Buttons to push to boost growth in North Carolina

Published January 29, 2013

By Michael Walden

By Michael Walden,Reynolds Distinguished Professor at NC State and published in the January 29th "Other Views" in The News and Observer.

The North Carolina economy is growing, but slowly. Jobs are being added and the unemployment rate is dropping, but we’re nowhere near levels anyone would consider acceptable.

For both our new governor and General Assembly, the priority will be boosting the rate of economic growth so jobs can be created at a faster pace.

Unfortunately, there is no magic switch any of our state leaders can pull to immediately create jobs. Indeed, much of the future course of the North Carolina economy will be determined by what happens to the national economy.

Still, there are actions North Carolina public leaders can take to improve the long-run competitive position of the state and to gain both jobs and income. Here are suggestions in four key areas.

1 Updating the state tax system: Many economists say moving away from taxing income to taxing spending is a way to encourage income and job growth. They say taxing spending – but exempting from taxation what people save and invest – would make North Carolina a magnet for business development and expansion.

While I am sympathetic to this viewpoint, there are issues. Since lower-income households spend more as a percentage of their income than higher-income households, a spending-based tax would be “regressive” unless rebates, exemptions or rates adjusted with income were introduced. Spending on many services not now taxed would be taxed, and this could put some of our service firms at a competitive disadvantage. And, questions about what would count as “investment spending” would have to be solved – for example, would spending on purchasing a home or college expenses be considered investments?

2Supporting education: A well-educated and trained workforce is essential to economic growth. There are many issues and challenges for both K-12 and post-secondary education in North Carolina, but clearly one of them is dropout and graduation rates. Although major improvements have been made, still 1 out of 4 high school freshmen in North Carolina do not graduate in four years. And the four-year graduation rate is even lower for college and university freshmen.

Never graduating or taking longer to receive a diploma creates costs for both the student as well as for the state government providing substantial financial support to education.

One idea at the high school level to motivate the interest of some students and improve graduation rates is upgrading the offerings of vocational studies. As the baby boom generation retires, some analysis points to an upcoming shortage of qualified workers for vocational and technical occupations. A high school student successfully completing a vocational or technical skill program could very well have a job waiting for him or her upon graduation.

A proposal at the four-year university level to strengthen student focus and enhance the efficient completion of studies is tuition costs tied to length of time in school. That is, students completing their college studies in four, or maybe, five years would pay a lower annual tuition than students who are in their sixth or more year without a degree.

3Revamping Medicaid: Medicaid is the joint federal- and state-funded program for assisting lower-income households with their health care expenses. In the last quarter-century, it has been one of the fastest-growing parts of the state budget.

Medicaid operates as a program to reimburse approved expenditures. Some say this encourages more spending. It also makes budgeting future Medicaid spending very difficult.

Several states – such as Florida – have received permission from the federal government to try alternative ways of operating Medicaid, methods that encourage cost competition and consumer involvement. Some studies show significant savings as a result of these innovations.

North Carolina may want to study these alterative procedures to determine whether medical coverage can be provided at lower costs.

4Improving transportation: Study after study finds that well-maintained highways are absolutely vital for economic development. But the big question is, how do we pay for roads? Drivers are resistant to the gas tax, especially if it rises at the same time the cost of the fuel is jumping.

Toll roads – where drivers of a specific stretch of highway directly pay for that road – are one funding alternative. Or, a gas tax tied to median household income – and not to the cost of gas – is another idea. Both should be examined and evaluated.

Much of our state economy’s direction is “baked in” with national trends and regional factors. Still, state leaders can make policy changes to position North Carolina on a better growth path for the future. However, here’s a warning: None of the changes will be easy or without intense debate. This is as it should be!

Mike Walden is a Reynolds Distinguished Professor at N.C. State University. Photo credit NC State.