Whichever political party controls the N.C. General Assembly, lobbyists for special interests often pressure lawmakers to raise taxes. That will be true in 2011, as Republicans take control of the state Legislative Building. John Locke Foundation President John Hood discussed the topic with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Martinez: To be clear, you’re not saying it doesn’t matter which political party takes control or has control of the General Assembly. You’re just saying that there is a reality about pressure.
Hood: The pressure will be there in either case. I think that a Republican legislature is obviously less likely to raise taxes in response to the pressure than a Democratic legislature is. In the limited experience we have with the two kinds of legislatures, we can see the difference. There was a brief Republican control of the North Carolina House in the 1990s, during which taxes were cut. Most of the rest of the time, the House was under the control of the Democrats. The Senate was always under control of the Democrats. And when recessions came, in every case, there was a tax increase. So we can base it on the history, but the point here isn’t so much about the party competition, it’s about the fact that there is a built-in, well-entrenched strong lobby for government spending in Raleigh. It’s a lobby that does cross some political boundaries.
Martinez: Where does the pressure come from? What types of groups and lobbying organizations will be going down to the General Assembly and saying, “We need more money”?
Hood: Well, it may surprise [people] to learn just how diverse the spending lobby is. You can assume, well, it’s the people who work for government. They have the State Employees Association. Teachers have the North Carolina Association of Educators. Surely those two groups are the ones that go down to the General Assembly and say, “Hey, don’t cut spending. That’s our jobs. Raise taxes.” They say that, but there are many other entities that do it, too.
Think about, for example, North Carolina’s Medicaid program. This is the jointly funded federal-state program of medical assistance for the disabled, the poor. The disabled and the poor don’t get the Medicaid money. They get services from Medicaid. But if they’re enrolled in Medicaid and they consume medical services and the government pays for them, who gets the money? Hospitals. Doctors. Pharmaceutical companies. Medical device manufacturers. Pharmacists. They’re the ones that get the money. They are lobbies down at the General Assembly in North Carolina state government to protect Medicaid, because they’re the ones who get the money.
Martinez: The ultimate recipients.
Hood: Absolutely. And similarly — and I’m not saying that there’s anything untoward about people on Medicaid spending their dollars to get medical services; that’s what it’s for — but it does create a built-in spending lobby with health care. Similarly, transportation. We all agree that North Carolina needs to invest in its roads, maintaining its roads, as well as adding some valuable roadways. But remember that the drivers — we taxpayers, we motorists — don’t get that money. We get the benefit of driving on newly paved asphalt, but the people who actually get the money are the contractors who build the roads, the people who mine the aggregates that are used to create the materials that you build roads and bridges out of. And they are lobbies for the transportation budget. If you go along the line in just about everything else that state government does — the prison system has vendors, state government in general has vendors for technology and supplies — all of these lobbies have a very strong interest in maintaining, if not expanding, how much money is spent by the State of North Carolina.
Martinez: So the pressure is going to be there. We also then have the specter of potentially a $3 billion gap between projected revenues and projected expenditures. So we are going to hear a lot of people saying we have no choice but to raise taxes. Do they have a choice?
Hood: Of course they have a choice. We’ve seen in our history and in the recent history in other states that, whether it’s Indiana or New Jersey or many other states, that you can save money if you want to. If you have strong leadership, you can close billions of dollars worth of budget deficits without raising taxes. What you have in this situation with the pressure to raise taxes is a combination of self-interest and ideology. As I indicated earlier, there are a whole bunch of very powerful groups, including the doctors of the state and a lot of the big businesses in the state, that get various subsidies and giveaways from the government. They’re strong lobbies for personal gain or institutional interest.
But you also have an ideology that is popular on the state’s editorial pages and in much of the establishment that cutting government spending during a recession is bad. Government ought to spend more during a recession to kind of tide us over until the rest of the economy restarts itself. It’s an old idea. It’s from John Maynard Keynes from the 1930s. He was wacky then. It’s even more wacky now. In every other part of life, we understand if we lose a job, if we lose a gig, if we have a major medical expense, we understand we have to cut spending elsewhere in our budget in order to close the gap. The same is true for government. It’s not any different, particularly for state governments, since states can’t print their own money and paper over deficits. They’ve got to balance the budget. That means when there is a recession, when the economy cools off and the state doesn’t collect as much tax revenue from households and businesses, it needs to reduce expenditures accordingly.
I think that’s common sense. It does have the disadvantage of being contrary to what all the liberal journalists and all the people who went to university and got economics classes think, because they got the wrong information. And it goes against the interest of some of these spending lobbies that are very powerful in Raleigh.
Martinez: You mentioned the drumbeat, and we are already hearing it because of the fiscal situation and the high unemployment in North Carolina. We already have a lot of people saying we’ve got to do more, we’ve got to invest more, we’ve got to help companies, give them a reason to come to North Carolina or stay in North Carolina and create more jobs. So they’re saying you’ve got to spend some money in order to get some of those jobs. True or not?
Hood: Well, whose money? This is always a question of agency and ownership. If I want to start a business, I’ll have to spend some of my own money with the expectation I might make a return on it later in life. What they’re trying to do is spend other people’s money so they can earn a profit and get that money through government. They’re trying to equate it with a business investment, and it’s nothing like a business investment. Ultimately this is about, what do the data show us? And if you look at recent research around the world, what do countries do when they’re faced with budget deficits? Some countries go into deficits and raise spending and so forth. Others cut their spending. The recent evidence suggests that countries grow faster when they cut spending during recessions, not when they raise spending. And the same analysis applies to states. North Carolina would be better off, more economically attractive, if we avoided tax increases and cut spending instead.
Martinez: Let’s talk about Indiana. You mentioned it briefly earlier. Gov. Mitch Daniels there really has bucked the trend. He’s taken his state from a deficit to a surplus. How’d he do it?
Hood: By being really, really tough and saying no when all the spending lobbies said this is unthinkable, this is not feasible, this isn’t practical. He said wrong, wrong, and wrong. We’re going to do it this way. Daniels had the advantage of having been in the private sector and managed corporate budgets — large-scale corporate budgets — and being the budget czar for the early Bush administration. So he knew a lot about how to stand tough on spending. That was back when President Bush was fiscally conservative. It was a brief period.
Martinez: Early, early in his presidency.
Hood: And so Daniels is a good example. Chris Christie, the governor of New Jersey, is another. There are even Democratic governors who are good examples in past recessions. The outgoing governor of Tennessee, for example, Phil Bredesen, balanced his budget years ago without a tax increase. It can be done, and in North Carolina, not only should it be done, but it is the only practical solution to our problem.