Marion Johnson of Think NC First recently spoke with Michael Mazerov, Senior Fellow at the Center for Budget and Policy Priorities, about his research on the effects of fiscal policy on jobs and entrepreneurship. 

You have recently conducted research on the relationship between state taxes and job growth. Can you walk us through your findings?

“First, cutting taxes reduces revenue, period.  No credible research backs up claims that tax cuts pay for themselves by inducing greater economic growth.

Second, the majority of the serious research finds that interstate differences in tax levels are not a major factor explaining relative rates of economic growth among the states. Other things matter a lot more, such as the existing industry mix of the state, the education level of the population, the quality of roads, bridges, and other infrastructure, and the presence of major research-oriented universities.

Of the eight major studies published in academic journals since 2000 that have examined the broad economic effect of state personal income tax levels, six found no significant effects and one of the other two had internally inconsistent results. Studies of state business taxes tend to find modest effects on economic growth, but only if one assumes that lowering business taxes does not damage the quality of education, infrastructure and other state and local government services needed by businesses – an assumption that’s generally unrealistic.”

Think: What about small business owners? Could they benefit from lower personal income taxes?

“Big income tax cuts probably harm the ability of small businesses to create jobs more than they help. Very few small businesses will create new jobs because of a tax cut, and the resulting cuts in funding for schools and other services can weaken the business climate and diminish entrepreneurial activity over time.

The vast majority of those who would get a personal income tax cut are in no position to create jobs. The U.S. Treasury Department reported less than three percent of personal income taxpayers own a bona fide small business with any employees other than the owner or owners. Even most high-income households — the group that likely would get the most money back from a personal income tax cut — are not small business owners. 

Most small businesses make too little money for tax cuts to produce enough income to pay new employees.  Nearly nine in ten small businesses have less than $50,000 in taxable income in a given year.  State income taxes for these businesses already are so low — just a few thousand dollars in most cases — that even eliminating the tax wouldn’t come close to paying one full-time worker’s salary.”

Think: What kind of research is there on whether raising taxes will drive job creators away? 

“True “job flight” is extremely rare. With respect to tax increases on individual business owners, a recent study by Cristobal Young and Charles Varner in the National Tax Journal looked specifically at whether the creation of millionaire’s tax bracket in New Jersey sparked out-migration of business owners and failed to find a significant effect. 

The vast majority of new jobs are created by businesses already located in a state, especially young, rapidly-growing start-ups that develop an innovative product or business model. One study found that startup firms –those less than a year old – were responsible for all of the net job creation in the U.S. economy since 1977. The lesson here is that if you want to create jobs in a state, you need policies that help foster entrepreneurship and help your home-grown businesses – especially start-ups—to survive and take off. And that means public investments that produce a talented local workforce and a high-quality of life.”

Think: What other measures could policymakers use to encourage entrepreneurs to start their business in North Carolina?  

“The most important things North Carolina can do to ensure a healthy start-up business culture is to improve K-12 education, maintain its high quality state university system, and preserve those services like public safety and parks and public recreation facilities that generally contribute to a high quality of life.  I’ve looked in depth at the research on the location decisions of entrepreneurs.  Most entrepreneurs start businesses where they already live, where they know the market and have personal relationships with potential bankers and investors, and people who could become their partners or employees.  So you want to be the kind of state where people likely to become entrepreneurs go to college or grad school or move right after they graduate.

Endeavor Insight, a research firm that examines how entrepreneurs contribute to job creation and long-term economic growth, surveyed executives of fast-growing companies for a February 2014 report.  This survey found that the typical entrepreneur had lived in the city where he or she had started the business for 7 years before doing so.  And almost 90 percent of the businesses were still located in the city where they’d been founded.  Only 5 percent of the entrepreneurs interviewed mentioned low tax rates as a factor in deciding where to start their venture.”

Think: Kansas is also looking at a budget shortfall after significantly cutting state taxes. Do you see the two situations as analogous?  

“Yes, unfortunately, policymakers in North Carolina bought into the same dubious tax-cutting prescription for economic revival as their counterparts in Kansas. In both states, the tax cuts are adding to the deep damage the recent recession did to schools and other public services that form a foundation for economic growth. In both states, the tax changes resulted in higher taxes for lower-income people, to help pay for big tax cuts for the wealthy. And in both states there’s no reason to believe that the tax cuts will lead to a stronger state economy. Kansas implemented its cuts a year before North Carolina, and so far there’s no sign of stronger economic growth in that state – a preview of what’s likely in North Carolina. Since the tax cuts were enacted, Kansas has added jobs at a slower pace than the nation, and the official state forecast expects the state’s economy to lag next year, too. 

I’m encouraged that serious questions are being raised in both states about the paths that they’ve recently set out on. Anyone looking at this research with an open mind will conclude that North Carolina’s 2013 tax cuts have been counterproductive and will harm the state’s economic prospects.  I hope policymakers will reverse course soon.”  

Click here to find more of Michael Mazerov's work at the Center for Budget and Policy Priorities.