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Carolina Comeback

by John Hood

Why voters in the Tar Heel State turned right

Ever since Pat McCrory became North Carolina’s first Republican governor in 20 years, a stream of media coverage has portrayed the Tar Heel State as “the Wisconsin of 2013,” to quote the headline of a recent Atlantic article. The New York Times weighed in with a factually challenged editorial that described North Carolina’s rightward turn on taxes, spending, public assistance, capital punishment, and other issues with terms such as “grotesque,” “cruel,” and “demolition derby.” Separately, Times columnist Paul Krugman savaged the state’s decision to trim unemployment-insurance benefits — part of a plan to speed up repayment of a $2.6 billion debt to Washington — as “a war on the unemployed” by conservative politicians who “won’t be dissuaded by rational argument.”

Ready-made for the media crush was a North Carolina protest movement called “Moral Mondays.” Created by the state chapter of the NAACP in alliance with other liberal groups, it consists of weekly protests at the state’s legislative building that have included the ritual arrest of activists for blocking access to legislative chambers, violating fire codes, and otherwise attempting to obstruct the normal operation of the general assembly. The movement began small but grew to thousands of participants a week as TV cameras swarmed and a Moral Monday arrest record became a ticket to the Left’s cool-kids table.

It’s not surprising that the national media would seek a new Wisconsin to serve as the setting for a morality tale in which scrappy liberal activists lead the public in challenging heartless conservatives. But reality intrudes. In 2010, North Carolina voters elected Republican majorities in both houses of the state legislature for the first time since Reconstruction, even though Democrats outspent Republicans by millions of dollars and had drawn the district boundaries. In 2012, Republicans expanded their majorities, and McCrory, the longtime mayor of Charlotte, won the governor’s race with 55 percent of the vote. These developments were a response to years of Democratic governance that had resulted in heavier tax and regulatory burdens, lackluster economic performance, pervasive corruption, and the criminal convictions of a governor, a speaker of the house, a senate majority whip, and an agriculture commissioner.

North Carolina had been a political outlier in the South during the 1990s and 2000s, combining one of the region’s strongest Democratic parties, one of its highest tax burdens, and one of its weakest rates of growth in per capita income. (Republicans tended to see causality in the correlation.) Yes, Charlotte had become the nation’s second-largest banking capital, and the Raleigh–Durham–Chapel Hill “Research Triangle” a prominent home for tech companies. But much of the rest of the state was struggling to keep or add healthy firms paying good wages. By throwing ever-increasing amounts of corporate welfare at a few targeted firms, the state managed to rank highly on business indexes popular with professional recruiters even as broader measures of actual economic performance revealed weakness. Then the Great Recession brought even high-flying Charlotte and the Research Triangle down to earth. Widespread layoffs and business failures gave North Carolina one of the nation’s highest jobless rates. In short, the state desperately needed a different governing philosophy. That’s what voters opted for in 2010 and 2012. And they’re getting it.

The change began in 2011, when the new Republican-led legislature rejected then-governor Beverly Perdue’s idea to close a multibillion-dollar budget deficit with higher taxes. Instead, state lawmakers let a temporary sales-tax hike expire and enacted additional business-tax relief. At least as important were successful Republican initiatives to limit overregulation, reform tort and medical-malpractice laws, and encourage entrepreneurship and energy exploration. Once Governor McCrory took office in January 2013, the state legislature was free to pursue additional economic-growth policies that Perdue would have vetoed, including a follow-up bill on regulatory reform that imposes periodic review and sunsets costly rules. And last month, McCrory, house speaker Thom Tillis, and senate leader Phil Berger announced a compromise tax reform that represents one of the most spectacular changes in state tax policy in recent history. When fully implemented, it will give North Carolina a flat tax of 5.75 percent — replacing a multi-rate income tax that currently tops out at 7.75 percent — and reduce the corporate rate from 6.9 percent to as low as 3 percent in the out-years. In one stroke, North Carolina’s tax regime went from No. 44 among the states in its favorability to business to No. 17, according to the Tax Foundation, a think tank in Washington, D.C.

