RALEIGH — North Carolina Democrats have never opposed lowering taxes on big business. You may hear a lot of rhetoric to the contrary during the election cycle. Here’s why, to borrow a phrase, you should take that rhetoric seriously but not literally.
Democrats have run state government for most of state history. They were in charge of both the executive and legislative branches as recently as 2010. The current Democratic governor, Roy Cooper, has served in various state offices since 1987.
So we don’t have to guess what fiscal policies North Carolina Democrats would implement. We can consult their history. It reveals that, contrary to what you may be told, they clearly agree with the proposition that taxes affect business decisions, just as other prices do.
For example, under partially or totally Democratic governments, North Carolina offered tax credits worth hundreds of millions of dollars each year to companies that made investments or created jobs in our state.
Democrats also bestowed tens of millions of dollars a year in tax breaks to companies, often huge ones, that produced films and TV shows. They provided millions more in tax credits to companies that purchased and redeveloped abandoned factories, power plants, homes, and other properties. They shoveled even more tax breaks to alternative-energy companies, primarily solar firms championed or populated by Democrats.
On top of all these other tax cuts, they negotiated additional tax breaks for politically favored companies — for technology firms, major manufacturers, and corporate headquarters.
If North Carolina Democrats really don’t think taxes affect business decisions, why did they pursue these policies? Was it just about straight-up graft and corruption? Was it a blind, unthinking attempt to “keep up with the Joneses” in other state governments?
We know the answer to these questions, too. When Republicans won control of the state legislature in 2010 and the governor’s mansion, albeit briefly, in 2012, they put their own stamp on North Carolina’s tax system. Believing it was a wiser policy to cut business taxes across the board rather than to carve out these special credits, rates, and exemptions, GOP policymakers have reduced the tax rate on corporate income to what will be 2.5 percent next year, down from 6.9 percent. They have also reduced the top tax rate on individual income, the relevant one for businesses organized in ways other than “c corporations,” to what will be 5.25 percent next year, down from 7.75 percent.
Partially to offset the fiscal impact of these tax cuts, Republicans eliminated many of the Democrats’ more-targeted cuts, such as the tax incentives for film and TV. Interestingly, Democrats have responded by claiming both that cutting business taxes won’t attract more employers to North Carolina and that eliminating the film credits have chased production companies away, costing us jobs.
It would be easy to charge the politicians and commentators involved with illogical reasoning or partisan hypocrisy. Far be it from me to take the easy way out. There is, in fact, a coherent theory here, although it is rarely spelled out: Government knows best. Politicians should decide which industries or individual businesses are the best investments, and can forecast which will respond most favorably to lower tax burdens.
In investment terms, Democrats think the state should actively manage a targeted portfolio of tax cuts. Most Republicans think this is folly. They know central planners can’t possibly possess the required knowledge about a dynamic economy to make such decisions prudently. Instead, Republicans favor a diversified portfolio of tax cuts — applying to all businesses, large and small, in any industry. Less favoritism. Less insider dealing. Less pretense.
A recent study by two College of Charleston economists, Peter Calcagno and Frank Hefner, found that states were more likely to strike tax-incentive megadeals if their income-tax burdens were higher than average. That provides at least partial empirical support for the nationwide presence of the trade-off I’m describing.
The real debate is whether to go narrow or go broad on tax relief. The latter is the correct answer.
John Hood (@JohnHoodNC) is chairman of the John Locke Foundation and appears on “NC SPIN,” broadcast statewide Fridays at 7:30p and Sundays at 12:30p on UNC-TV.
John Hood is chairman of the John Locke Foundation.