By John Hood
RALEIGH — When it comes to fostering new businesses, North Carolina is doing better than average — but not as well as we could be.
That’s a fair reading of the latest Indicators of Entrepreneurship report from the Ewing Marion Kauffman Foundation. Its composite index ranked North Carolina 15th in the nation last year in entrepreneurial activity. Among our neighboring states, only Georgia fared better.
Examining the measures that make up the index, however, reveals more of a mixed bag. North Carolina is below average in the share of residents who started new businesses and the share of those who did so by choice rather than by necessity (after suddenly losing one’s job, for example). On the other hand, we’re above average in the share of new businesses that survived their first year and the number of jobs they created.
Making our economy hospitable to entrepreneurs is a cause in which we all have more than a rooting interest. While you often hear the claim that small businesses create most net new jobs, that’s not quite right. It is young businesses, not necessarily small ones, that play a disproportionate role in driving investment, innovation, and employment gains in healthy economies.
Of course, the vast majority of those young companies began small. Predicting which firms will stay that way and which will enjoy explosive growth is an art many economic actors aspire to master. More power to them. As a journalist and policy wonk, however, I’ve never shared their aspiration. I just want to make sure our state is a preferred location for entrepreneurs, lenders, and investors to make the attempt.
So do leaders of the General Assembly. Over the past decade, state lawmakers have enacted a series of tax and regulatory reforms designed to promote entrepreneurship in North Carolina by reducing its costs, increasing its returns, and removing any uncertainties caused by government.
Progressives argue vociferously that tax and regulatory policies have little effect on business decisions. They’re mistaken about that—and their arguments have failed to persuade even Democratic officials such as Gov. Roy Cooper, who concedes that government-imposed costs shape economic outcomes. The real partisan divide is about scope and structure. Cooper and his allies believe in awarding tax breaks selectively, to companies already well-established and large enough to merit their attention, while GOP leaders in the legislature believe it’s wise to cast a broader net that includes firms of all ages and sizes.
Regarding the relationship between taxes and business formation, the latest evidence I’ve seen was published earlier this month in the journal Small Business Economics. Examining business start-up rates along state borders — a common research design that serves to control for non-policy influences on economic growth — the authors found that jurisdictions with higher tax rates tended to have lower rates of entrepreneurship. Property taxes had the biggest effect but other taxes depressed business starts, as well.
“Fledgling firms with low sales and income would not pay taxes on personal or corporate income or on sales, but they would still have to pay property tax,” the authors wrote. “Hence, the property tax should have the greatest salience for entrepreneurs.”
This latest paper follows earlier research that produced similar conclusions. A 2013 study in the Journal of Entrepreneurship and Public Policy, for example, found that state tax cuts promoted more business starts. Other studies show that lower regulatory burdens correlate with higher rates of self-employment, income growth, and sustained business growth.
As for government services, North Carolina policymakers shouldn’t be distracted by the trendy or exotic. Empirical evidence demonstrates that bread-and-butter functions — well-maintained highways, effective schools, robust protections for intellectual property, and fair, efficient courts for adjudicating disputes — foster the creation and growth of businesses. Many other services, including some programs specifically to nurture entrepreneurship, don’t seem to have a measurable effect.
North Carolina is a popular place to start a business. Among southern states, however, Florida, Georgia, and Texas are even more popular. Will we let that stand?
John Hood is a John Locke Foundation board member and author.