Letter from Phil Kirk for May 2004

A Bad State for Small Businesses

One of the keys to a strong economy in North Carolina is how state government and local governments treat small business owners and entrepreneurs.

The Small Business Survival Index ranks the 50 states by measuring the impact of public policies on small business and entrepreneurship.

Just as most candidates for governor promise to be “education governors,” they almost always also claim to be strong pro-jobs, pro-economic growth candidates.

Regretfully, North Carolina fared very poorly in the study — a fact NCCBI has pointed out for years.

Our state ranked in the last tier of states by being included in the “most anti-entrepreneur policy environments.” Our actual ranking was 37th and even more disturbing is the fact that we are the only southeastern state in the worst group, except West Virginia, which is a poor state dominated by labor unions. Florida, Texas, Tennessee, Mississippi, Alabama and Virginia are in the most friendly group of states.

The Survival Index analyzes 21 major government-imposed or government-related costs affecting small business and entrepreneurs such as personal and business tax rates, property taxes, as well as health care costs, and other factors and computes an overall rating.

Why should we be concerned about small business? In case you don’t know, small businesses and entrepreneurs truly are the backbone of the U.S. economy and the primary source of job creation.

According to Small Business by the Numbers, a publication of the U.S. Small Business Administration’s Office of Advocacy, the following facts are called to your attention.

Businesses with fewer than 500 employees account for 99.7 percent of all employers. These firms employ more than half of private-sector employees;

Small businesses create between 60 and 80 percent of net new jobs;

Small businesses create 13 to 14 times the number of patents per employee compared to large patenting businesses;

Thirty-nine percent of high-tech workers are employed by small businesses; and

Small businesses account for 97 percent of all exporting business.

Those are just a few of the reasons why the health of small business is so important to our economy. And it is a key reason why NCCBI created a Small Business Advisory Board several years ago. The board is chaired by Pickett Council, a tool manufacturing executive from Columbus County. Linda Staunch, a public relations executive from Craven County, is vice-chair.

One key reason our state fared so poorly in the Index is our non-competitive tax structure, especially in the personal income tax table where we are the highest in the Southeast, and the corporate income tax where we rank as the third highest.

These two high taxes impact individual economic decision-making. These high taxes raise the costs of working, saving, investing and risk taking. Sales, gross receipts, excise taxes and death taxes are also important parts of the mix.

Workers’ comp rates, crime rates, unemployment insurance costs and gasoline taxes are also important in the Index.

North Carolina ranked high in the right-to-work category since we are a right-to-work state in which employees are not forced to become labor union members or pay dues to unions.

The increasing number of costly lawsuits contribute to a negative business climate. We especially see this as a problem in medical malpractice insurance — hopefully the North Carolina House will effectively address this important issue this month.

New Mexico provided the best news in these areas in recent times. In early 2003, the new governor, Bill Richardson, a Democrat, secured the passage of huge reductions in personal income taxes (rate is going from 8.2 percent to 4.9 percent) and the top capital gains taxes (rate will go from 8.2 percent to 2.45 percent).

Reducing the correct taxes by significant amounts should result in increased jobs, which will produce more revenue, not less, for governments in the long run. Too many politicians fail to grasp the big picture. They tend to look at the possible short-run revenue losses rather than bringing about major efficiencies in government that would save money. For some, they would prefer the easier route of piling more taxes on politically unpopular targets, such as tobacco, beer, wine and hard liquor.

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