Thursday, February 21, 2013

Alice in Raleighland: Exacerbating Income Inequality

 Alice in Raleighland: Exacerbating Income Inequality

Politics and economics in North Carolina have been turned completely upside down.  Only weeks into the legislative session, the General Assembly passed and the Governor signed a bill lowering the maximum unemployment benefit from $535 to $350 per week, lowering the eligibility period from 26 weeks to 12 to 20 weeks, and rejecting extended federal benefits for the State’s long-term unemployed.  Bills are also moving afoot to repeal the estate tax, which benefits estates above $5.25 million, and to lower and then repeal the Earned Income Tax Credit, which benefits the working poor.   The Republicans’ ultimate reform would repeal the corporate and income taxes and replace them with a broader and higher (8%) sales tax.

Attracting Consumers (2009)

Much like the United States, North Carolina has a growing problem of income inequality and our legislature is intent on making it worse.  Even before these laws and proposals take effect, the gap between the rich and poor is massive.  One measure of the gap is the Gini coefficient, a measure where 0 is perfect income equality and 100 represents total inequality.  Most developed nations fall in the 25 to 40 range and the US is at 46.  For purposes of comparison, China, Congo, Mexico, Peru, and Zimbabwe have similar levels of income inequality to the United States.

Overall North Carolina Gini coefficient is 45, just below the US average.  The highest disparity is in Orange (Chapel Hill), county which has a ratio of 52, which is consistent with levels of income inequality in Brazil, Paraguay, Chile, and Zambia.   It’s rather ironic that the bastion of North Carolina Democrats is going to owe a big fiscal thank you to the conservative Republicans in charge of both houses of the General Assembly. Those wealthy liberals in Chapel are going to be getting big breaks.

To get a sense of who is going to get helped and hurt the most, I built a data base drawn from the 2011 American Community Survey conduct by the US Census and labor statistics drawn from the North Carolina Employment Commission.  The losers among the unemployed are concentrated in eastern North Carolina, as well as pockets outside the State’s metropolitan areas.  Table 1 lists the counties most deeply impacted by the cut back in unemployment benefits.   Think of it this way: business owners in the Charlotte, Raleigh and Greensboro areas will be getting a break on the employment tax, but the theoretical benefits (more jobs) will not flow to the places with incredibly high unemployment.   Perhaps it’s not surprising that Democrats represent many of the eastern counties on the list below.

                                                                               Table 1
Turning to the income side of the equation, Table 2 shows where politicians will be doing their fund raising.  These are the counties where the top 5% of households have the highest incomes, and where the biggest benefits will flow from the legislatures tax initiatives.  If you own a second home in the mountains or the beach, or work as an executive in or around a metropolitan area, you’re already making 7 to 10 times more money than the average North Carolinian, but you’re going to get even more tax benefits from state government.

Table 2

Who is going to get hurt?  Obviously, the least among us are going to suffer.  The average income of the lowest quintile of households is $10,500, or one-quarter of the state average of $41,000 per year.  It’s hard to imagine, but some counties are even poorer, as you can see in the table below.    For example, the bottom 20% of households in mountainous Watauga County, home of Appalachian State, earn a mere  $5,943 per year.   In fact, Watauga is a poster child for income inequality, as the top 5% are doing very well.  They make 41 times more money than the bottom 20%.  It’s no small wonder they live in gated and patrolled communities.

Table 3

Lenoir County is another sad example.  Drive 45 minutes north or south and you’re in relatively prosperous Mecklenburg  (Charlotte) or Guilford (Greensboro) County.    Arguably, the legislature’s initiatives might create some additional economic opportunity north or south of Lenoir.  However, the Lenoirs of our state will be bypassed.

I’m curious what the folks in poorer Republican counties, especially in the mountains, will think of the legislature’s agenda.  They have few prospects of passing along an estate worth more than $5.6 million and drawing heavily on the EITC.  Moreover, they can ill afford an expansion of the sales tax.  I guess the legislature is hoping that making a “nipple slip” a class H felony, outlawing gay marriage[i], loosening gun laws[ii], and further restricting abortion will be more than enough compensation as their economic slide deepens.

PS.  To my investment friends in New York, Connecticut and Silicon Valley; don’t feel to smug about the level of inequality in North Carolina.  I’ve looked at the data across the country, and the situation is even more extreme in your backyards.

[i] North Carolina has taken a belt and suspenders approach by restricting marriage to a man and a woman by statute and constitutional amendment.

[ii] Bills have been introduced to allow armed volunteers to patrol schools, and permit people to carry concealed weapons in restaurants.  

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