Friday Interview: N.C. Reforms Follow Lead Of Conservative Icons | Eastern North Carolina Now

    Publisher's note: The authors of this post are the CJ Staff of the Carolina Journal, John Hood Publisher.

JLF president explains that 2013 laws mirrored ideas from Reagan, Friedman

    RALEIGH  -  Conservative icons such as Ronald Reagan, Barry Goldwater, and Milton Friedman would have appreciated some of the North Carolina General Assembly's key accomplishments in 2013. That's the assessment of John Locke Foundation President John Hood, who discussed the issue with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

    Martinez: You wrote a very interesting column about the fact that you go out and give a lot of speeches around the state. And after you gave a few recently, you had an epiphany. Tell us about that.

    Hood: Well, I did. It was a telling moment, not a very flattering moment for myself.

    Martinez: Uh-oh.

    Hood: But a telling moment nevertheless. What happened was, I was speaking to an audience, and we were talking about tax reform. In particular, we were talking about tax reform in Washington and the fact that it hadn't moved very far and that there are lots of different models and people have been debating tax reform for decades.

    And I took the opportunity to explain the concept called the flat tax, which had its origins in the late '70s. It was championed by many conservatives in the 1980s, 1990s, and beyond. Ronald Reagan very much liked the flat tax. Jack Kemp was an advocate of the flat tax or something similar to it  -  the idea of simply having a single marginal rate applied to an income tax base that didn't punish savings and investment. That was the idea. And I was trying to tell the audience  -  this happened to be in Henderson County  -  I was trying to tell them that isn't it exciting that North Carolina just adopted a flat tax and it had this long pedigree.

    Well, after the speech, someone came up to me, expressed great enthusiasm for the flat tax, said it had always been an inspiring idea, and wondered if I thought that North Carolina would ever adopt a flat tax, which I thought I had just explained. It's not the only time that I've had that kind of response. In other events, maybe not quite so embarrassing for my lack of rhetorical skill, but at other events people would come up and say, "I was very disappointed that North Carolina was going to reform the tax code but it didn't happen." And I'd have to explain that yes, it did happen.

    What I learned from that experience is that people don't follow the legislature very closely. To the extent that they follow state affairs, they often get their news in little bits and pieces that aren't added up. They might have heard a story or read a story about a proposal that somebody had to reform the North Carolina tax code that didn't happen, and they were assuming because they heard or read that little snippet, that nothing ever happened.

    So I discovered and determined that this was an opportunity for myself, for the Locke Foundation in general, for everybody that I knew to spend more time explaining what has already happened in Raleigh and the benefits of it, or potential benefits of it because people simply don't know.

    Martinez: Let's talk a little bit more about the specific idea, then, of the tax reform that has occurred. How will North Carolinians benefit from what the legislature has done?

    Hood: Previously, North Carolina had a progressive rate tax structure, rates of 6 percent, 7 percent, and 7.5 percent. There was actually even a fourth rate for a while, of 8.25 percent. And these are fairly high income tax rates by Southern standards. Most of our neighbors didn't have as high rates, or even any income tax in a couple of cases.

    And so the proposal from the legislature  -  and Gov. [Pat] McCrory supported and signed the legislation  -  was to create a single rate. It'll be at 5.75 percent when fully implemented. That will be lower than all the previous rates, so everybody gets a rate reduction in North Carolina regardless of income. And that rate is lower now than most of our surrounding states.

    The idea there is to make North Carolina more competitive, to create more growth and more job opportunities, and to let people keep more of what they earn. This is not just a tax reform; it is a tax reduction. And usually you have to do those two things together. Sometimes you hear, "Well, we should reform the tax code and generate more money," meaning a higher tax burden out of it. Or that it ought to be revenue-neutral.

    You can understand why some people think that, but you've got to remember that tax reform is inevitably a process of taking some special benefits away from some people. The reason the tax code is so goofed up is because there are very active lobbies pressing for special breaks, special advantages. And any sensible tax reform will take those away and treat everybody the same. If you're going to do that, politically, you need a spoonful of sugar to help the medicine go down. So you've got to give people  -  almost everybody  -  a break, so that the people who lose something from tax reform will not prevail.

    Martinez: John, when a company looks at locating in North Carolina, what do the executives look at when it comes to the tax code? Are they just looking at the corporate rate, or are they trying to figure out what it's going to cost their employees to live in the state? What do they look at when they start comparing?

    Hood: It depends upon the situation. Lots of smaller companies, people setting up new companies, they might not even organize themselves in ways that would subject their business earnings to corporate tax. So they might just be looking at the personal income tax rate. Pretty much all corporate managers, corporate executives, look at the personal income tax rate in addition to the corporate rate because they're going to pay it, and they want to know about that. And they want to think about recruiting high-level talent and whether the tax burden will be a turnoff or a turnon in that process.

    So when the giants of conservative tax philosophy were thinking about tax reform, they were thinking about this very issue: What is the most efficient way to collect the money the government needs in a way that does not discourage economic investment? And the flat tax is at the top of that list. North Carolina now has a flat tax. Most states don't, so this is a competitive edge for us, and it's something that I think Ronald Reagan and other conservative icons would be very proud of North Carolina for doing.

    Martinez: In your column, where you talk about the relationship between the conservative icons and the accomplishments of the state legislature, you also bring up Milton Friedman, who is the icon in the school choice movement. What has North Carolina accomplished?

    Hood: Well, he didn't invent the idea, but he did a lot to publicize the notion of parental choice as a way to provide competition and alternatives and educational quality and improvement. What North Carolina has done in response to Milton Friedman's example is to create a very broad charter school bill to allow charter schools to pop up and provide services and opportunities for children. And now, a low-income scholarship program for students  -  it's essentially a voucher program that will allow some disadvantaged students to go to private school with some taxpayer funds. [Editor's note: This interview took place before a Superior Court judge issued an injunction blocking the opportunity scholarship program for low-income students.]

    Martinez: John, what always surprises me is that some folks who don't like those policies will say, "Well, we have a perfectly good public school system." But is it reasonable to think that the traditional public school system can meet all of the varied needs of every child in the state?

    Hood: It clearly can't. And the people who say that, they don't apply the same theory to other kinds of education. I assume they don't think that only if you go to a state university can you be well-educated. I assume they don't think that all the preschool kids should go to government-run day care centers.

    They understand that you want a variety of options  -  for-profit providers, nonprofit providers, churches, religious-affiliated colleges  -  that that's good at the higher education level, it's good at the pre-K level. Why would it also not be effective at the K-12 level? This is an argument Milton Friedman made, and he was right. North Carolina has finally listened to him.