Capital Goods - October 2008

Change you can’t believe in
By Scott Mooneyham

Charlotte Mayor Pat McCrory is a danger to the middle class. Just ask Lt. Gov. Beverly Perdue. As for Perdue, she’s part of the power elite, one of five or six people who control everything in the state. McCrory says so. To hear Democrat Perdue and Republican McCrory speak, you would think the world will come to an end should the other move into the governor’s mansion in January. And, of course, each candidate’s own election will certainly transform the state and its economy as we know it.

“Jobs, jobs, jobs,” McCrory begins one television ad. There’s an original line. Like most every Republican who has run for any kind of office the last 30 years, he also talks a lot about cutting taxes. He’s eyeing reductions in the state corporate and personal income taxes. Perdue, on the other hand, has been trumpeting proposals to expand government health-insurance programs for the working class. Neither would be cheap. Either could create pressure to raise taxes. On business recruitment and job creation, the two major-party candidates croon a similar tune. When questioned, both lament North Carolina’s growing reliance on cash and tax inducements to lure businesses. Both vow to explore regional agreements to limit incentives. So we seem to have in McCrory and Perdue change we can believe in, albeit different kinds of change. Don’t bet on it. Election of either likely will portend few changes in the course of economic or tax policy, for a variety of reasons.

McCrory argues that reducing the state income tax would improve the state’s business climate. But whoever becomes the next governor will face some stark budgetary realities. The economic slowdown likely will mean an end to five years of budget surpluses, and the new governor probably will be confronted with a shortfall within a few months of taking office. The reserves sit at more than $800 million, about 4% of the $21 billion budget. That’s a substantial cushion if tax collections slow. The current budget is based on fairly conservative revenue growth, so the next governor shouldn’t inherit the mess that Mike Easley had to deal with when the bottom fell out on tax collections in 2001. But a faltering economy would strain state finances next year and into 2010. Historically, these are the kind of times when legislators and governors — Democrat and Republican — have raised taxes, not lowered them.

Even as the economy recovers, cutting broad-based income taxes never will be easy in North Carolina. Easley talked about trimming the corporate rate toward the end of his first term, but nothing happened. That kind of talk is always accompanied by criticism that many of the large corporations, because of various tax breaks, enjoy effective tax rates that are well below the state’s 6.9% flat rate. As for the personal income tax, which ranges from 6% to 8%, it accounts for better than half of the state’s general operating revenue. A cut of just half a percentage point would whack $900 million out of the budget, money that wouldn’t be available for schools, prisons or raises for state employees. But these same financial pressures will affect Perdue’s plans for tuition-free community colleges and expanded health-insurance subsidies. Phased in or not, the costs eventually would top a half-billion dollars. The moderate Democrats who control the legislature won’t ignore the wishes of a Democratic governor. They also won’t put themselves in a position of being forced to raise broad-based, unpopular taxes and thereby undo the Democratic majorities in both houses.

As for business recruiting, McCrory and Perdue may talk a good game of trying to limit cash and tax-break inducements. Neither has a record of doing much beyond talk. Charlotte has sought a regional agreement to try to limit the use of some incentives, but its main effect has been unbridled laughter in Lancaster and York counties, S.C. It’s also worth remembering that North Carolina’s jump into the incentives abyss — the Bill Lee Act tax credits — took place while Perdue was a powerful state senator. She was hardly an outspoken critic and today says that Dell and FedEx wouldn’t have come to the state without incentives.

Neither Perdue nor McCrory gained reputations as pro-business moderates by being boat-rocking reformers. To expect that they would upset the economic-policy apple cart might make for good campaign com­mercials. The reality is that the election of either will lead to more of the same — something that many people will view positively, given the state’s economic progress over the last few decades. That change stuff? It’s for Washington, not Raleigh.

Scott Mooneyham is the editor of The Insider,