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. As a journalist and policy wonk, I’ve never shared that aspiration. I just want to make sure North Carolina 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 by reducing its costs, increasing its returns and removing any uncertainties caused by the government.
Progressives argue vociferously that tax and regulatory policies have little effect on business decisions. They’re mistaken – and their arguments have failed to persuade even Democratic officials such as Gov. Roy Cooper, who concede 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 wiser 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 standard 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 (probably because they have to be paid regardless of whether a new business is making any money) but sales, income and corporate taxes depressed business starts, as well.
Policymakers should continue to reform our tax and regulatory codes. Research on entrepreneurship also confirms the importance of infrastructure quality, access to financial and human capital, and protections for intellectual property.
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. He can be reached at jhood@johnlocke.org.
