Stephen Moore, a renowned libertarian-leaning economist and member of The Wall Street Journal’s editorial board, has some advice for the GOP leadership now running the show in Raleigh: Man Up and Move Forward on reforming the state’s tax code.
Moore expresses concern that the Raleigh Republicans may be backing away from some of the promises that put them in power:
One of the favorite slogans in Carolina country is: “If God isn’t a Tar Heel, why is the sky North Carolina blue?” In the past two election cycles, this state has turned from North Carolina blue to Republican red. Now, only days away from a crucial legislative vote, Republicans are struggling to fulfill the tax-cut promise that got them elected in the first place.
The GOP blitzed Democrats at the polls in 2010 and 2012. Gov. Pat McCrory, an affable former businessman and mayor of Charlotte, is the first Republican governor in Tobacco Road country in 20 years. More remarkable still, for the first time since Reconstruction, Republicans control the governorship and both houses of North Carolina’s legislature. The state was pretty much the last domino in the South to tumble into the GOP column.
Republicans gained power by promising tax cuts and economic development. Now a debate is raging in the capital about how to reform the tax code—or whether to do it at all.
This has been a disappointing year so far for state tax-reform initiatives across the country. Despite small tax cuts here and there, bold attempts to slash or even abolish income taxes in Kansas, Louisiana and Nebraska have mostly fizzled. North Carolina may be the last chance this year to get the economics and the politics of tax reform right.
To get that done, Republicans have to stop feuding among themselves. When the new GOP regime led by Gov. McCrory came to power in January, the buzz was about North Carolina turbocharging its economy by joining Tennessee, Texas and Florida as a no-income-tax Southern state.
In an interview on May 29 in his office in the 150-year-old capitol building, Mr. McCrory—who describes himself as a bricks-and-mortar “Eisenhower Republican,” because Ike “was the president who built the interstate highway system”—said that jettisoning the income tax is a “worthy goal.” Yet now Mr. McCrory has the less lofty ambition of just getting the tax rate lower than South Carolina’s 7% or Virginia’s 5.75%.
No state is riper for a sweeping tax overhaul than North Carolina. Its income-tax code is a relic of the 1960s and ’70s. The top income-tax rate is 7.75%, the highest and thus most anticompetitive in the South, much more in line with the taxes in the calcifying Northeast. North Carolina also has an estate tax as high as 16%, which deters wealthy people from moving to the state for retirement.
The other imperative for tax modernization is the state’s lackluster economy. North Carolina is famous for its bustling high-tech and medical-research centers in Raleigh-Durham and for its top-flight universities, along with the Duke-UNC basketball rivalry. What isn’t so well known is how many poor regions lie outside Raleigh, Charlotte and the upscale coastal tourist towns.
The unemployment rate in North Carolina, now 8.9%, has ranked consistently among the highest five states in the country. The 16% poverty rate exceeds the national average, and the median income is $6,400 below the national average.
The state senate, on the advice of supply-side, tax-cutting icon Arthur Laffer, wanted to chop the income tax nearly in half to 4.5%. The plan was to replace income-tax revenues with the proceeds of a broadened sales tax applied to more than 100 services and businesses that currently get away scot free. But as happened in Louisiana and Nebraska, the special interests that have long enjoyed targeted tax carve outs—from the farm-equipment industry to lawyers, accounts and beauty-parlor operators—attacked and devoured the plans to apply the sales tax to them.
Which brings us to a tax-reform lesson for Republicans: Expanding new sales taxes to scores of industries that have never paid them may be good economics, but it can be politically ruinous.
So now the best chance for reform is in the North Carolina House. Its plan, which will be voted on in the next few days, would adopt a flat tax of 5.9% (near the average rate in the South) and pay for it by closing income-tax loopholes. The plan would cap total deductions at about $25,000, so that high-income North Carolinians would lose their write-offs as their incomes rose. Even this modest approach has run into a buzz saw of opposition from charities and the powerful housing lobby.
Realtors across the state (and even in the Republican caucus in the House) have trashed the deduction cap—which would affect the mortgage deduction for mansions—with over-the-top rhetoric about how the dream of homeownership will be put at risk. Since 70% of Carolinians don’t even itemize deductions, this claim is hard to credit.
North Carolina legislators would do well to consider that a lower, flat tax will bring more jobs and businesses to the state, boosting homeownership and real estate values. Despite the 2007-10 housing depression, the states with big housing booms over the past three decades have been Florida, Nevada and Texas. They have no income tax and thus no mortgage deduction.
State senators wisely want to push the tax rate even lower than 5.9%. For now, though, it’s a gut-check moment for the Republicans: Do they stand for growth or for special-interest lobbyists? The only thing certain is that Republicans will suffer a grave blow to their credibility if they fail to deliver any kind of tax cut this year.