Rob Christensen of the News & Observer recently published an article in which he claims to uncover “the truth” behind 10 “myths” about North Carolina state government.
Disappointingly, Christensen gives short shrift to each point, and his “facts” are deliberately cherry-picked and incomplete in order to fit his preconceived narrative. Christensen does his readers a disservice trying to address ten different topics in such short fashion; perhaps a better article would have addressed five “myths” explored in greater depth. In any event, his choice of avoiding depth and ignoring ample contrary data reveal either willful ignorance or intellectual laziness.
The “myths” he fails to debunk focus on education and fiscal policy. This article will focus on the fiscal policy “myths,” and uncover the truth behind Christensen’s half-baked, woefully under-researched article.
NC’s State Government Was in a Financial Mess Until the Recent Change in Party Control
To combat this “myth,” Christensen relies exclusively on the state’s AAA credit rating, one of nine states to maintain the rating. This is true as far as it goes. The credit rating is an evaluation of the state’s debt and the state’s ability to repay it. However, the state Treasurer’s office had essentially ordered the state legislature not to issue any more debt for the last few years because the state’s credit rating was indeed in jeopardy because of the dramatic rise in state debt. Per capita state debt had shot up an alarming 250 percent from 2000 to 2010. The Treasurer has also been warning for years that the state’s high reliance on debt unapproved by voters further threatens that rating.
But even more important, and completely ignored by Christensen, are the state’s unfunded liabilities. For instance, according to the state’s 2012 Annual Financial Report prepared by the State Controller, the state has racked up more than $30 billion in unfunded liabilities in healthcare benefits for state retirees. The liability was recently calculated as 9th worst in the nation on a per capita basis. Oh, by the way, in just five years, from 2005 (the first year it was calculated) to 2010, the liability exploded by nearly $10 billion. Since the “change in party control” in the legislature in 2010, the liability has shrunk by roughly 10 percent.
And then there’s the $2.5 billion in unemployment insurance debt owed to the federal government previously racked up, about $3 billion in unfunded state pension liabilities, and the billions in Medicaid and State Health Plan cost overruns over the last several years.
I’d hate to see the financial catastrophe that does qualify as a “financial mess” in Christensen’s eyes.
Until recently, state government was on a spending spree.
Christensen attempts to refute this claim by citing a Tax Foundation report showing that North Carolina state government spending per capita grew at only the 45th fastest rate in the nation from 2001 to 2011. That’s an interesting time period to select. Roughly half of those years consisted of recessions, and North Carolina’s economy was hit harder than most states in those recessions. Naturally, as a result tax revenue, and thus spending, would have likewise been more limited than most states.
To gain better perspective, a longer timeline that also involves more years of economic growth would paint a clearer picture. Luckily, we have such a timeline. From 1979 to 2009, state government spending more than tripled, even after adjusting for inflation; growing at more than three times the pace of population growth. And don’t forget to tack on the billions in debt issued during those years, because the on-budget spending just wasn’t enough to satisfy state lawmakers’ appetite for spending other people’s money.
If that doesn’t meet the definition of “until recently, state government was on a spending spree,” I don’t know what does.
North Carolina was a high-tax state before the recent tax cuts.
Christensen again turns to Tax Foundation data to show that this notion is somehow a myth. He uses data that calculates the amount of taxes paid as a percentage of income to show that North Carolina was not really a “high tax state,” because North Carolina’s taxes paid as a share of income was at the national average. He then concedes, however, that NC’s percentage stood as high among Southern states – which was the main point of people highlighting the dangers of high taxes to begin with. (We often used the phrase “a high tax state in a low-tax region”).
But even on this score, Christensen misses the mark. Taxes are all about incentives: The higher the tax rates on an activity, the less of that activity will take place, and vice versa. Thus, it is tax rates that truly matter when evaluating whether a state is “high tax” or not. Using actual taxes paid cannot capture the impact of the disincentive to investment and job creation created by high tax rates.
North Carolina’s top personal rate and corporate tax rate have been highest in the Southeast for years, and the top personal rate has been tenth or eleventh highest nationally for years. We simply cannot calculate how much investment did not occur because of our state’s high tax rates, which is the real mark of a high-tax state.
North Carolina was no longer an attractive state because of high taxes, and has an anti-business climate.
For starters, Christensen claims that North Carolina does indeed have a good business climate –but he does it not by looking at the actual record of, you know, businesses expanding or moving here and creating jobs, but rather by looking at some magazine rankings. One such ranking is the Site Selection magazine ranking, which has placed North Carolina at or near the top for nearly a decade. But when you actually look at Site Selection’s criteria, you quickly realize their “best business climate” ranking is actually a measure of which states are engaged in the highest amount of corporate welfare activity.
Moreover, Christensen should be embarrassed for not questioning the methodology that somehow ranks a state with the third-highest unemployment rate as having the top business climate. Normal people would think reality trumps a magazine ranking. What would Christensen think about a magazine that ranked last year’s 2-14 Kansas City Chiefs as the NFL’s best team?
Secondly, he points to North Carolina’s overall net in-migration as a sign that the state’s high tax rates do not make it unattractive. Our state was the fourth highest destination for moves in a recent study, according to Christensen, so therefore the state’s tax rates didn’t deter people from moving here.
But if we are talking about tax rates and whether or not they provide a disincentive to move to the Tar Heel State, wouldn’t it make sense to determine where these people are moving from? The Tax Foundation provides a tool to examine such trends, and looking at data from 2000 to 2010, roughly one-third of all net in-migration came from high-tax New York and New Jersey. Another 18 percent came from high-tax states Massachusetts, California, Maryland, and Connecticut. Taxes of course are far from the only reason people move, but Christensen doesn’t even make an honest attempt to disprove this alleged “myth.” Additionally, Civitas recently showed how North Carolina was a net loser in migrating incomes with each of our neighboring states. By the way, Tennessee – with no income tax – was a net income winner from all eight of its neighboring states.
Moreover, for Christensen to imply that state tax rates have no impact on migration patterns in general is absurd and contrary to mountains of evidence. This analysis in US News & World Report shows a clear pattern of high tax states losing people – and their income – to lower tax states. And Ohio University economist Richard Vedder studied migration patterns in the 1990s and found that “Some 2,849,310 persons moved into the no-income tax states from the states that levied taxes on the productive activity of their citizens” from 1990 to 1999. That’s more people than moved from East to West Germany during the Cold War.
But Christensen could not be bothered to look into such data.
Rob Christensen’s latest article purporting to disprove what he labels “myths” was half-hearted and poorly researched. The actual myth is that North Carolina was a fiscal paradise before 2010. The truth is that North Carolina’s economy had been sputtering for years, state lawmakers racked up massive amounts of debts and liabilities in addition to wildly expanding the state budget, and strong action was and is needed to put the state’s finances in good working order.