YOU DECIDE: What state policies can boost economic growth?

Date posted: January 18, 2013

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

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. So as our new governor takes office and the General Assembly reconvenes, the priority for most of our elected officials will be boosting the rate of economic growth in our state 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. These actions revolve around the two broad areas that state government directly controls — state taxes and state spending. Here, I will look at ideas for improving the state’s economic growth in four key categories: changing the tax system, supporting education, funding Medicaid and building and maintaining roads.

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.

But moving from an income-based tax to a spending-based tax would be a big change for North Carolina and, therefore, would be very controversial. Since lower-income households spend more as a percent 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 there would be debates about what would count as investment spending. For example, would spending on purchasing a home or college expenses qualify?

Supporting 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 one out of four high school freshmen in North Carolina won’t graduate in four years. And the four-year graduation rate is even lower for college and university freshmen.

Students who never graduate or who don’t graduate on time create three costs. For themselves, their lifetime income is lower as they enter the workforce with less preparation. For the state, a less-trained workforce is a negative for attracting businesses. And since both K-12 and public higher education are substantially supported by state funds, students not completing their studies in a timely manner lower the financial return to state-spent dollars.

One idea at the high school level to motivate the interest of some students and improve graduation rates is to increase the offerings of vocational studies. As the baby boom generation retires, some analyses point 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 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.

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

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

Several states – Florida is one of these — 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 see if they can provide needed coverage at lower costs.

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.

So, taxes, education, Medicaid and roads; that’s certainly a full agenda for thinking about ways to promote economic growth in North Carolina. Make sure to put your “two cents” in, as my late father use to say, as collectively we get ready to decide.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/

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