We create some of our own big problems when we act on our beliefs without checking to see if the beliefs are true. Governor McCrory and the North Carolina Legislature are about to do that as they reform our taxes. They have been cutting spending and now they plan to cut taxes with religious zeal based on two erroneous beliefs. One belief is that cutting taxes will stimulate creation of good jobs and economic growth. The other belief is that North Carolina taxes are too high.
First, let’s look at how much we are actually spending compared to other states. Counting all forms of state taxes including corporate and personal, we collected $2320 per person in 2011. That ranked us 34th highest among the 50 states. Gross State Product measures the total economic output within the state. Our combined state and local government spending as a percent of our Gross State Product ranked 44th among the 50 states. That means that the tax burden on our state economy was lower than all but six states.
Our spending on public K-12 education has been a hot topic. Our per pupil spending in 2011 ranked 44th among the 50 states and the legislature has already cut it below that level. As a percent of GSP, our per pupil spending ranked 46th. The K-12 tax burden on our GSP was 4.8%. Some states with low GSPs are trying to catch up with the rest of the nation. While we go backwards, low wealth states like West Virginia, Mississippi, Alabama, South Carolina and Arkansas are placing a tax burden of 7% to 8.4% on their GSP to support K-12 education.
What about the other reason for cutting taxes – to bring more jobs and economic development? High wage employers will be looking for a highly educated and skilled workforce. That is the reason, for example, that tech industries have concentrated around Seattle, San Francisco and Boston. It is because strong public education K-PhD produces a strong workforce and because those regions provide the quality of life (some of which is tax supported) which attracts and retains highly skilled people. Here in North Carolina, the Research Triangle Park has been a viable competitor for those companies. A few other communities have made some headway, mostly in proximity to universities which help attract the workforce. A tech company might put a call center or data center in other parts of our state (and that would be a good thing) but the corporate headquarters and the R&D functions which provide the best jobs will be elsewhere.
If our taxes and wages are reduced enough, we may indeed attract some jobs because there are some businesses which consider small differences in tax rates as an important criterion when choosing a location. They are also typically looking for the lowest labor costs. They don’t need a highly educated and skilled workforce and they keep benefit costs low by using as many temporary workers as they can. Those are also the jobs which are most vulnerable to outsourcing and automation. Having a mix of jobs available is a good thing but if we can’t attract our share of the high wage jobs then why will our brightest and most ambitious children return home for their careers? Or will they migrate to other parts of the country (or the world) for better wages and the environment that they want?
My conclusion is that the legislature and the Governor have entered us in a race to the economic bottom and if they continue cutting taxes and spending we are likely to win that race. I hate waste and don’t enjoy paying taxes but I’m very willing to pay for excellence in public education from birth through college. And I’m willing to pay fair wages to public servants who make our lives safer and better, and for parks, arts, and other government programs which promote the general welfare. Business leaders already know, but may require an occasional reminder, that it is a lot easier to earn a profit when your customers have money to spend. For that to happen, we need high wage jobs and a high skill workforce and public education to support both.
Tax reforms to close loopholes, to begin taxing services, and to reduce corporate taxes may indeed be good things but the design of the changes should increase rather than decrease state revenue and the tax burden must not be shifted to the middle class and poor who are least able to bear it.
I am an optimist. I believe in the people of my community and my state – good people who are working hard toward better lives for themselves and their families. We need to see ambition and optimism from our leaders including an understanding of that phrase “promote the general welfare” from the US and North Carolina constitutions. Taxation is not a win-lose game and neither is good government. When we spend our resources wisely on education and enhancements to quality of life, we all win. When wages go up, so does demand for products and services. It is time now for North Carolina to reclaim our dual heritage as a pro-business and progressive state.