‘The North Carolina way’ takes a sharp right turn

By Rob Christensen, News and Observer columnist, July 28, 2013.

Call it the big shift – a sharp right pivot by North Carolina state government in spending priorities, taxes, social policies and even in tone.

Not since the 1930s, when North Carolina was staggered by the Great Depression, has a legislature performed such radical surgery on the state’s body politic. This legislature moved to a flat tax and away from a graduated income tax first enacted in 1921, cut unemployment benefits to 1951 levels, turned down federal health insurance for the poor and made voting more difficult.

The changes were so stark they precipitated a social movement, with the kind of weekly mass demonstrations and civil disobedience usually reserved for causes such as civil rights or national independence. The unrest focused unwanted national attention on North Carolina, a state that has long prided itself on its level-headed moderation.

For generations, North Carolina tended to walk a middle path, spending more on roads, universities and culture, and later on community colleges and research parks, as a way to modernize. Often called “the North Carolina way,” the approach was backed by the state’s forward-looking business leadership as an alternative to the low-tax, low-regulation strategies of much of the rest of the South.

At the same time, the state had its conservative ways: anti-union, Bible-Belt traditionalism on social issues and, of course, support for segregation during its time.

“North Carolina has taken pride and sold itself as a progressive state, by which it means pro-business, pro-education, moderate,” said historian Karl Campbell of Appalachian State University, a biographer of Sen. Sam Ervin Jr. and Gov. Luther Hodges.

“That self-image has been rejected by this legislature,” Campbell said. “It seems that our leadership is turning now toward following (conservative) Southern trends, whereas in the past North Carolina tended to boast that it was leading in new directions. That is different in the state leadership’s self-perception.”

At one time, other creative Southern governors – from Bill Clinton of Arkansas to William Winter of Mississippi – beat a path to North Carolina to learn about the newest policy innovations. Now the conversation in Raleigh has flipped. It is focused on how North Carolina can catch up to its neighbors by having the lowest taxes and the fewest regulations. North Carolina has moved from being a regional leader to a follower.

Moderates vanished

The big shift was precipitated by Republicans taking control of both the legislature and the governor’s office for the first time since 1899. It is a more conservative Republican Party than it was even a generation or so ago.

Campbell said there are some striking differences between how North Carolina’s leaders responded to economic problems in the 1950s and today. In the 1950s, the problem was that North Carolina had the lowest industrial wages in the country. Today, North Carolina’s problem is that it has the fifth-highest unemployment rate in the nation because many of those 1950s-era plants have closed.

Hodges, governor from 1954 to 1961, was a conservative textile executive who wanted to stimulate the economy. He pushed a cut in corporate income taxes through a conservative Democratic legislature. But Hodges also got the minimum wage increased, started the industrial education centers that would morph into the community college system and began laying the groundwork for what would become Research Triangle Park.

In this legislature, there was not even a pretense of trying to provide political balance, Campbell said. Lawmakers just pushed through corporate and personal income tax cuts. Campbell called it “monotone” public policy.

Will tax cuts work?

The driving intellectual idea in the session has been the Republican faith in Reaganomics – that broad tax breaks would stimulate North Carolina’s economy and lessen the state’s lingering high unemployment. Legislative leaders even brought in Arthur Laffer, the father of supply-side economics, to Raleigh to sing its praises.

The historic tax cuts – and ultimately the state budget – that were the centerpiece of the legislature’s work were shaped by the Reaganomics idea.

But the legislature’s reliance on huge tax cuts is a major gamble for the state. Michael Walden, an economist with N.C. State University, said that while everyone likes to pay less tax, there’s little evidence that lower taxes will actually have much of an effect on the state’s economic growth.

“The preponderance of evidence that has been published by economists in peer review journals is that state taxes have at most a modest – modest – impact on economic growth,” Walden said. “The reason is that states have to operate under a balanced budget. When they cut taxes they usually have to cut services. Businesses benefit from state services. They benefit from an educated work force. They benefit from the transportation system.

“So will the cut in state taxes set off an economic boom in North Carolina? I would say based on the literature that I have looked at, which is extensive, no.”

There is some evidence, Walden said, that a reduction in corporate income taxes can have a modest impact on growth. But he said assertions that the tax cuts will pay for themselves – or even produce more tax revenue, as Republican leaders suggest – have been debunked in numerous independent studies.

Shrinking government

What does seem clear is that the tax cuts will make it more difficult for North Carolina to remain a leader in higher education and achieve needed gains in grades K-12.

North Carolina has already fallen to 46th in the nation in spending on schools and teacher salaries, with funding falling from $7.9 billion in 2007-2008 to $7.5 billion during the current year. Based on normal growth of the previous five years, the school budget would normally be about $9.9 billion this year.

The University of North Carolina system, long considered the state’s crown jewel, has seen its budget drop from $2.7 billion in 2007-2008 to $2.6 billion this year. Under normal growth, the UNC budget would be $3.7 billion this year.

Many of the reductions came during the recession, and cuts were made under Democrats and Republicans. But as the state recovers, legislators have passed a tax law that will decrease revenue by $2.4 billion during the next five years.

During the first decade of this century, North Carolina ranked 45th in the nation in growth in real dollar per capita state government spending, according to the Tax Foundation, a conservative research group in Washington, D.C. It was the lowest spending growth in the South, except for West Virginia.

The Republican legislature wants to slow it further.

North Carolina has never been a high-tax state, according to the Tax Foundation. The state-local tax burden was 9.91 percent in 2010, compared to the national average of 9.9 percent, the last year figures were available. It has been at about that level for years, according to the foundation – 9.7 percent in 1977 and 10.1 percent in 1994.

Helms as a model

Underlying much of the discussion is a question of the size of government.

It was expensive for North Carolina to become known as “the good roads state” and to build an extensive university and community college system. That’s why North Carolina is not a low tax-state.

At every step along the way, conservatives unsuccessfully fought the expansion of services. Conservative icon Jesse Helms, then a WRAL commentator, editorialized against creating a community college system, saying the state could save money by relying on its network of private colleges.

Now the legislature is filled with lawmakers who view Helms as a role model.

“The Republicans want less government– that is what is at the heart of this debate,” said Carter Wrenn, a long-time Helms strategist and current blogger. “The unfortunate thing is the debate never happened. It got lost in what I call the modern political howling that began with the Moral Mondays and it got lost with the tax reform debate between all the different groups that got involved in that.

“At the end of the day, we never had much debate on how much government should grow. That, I think, is a legitimate debate for both sides. Instead we had six months of modern politics, maybe at its most entertaining, but not at its most enlightening.”