RALEIGH – North Carolina policymakers continue to debate issues of tax reform and the proper distribution of responsibilities among localities and the state. That’s good news. These are important matters.
However, the discussion within North Carolina is too often insular and backward-looking, as if the only relevant information is how things used to be done and how much money government agencies “need” rather than seeking a clear understanding of how other states approach tax issues and the true costs and benefits of governments in our region and across the country. I attribute this tunnel vision in part to what I have previously termed North Carolina’s Blarney Tradition, which leads some to make embarrassingly silly boasts about the state’s economy, culture, and governance.
Several new pieces of information ought to help fill in the gaps for state lawmakers, administration officials, and others studying and lobbying tax issues.
First, the Washington-based Tax Foundation has just released its latest ranking of state and local government costs. In 2007, North Carolina’s state and local governments are projected to consume 11 percent of personal income, the highest burden since the analysis began in 1970. North Carolina now ranks 19th in the nation in state & local tax burden. We continue to rank 1st in the Southeast in this dubious category, with neighboring states such as Virginia and Georgia imposing significantly lower costs, and we now rank 3rd in the entire South, with only hapless Arkansas and pitiful Louisiana beating us out. As recently as 2000, North Carolina ranked 36th. Since then, the real tax burden has grown by 10 percent. Many of our competitors have held the line or reduced their costs during the same period.
Some might respond with a frustrated “so what?” Perhaps North Carolina has simply “invested” more than other states, thus improving the quality of government services, they might argue. Well, I’d ask them to prove it. I see little evidence in reputable test scores, graduation rates, traffic congestion, crime rates, or other data to show that North Carolina’s increased costs have improved our government services compared to those in lower-cost states. We just spend more.
Others, infected with the aforementioned blarney gene, might insist, with the appropriate swagger, that North Carolina’s taxes must not really be burdensome since we’re leading the nation in economic and population growth. But, first of all, that’s a gross overstatement. Judging by standard measures, North Carolina’s statewide economic performance in recent years has been weaker than average, not stronger (though our two biggest metros, Raleigh-Durham and Charlotte, have performed better):
• Private gross domestic product since 2000: North Carolina is up 26 percent, the Southeast up 32 percent, the nation up 27 percent.
• Employment since 2000: North Carolina up 4 percent, the Southeast up 6.3 percent, the nation up 4.5 percent.
• Per-capita income since 2000: North Carolina up 19 percent, the Southeast up 24 percent, the nation up 22 percent.
As for population, North Carolina’s growth since 2000 has been a robust 10 percent, ranking us in the top 10 for sure but not number one. Arizona, Colorado, Florida, Georgia, Idaho, Nevada, Texas, and Utah have all had faster growth rates (and lower state & local tax burdens, by the way).
More generally, I am not arguing that government cost is the only factor that matters. Far from it. What’s going on is a large-scale migration of people from the North and Midwest to the South and West, driven by such factors as climate, quality of life, housing and energy costs, culture, and economic dynamism. Finally, the fact that plenty of folks would prefer to live in North Carolina, where the tax burden ranks 19th, rather than their home states of, say, New York (3rd), Ohio (5th), Connecticut (8th), or New Jersey (10th), doesn’t offer much relief to native North Carolinians who resent governmental bloat as an encroachment on their freedom to spend their own money as they see fit, and as a wasteful expenditure with scant returns in improving schools, roads, or public safety.
Meanwhile, as North Carolina policymakers talk, other states are taking action. Utah has just enacted a comprehensive tax-reform measure that will slash the top income-tax rate, lower the sales tax, and offer an optional flat-rate income tax for taxpayers seeking to reduce compliance costs. I’m not crazy about some aspects of the Utah reform package, enacted unanimously (!) by the state legislature, but the broad outlines look good and, importantly, it constitutes a net reduction in the state’s annual tax burden of about $220 million. Any tax reform worth doing will have some “losers” among particular industries or interest groups. They’ll organize effectively to block the policy unless there is enough of a benefit to others – in the form of a net tax cut, not just a revenue-neutral reform – to induce them to fight for tax reform. Besides, no one should overlook the value of simply cutting broad-based taxes. Sometimes, the best way to reduce the unfairness or inefficiency of a flawed tax is to whittle it down.
Back in the Tar Heel State, however, the latest news is that House Speaker Joe Hackney may agree with Gov. Mike Easley to renege again on the original promise to sunset the so-called “temporary” sales and income-tax increases they enacted in 2001.
[Sigh.]
Hood is president of the John Locke Foundation.