs”)
- This is the only topic mentioned three separate times. In short, the survey basically reflects which states are most willing to provide corporate handout
- The other half of the score is based on their “new plant database,” a list that tells a very incomplete story:
- According to their website, the Site Selection new plant database includes only “projects costing at least US$1 million, covering at least 20,000 sq. ft. or employing at least 50 people.” In other words, projects more likely to have received some government incentives are included, while small, independent business starts are ignored