McCrory, Tillis, Berger, and other state leaders are new in their current roles but experienced in politics and public policy. Contrary to liberal caricature, they, like most conservatives, do not believe that taxes and regulations are the only factors that affect state economies. They have also focused significant attention on increasing the productivity of public investments, such as those in infrastructure and education, while seeking ways to reduce the share of state spending devoted to transfer payments and other public consumption. During the 2013 legislative session, lawmakers rewrote the state’s transportation policies so as to reduce traffic congestion and encourage job creation. On education, they abolished teacher tenure, expanded the state’s charter-school program, and enacted two statewide voucher bills that will serve as many as 13,000 students within three years. The legislature also gave McCrory the green light to pursue a new competitive-contracting model for the state’s rapidly growing Medicaid program, which is sapping resources that would be better spent on roads, schools, or additional tax relief.

These policies put North Carolina squarely within a modern conservative vision of how states can promote economic freedom and prosperity. Conservatives agree with liberals about the economic importance of infrastructure and education. Long-term growth comes from investment: from building the financial, physical, and human capital necessary to start and grow successful businesses. Where conservatives and liberals often disagree is on how states can best foster capital formation. Liberals tend to focus primarily on public capital, such as schools and roads, while worrying less about the private investment that accounts for roughly 80 percent of the economy’s capital stock.

Higher taxes can finance higher levels of public investment, yes. But higher spending doesn’t necessarily result in higher-quality infrastructure or education. At the same time, higher taxes can lead to lower levels of private investment by giving entrepreneurs, investors, executives, and professionals a reason to take their financial and human capital elsewhere. Successful states find ways to build and maintain good public assets while keeping tax and regulatory costs low in order to attract private assets. As a colleague of mine, Jon Sanders, puts it, “State legislation creates jobs the way roads create cars.” By limiting their role to establishing the rule of law, protecting property rights, and funding true public goods, state governments facilitate prosperity through private initiative.

Obviously, it’s too early to judge the effectiveness of reform legislation enacted this year. But the Republican legislature began putting its imprint on North Carolina’s fiscal and regulatory policies two years ago, and the early trends have been positive. Since the implementation of the lower-tax Republican budget in July 2011, North Carolina has added about 135,000 new jobs, which represents a faster job-creation rate than that of the nation as a whole and a major improvement over the preceding four fiscal years, when the state suffered a net loss of 240,000 jobs and underperformed the national economy. From 2001 to 2011, North Carolina’s rate of growth in real per capita GDP averaged less than a third of the national rate. Since 2011, however, North Carolina’s performance on this key indicator of economic progress has roughly matched the national rate.

Still, the state’s unemployment rate (8.8 percent as of June) remains one of the highest in the United States. Among the ten most populous states, only Illinois (9.2 percent) ranks worse. Even if a policy mix of lower taxes, less regulation, smarter infrastructure spending, and market-based education reform is likely to boost economic growth in the long run, the benefits will take many years to become fully manifest. Impatient voters may not wait that long to issue a verdict on North Carolina’s new Republican government. That’s what state Democrats are counting on — and it’s the real reason liberal groups are holding Moral Monday rallies. They hope to activate Democratic-leaning voters, who typically make up a smaller share of the electorate in midterm elections than they do in presidential years. Although they are swimming furiously against the historical tide — a political party tends to fare poorly after six years of controlling the White House — Democrats do enjoy generous and largely favorable state and national press coverage, well-funded organizations, and other institutional advantages.

So the histrionics continue. Perhaps the strategy of media-friendly protests will have better success in North Carolina than it did in Wisconsin. As a conservative, however, I incline to the view that history is instructive.

– Mr. Hood is the president of the John Locke Foundation, a public-policy think tank in Raleigh, N.C., and the author of Our Best Foot Forward: An Investment Strategy for North Carolina’s Economic Recovery.

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