Lessons from Carolina: Paying People to Not Work is Losing Policy, Tax Cuts and Reforms do Work

In 2013, North Carolina figured out paying people to not work is a losing policy.

N.C became the first state to reject “free” federal payments for extended unemployment benefits and reduce the weeks of benefits to 20 from 26. It also passed big tax cuts.

Huge Payoff

The result was phenomenal as reported by Stephen Moore, senior fellow at the Heritage Foundation in the Wall Street Journal article: The Tax-Cut Payoff in Carolina.

Four years ago North Carolina’s unemployment rate was above 10% and the state still bore the effects of its battering in the recession. Many rural towns faced jobless rates of more than 20%. But in 2013 a combination of the biggest tax-rate reductions in the state’s history and a gutsy but controversial unemployment-insurance reform supercharged the state’s economy and has even helped finance budget surpluses.

The tax cut slashed the state’s top personal income-tax rate to 5.75%, near the regional average, from 7.75%, which had been the highest in the South. The corporate tax rate was cut to 5% from 6.9%. The estate tax was eliminated.

Next came the novel tough-love unemployment-insurance reforms. The state became the first in the nation to reject “free” federal payments for extended unemployment benefits and reduce the weeks of benefits to 20 from 26. The maximum weekly dollar amount of payments, $535, which had been among the highest in the nation, was trimmed to a maximum of $350 a week. As a result, tens of thousands of Carolinians left the unemployment rolls.

While these measures were passing the legislature, the state capital boiled over with rancorous political rallies, called Moral Mondays, designed to block the “cruel” GOP agenda. Rev. William Barber II, one of the protest organizers, lambasted Republicans for making the Tar Heel State a “crucible of extremism and injustice.” The national media piled on with claims that the Republican agenda cut taxes for the rich while slashing benefits for the poor.

Then a funny thing happened. After a few months, the unemployment rate started to decline rapidly and job growth climbed. Not just a little. Nearly 200,000 jobs have been added since 2013 and the unemployment rate has fallen to 5.5% from 7.9%.

On the Tax Foundation index of business conditions, North Carolina has been catapulted to 16th from a dismal 44th since 2013.

The most recent news will make many other governors jealous. The state didn’t take the extra federal benefits—which require repayments later to the feds—and it cut the weekly benefits. So the state government has been able to pay back $2.8 billion in unemployment-insurance money owed to the feds, and it now has a trust-fund surplus. This means it will be able to provide employers with at least $500 million in cuts from the state and federal unemployment tax on payroll over 18 months.

This comes at a time when other states are having to raise payroll taxes to pay off the loans for the rich benefits they doled out in the recession and its aftermath. The lesson: Handouts from the feds are never free.

An even bigger surprise—even to supporters—is the tax cut’s impact on revenue. Even with lower rates, tax revenues are up about 6% this year according to the state budget office. On May 6, Gov. McCrory announced that the state has a budget surplus of $400 million while many other states are scrambling to fill gaps.

The story gets better. Because North Carolina built in a trigger mechanism that applies excess revenues to corporate-rate cuts, the business tax has fallen to 5% from 6.9%, and next year it drops to 4%.

Lesson for Illinois

Tax cuts, workers' comp reform, and other business-friendly measures are the way to growth.

Instead, Illinoisans suffer from high taxes, untenable pension promises, inane union work rules, and workers' comp rules that collectively drive businesses away.

Worker's Comp Reform Dies in Illinois Senate

Let's put a spotlight on the need for workers' comp reform and why it's important for businesses in Illinois.

On May 29 Workers' Comp Reform Defeated in Illinois Senate.

An amendment to SB 997 filed by Senate GOP Leader Christine Radogno would finally address Illinois’ causation standard under our worker’s compensation law.  Currently, the workplace could be less than 1% the cause of a worker’s injury yet the employer is on the hook for all costs. Under Governor Rauner’s plan, the workplace would have to be the primary cause, or 50% at fault, for the employees’ injury.

The owner of a trucking firm located near the Indiana border testified that his work comp costs are $325,000 higher in Illinois than Indiana.  The owner of a steel fabricator said he would save $106,000 in work comp costs if he moved to Indiana. A site selector, who works with businesses who want to either move or expand, said due to our work comp costs Illinois is always being cut from the short list of places to look at.

Despite these compelling arguments, Democrat members of the Judiciary committee vote against the bill mostly citing their concerns about the process and lack of vetting of the legislation.

Why Illinois Job Growth Lags

High taxes, demand for still more taxes, and inane work rules cause Illinois businesses to flee the state when they can.

Job growth lags precisely because Illinois is a poor state in which to conduct business.

The Illinois Policy Institute, Governor Rauner, and the National Federation of Independent Business (NFIB) want to address these issues.

Unfortunately, all reforms die in the same place: an Illinois legislature controlled by House leader Mike Madigan and Senate President John Cullerton.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.