John Hood's Syndicated Weekly Column
RALEIGH – North Carolina history buffs will remember that one of our state’s first nicknames was the “Rip van Winkle State.”
The charm of Washington Irving’s tale of a drowsy farmer notwithstanding, this sobriquet for North Carolina was not a term of affection. It referred to the state’s lack of growth during the early 19th century, and more specifically — and less fairly – to the alleged indifference of state leaders about this languidness.
It may be time to bring back the name.
For decades, self-promoting and self-congratulatory North Carolinians have viewed our state as a progressive leader of New South dynamism. No more. Over the past two years – hampered by factors as diverse as tax increases, crumbling infrastructure, and military deployments – our economy has turned in the worst performance in the South and one of the worst in the United States.
From March 2001 to March of this year, for example, North Carolina lost 119,000 jobs – or more than one-third of all the net losses of the Southern states. Even this miserable record is worse than it appears, because North Carolina actually saw more growth in government employment – about 31,000 positions, or 5 percent – than any other of our neighbors, where the average growth rate was only 3.2 percent. So North Carolina’s private employers shed 150,000 jobs during the past two years, dwarfing the losses of any comparable state.
Other measures confirm the trend. Personal income in North Carolina grew by 4.1 percent from the first quarter of 2001 to the fourth quarter of 2002 (the most recent available). Again, this was the slowest rate in our region and lower than the national average. On industry income, North Carolina again led the region in government growth while trailing the region in private-sector growth.
These data pose a serious challenge to the credibility and the political viability of North Carolina’s elected officials, starting at the top with Gov. Mike Easley. In both 2001 and 2002, the governor proposed, lobbied for, and subsequently signed increases in income, sales, and business tax rates that have collectively boosted the tax burden on North Carolina families and businesses by well over $1 billion a year.
Actually, that was the predicted fiscal impact. The tax increases imposed on North Carolina’s already teetering economy by Easley and the General Assembly were typically discussed in terms of how many hundreds of millions of dollars they were projected to cost taxpayers. But these discussions largely ignored the reality that households and businesses respond rationally to government policy.
Easley’s tax policy sent a message sent to entrepreneurs, investors, and high-income professionals that North Carolina would now impose one of the highest income-tax rates in the United States (8.25 percent). It sent shoppers the message that North Carolina would now have an average sales tax higher than the regional average, with shoppers close to Virginia and South Carolina essentially encouraged to buy high-priced merchandise such as furniture and jewelry north or south of the border if possible. And in part because of withheld tax reimbursements, local governments across the state hiked property taxes and thus sent similarly discouraging messages to prospective employers and homeowners.
I’m not going to pretend that state and local tax policies alone can determine the fate of the economy. But they have undeniably played a significant role in hampering North Carolina’s economic recovery. Evidence for this insight can be found in neighboring states, such as South Carolina and Georgia, which have faced many of the some macro-problems that North Carolina has – such as intensified foreign competition – without taking nearly as large an economic hit.
As a result, Easley and the legislature did not collect as much revenue from their exceptionally large tax increases as their static models projected. Over the past two months, for example, state tax revenues have fallen so short of projections that budget officials now expect a nearly $300 million fiscal deficit through June 30, rather than the $114 million surplus that the Easley administration forecast as recently as March.
For next year, this means that the deficit legislative budget plans had tried to fill, once again largely by boosting the tax burden, could be $400 million bigger. At this writing, the most likely response from House and Senate conferees is, believe it or not, to raise taxes even more.
Thanks in part to our politicians’ handiwork, North Carolina must now yearn to achieve the economic growth rates of Alabama, Mississippi, and Louisiana – the very Deep South states that North Carolinians used to pity, not envy. That loud, annoying sound emanating from Raleigh is a snore. Rip van Winkle has returned.
Hood is president of the John Locke Foundation and publisher of Carolina Journal, in print and on the web at www.CarolinaJournal.com.