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Daily Journal

Right On, Governor, But ...

Feb. 16th, 2011
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RALEIGH – When Gov. Bev Perdue is right, she’s very right.

During her State of the State address Monday night, the governor called for a fundamental reorganization of state government, privatization, regulatory reform, educational innovations such as virtual schools, the closure of many state boards and commissions, and reductions in both the size of the public-sector workforce and the state’s high and self-defeating tax rate on corporate income.

Check, check, check, check. Good to see that the governor’s office is still on the John Locke Foundation’s mailing list and making productive use of the material.

Unfortunately, Perdue’s speech wasn’t limited to pitching these ideas. The governor also gave clear signals that her forthcoming budget would avoid necessary economies in education, extend the 2009 increases in sales and income taxes, and rely on gimmicks to balance the budget rather than laying the foundation for sustained growth and job creation by cutting North Carolina’s government to an affordable size.

The problem was that the governor spent too much time pandering to spending lobbies and special interests.

For example, while embracing the necessity of cutting marginal tax rates on corporations large and small, she also defended selective breaks and subsidies for big business. These two policies are in tension, if not in contradiction. Cutting marginal tax rates means getting the government out of the business of trying to pick and determine which firms will succeed or fail. Making incentive deals means keeping the government in that very business.

Perdue also continued to pander to the Blarney Tradition within the state’s political class by claiming that, thanks to “public investment” in bigger government, North Carolina is on the leading edge of economic recovery. That’s false. Unfortunately, North Carolina has lagged the rest of the region and nation in economic performance for years. We are still lagging.

Taxing and spending more than our competitors on subsidies of business and higher education didn’t make North Carolina more competitive. It made us less competitive, as evidenced by the fact that most of these states have posted stronger economic performance than North Carolina has posted since the mid-1990s.

We need to change course, not stay the course. Our ship of state is in the shoals, not the open sea.

The good news is that much of Perdue’s address can still be read as endorsing fiscal conservatism and opening the door to an agreement with House and Senate Republicans on how to move North Carolina forward in these challenging times. Here are the broad outlines of such a deal:

• Fashion a General Fund budget that spends about $18.7 billion next year – slightly less than the currently forecast $18.8 billion in General Fund revenue, and about 13 percent less than the $21.6 billion baseline that assumes no change in current programs and spending promises.

• Accomplish this 13 percent reduction off the baseline not by across-the-board whacking but by judicious application of sound budgeting principles and firm fiscal priorities. Under JLF’s forthcoming budget plan, for example, the primary function of state government – public safety – would experience a 3 percent cut. Budget savings in public schools and community colleges would be about 10 percent. Cuts to business subsidies, politically connected nonprofits, agency administration, and other low-priority programs would range from 40 percent to 100 percent.

• Significantly reduce the number of state agencies, departments, and commissions. While the budget savings, though welcome, would be relatively modest, cleaning up the state’s organizational chart would have other operational benefits.

• Advance the ball on state tax reform by broadening tax bases while reducing marginal tax rates. We suggest that North Carolina cut its corporate tax rate to 4 percent by 2013 and its top income tax rate to 6 percent by 2015. This truly will make our state’s economy more competitive in the international market for capital, highly productive labor, and technological innovation.

• Further strengthen the state’s competitive position through regulatory reforms that submit government rules to rigorous tests of legal authority and net benefit.

Gov. Perdue has a great opportunity to transform both the state and her own political fortunes. I sincerely hope she takes it.

Hood is president of the John Locke Foundation.