A new study by the Manhattan Institute suggests North Carolina’s income tax may be hampering economic growth in the state’s metropolitan areas. The well-known think tank analyzed economic growth in the United States, ranking the nation’s 100 largest metropolitan areas based on per capita GDP, per capita personal income, and private sector employment. The study shows major North Carolina metro areas to be lagging far behind leaders in economic growth. North Carolina’s highest ranking, the Charlotte-Concord-Gastonia metro area, is 21st place. The Raleigh area places just below average (53rd), while NC’s two remaining ranked metro areas fall among the 20 worst performers – Greensboro-Highpoint in 82nd place, and Winston-Salem in 93rd. It’s clear that NC cities are struggling — even Charlotte faces difficulty in attracting corporate investors.
If North Carolina metropolitan areas seem to be falling behind, nationally, what is there to be done? A quick breakdown of the top performers reveals some interesting trends. Five of the top 10 metro areas are in Tennessee or Texas, two states that are notable for their lack of an income tax. With a larger sample size of all 357 Metropolitan Statistical Areas (MSAs) instead of the 100 largest, we find that nine out of the top 20 performers are in income tax-free states. Only 9 states (less than 20 percent) have no income tax, yet are home to nearly half of the highest performing MSAs. This disproportionate level of economic growth in no-income tax states suggests a strong correlation between the two. This finding should come as no surprise: A 2012 report published by the Civitas Institute, in collaboration with famed economist Arthur Laffer, revealed that no-income tax states enjoyed higher rates of population growth and job growth compared to states with the highest income tax rates. Laffer concluded that over a 10-year period, Texas gained 870,000 transplants from other states, while California (with one of the highest income tax rates) lost over 1.5 million residents.
NC policy makers and legislators take heed: If North Carolina wishes to experience economic growth in its metro areas, it would do well to consider the example of Texas and Tennessee. “You can’t tax an economy into prosperity,” Laffer has said. A bold, yet well-supported, plan for economic rejuvenation would be to abolish North Carolina’s income tax.