State of the Arts

Laffer, supply-side guru, is behind the idea of killing N.C.'s income tax, but Pope, of all people, says it's a bad idea
The Laffer Center
Laffer

So, as you may have heard, a group of Republican legislators have floated a proposal to eliminate North Carolina’s income tax and replace the uncollected revenue with, among other things, a quadrupling of the state’s sales tax on groceries.

It seems beside the point to dig into the “merits” of the proposal itself. The idea of doing away with state income tax and raising the sales tax on food is so nakedly regressive that it appears almost unreal, like a feint of some kind. Surely they can’t be serious.

And then you start looking at what’s behind the ditch-state-income-taxes movement, and things start to get a little strange. Hint: Art Pope is involved, of course — but not in the way you might think.

The advantages of a supermajority

First off, this isn’t just a North Carolina thing. Eliminating state income taxes is becoming a very popular idea in states where Republicans hold legislative supermajorities after the 2012 elections. North Carolina is one of 11 states with compromise-proof GOP supermajorities in both legislative houses and Republican governors. The others: Idaho, Indiana, Kansas, the Dakotas, Ohio, Oklahoma, Tennessee, Utah, and Wyoming.

Three of those are already in the camp of states without broad-based personal income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, New Hampshire, Tennessee, and Wyoming. Those states have had to find other sources of revenue or do without: Alaska, for example, derives much of its operating capital from oil production. Nevada gets money from the gambling industry. Wyoming has neither individual nor corporate income taxes, but Wyoming is Wyoming, with a population of a little more than a half-million — it’s the least populous state — and an economy based on mineral extraction and tourism.

Under the proposal, North Carolina would do away with all tax breaks — “closing loopholes” — and hike sales taxes on all goods and services, including groceries, plus real estate transactions.

Smart. The state, along with the nation, is slowly lifting itself out of recession. The housing market is recovering. The payroll tax cut just expired. Now would not seem to be the time for the party that screeches non-stop about the crushing burden of taxation to stick it to people when they’re buying milk and macaroni and cheese at Aldi. There’s a reason why it’s called “regressive” taxation: Tax hikes on goods and services rather than income are mere annoyances to rich people but boons if the tradeoff is not having to pay state income tax come April.

To a single mother, though, who has to feed not just herself but two or three kids? It’s a punch in the gut. Say she spends $100 per week on groceries. She’ll now be paying an extra $6 per week, $312 per year. For someone making even the average North Carolina income of $25,256, that’s not an inconsiderable burden.

The Laffer con

The rationale from the GOP is distressingly familiar:

Sen. Bob Rucho, a Charlotte Republican leading the tax overhaul, countered the argument by saying corporations would pass along savings to consumers if they paid lower taxes. Rucho compared North Carolina’s economy to a “dying patient” to emphasize how tax changes are needed to lure new businesses and lower the burden on existing companies. He believes such moves would allow them to add more jobs and improve the state’s overall economic picture.

But he acknowledged there are no guarantees that businesses would lower the cost of their products or relocate to the state. The Republican proposals announced Wednesday also included no protections for low-income workers who pay a larger proportion of their income towards sales tax.

“The expansion of the sales tax might increase the burden on low-income taxpayers, so finding a way to hold them harmless would be key,” said Roby Sawyers, an N.C. State University professor and expert on North Carolina’s tax system.

At base, this is nothing more than trickle-down economic theory repackaged as an economic development tool. So where’s it coming from? Exactly where you’d think.

Arthur Laffer’s consulting firm—Arduin, Laffer & Moore Econometrics (ALME)—has released a report purporting to show that North Carolina could usher in an economic boom if it repeals its personal and corporate income taxes and replaces them primarily with a much larger sales tax. Prepared for the Civitas Institute, “More Jobs, Bigger Paychecks” relies on an economic analysis that is fundamentally flawed to the point of making it entirely useless.

The John W. Pope Civitas Institute is the Raleigh-based right-wing think tank whose elections-spending arm, Civitas Action, donated thousands to McCrory and other Republican candidates for state office last year. According to a 2010 article in the Institute for Southern Studies’ online magazine, “Civitas owes its existence almost entirely to the generosity of Art Pope,” who is, of course, our state’s new budget writer.

As for Laffer, he’s the “father of supply-side economics,” coiner of the Laffer Curve, a guy who’s peddled trickle-down theory the length and breadth of the land long after it was debunked around the first time Ronald Reagan had to raise taxes or risk plunging the country into the pits of economic hell. That was in 1982. Supply-side remains an attractive barrel of snake oil, though, because it flatters rich people into thinking greed serves a greater good. Empirically, it does nothing of the sort, but Laffer constructs a kind of intellectual Potemkin village these folks can duck behind when they need to.

Laffer’s a swell guy, too. I had the pleasure of hearing him speak back in September in Nashville, where he lives and works. Here’s the kind of guy Art Laffer is: He relocated from California to Tennessee, he said, because of California’s oppressive state income tax rate — a measure needed to counteract the effects of Proposition 13, the 1978 measure that severely limited government’s ability to collect property taxes, which Art Laffer provided the justification for. It’s just good business. Win-win.

That day, he had a few other bons mots to share:

“Rich people can manipulate the system. That’s the way the world is, not the way we’d like it to be.”

On his affection for illegal immigrants: “What the hell’s wrong with ’em? They’re low-cost, hard-working, and they cheat on their taxes. I wish more of us were illegal aliens!”

I think he was half-joking, or trying to seem like he was. He told the crowd at the corporate retreat I attended that Republicans shouldn’t even think about compromising with Democrats on tax issues and the upcoming “fiscal cliff.” Laffer said it’d be like negotiating with a guy who wants to rape your mother 10 times and talking him down to just five.

Laffer’s speaking tonight, by the way, at a Civitas Institute reception at the North Raleigh Hilton. The event is sold out. “Heavy hors d’oeuvres will be served.”

The Pope puzzle

OK, so Laffer, Civitas, Art Pope, the kind of “wealth redistribution” the talking heads on Fox News don’t want to acknowledge (poor-to-rich, Robin Hood in reverse) — all connected, right? Surely this income tax thing is the work of the man N.C. Democrats are already calling, with equal contempt and respect, “Governor Pope.” Isn’t it?

Or is it?

Gov. Pat McCrory’s budget director distanced the Republican chief executive from a proposal to eliminate income taxes in North Carolina and expressed his own “great concerns” with the concept being floated by leading GOP lawmakers.

Art Pope said the state’s current tax system is plagued by “holes and problems” — but the idea of abolishing personal and corporate income taxes by increasing the sales tax and levying the tax on dozens of duty-free services creates more concerns.

“Maybe if you were designing a tax code from scratch, you may want to look at a broad-based consumption tax,” Pope told a reporter roundtable at UNC-Chapel Hill’s journalism school Wednesday. “To go there from where we are now, I think, is very difficult to do and has lot of impracticalities.”

In particular, Pope cited a concern that the higher sales tax is “absolutely, no doubt” regressive, meaning it would hurt low-income taxpayers the hardest. He said it amounts to a gross income tax “without any regard to whether you are making any money.” And he worried about upsetting the current three-tier system of income, sales and properties taxes, calling it “fairly balanced.”

I’ll confess — I honestly don’t know what to make of this. It seems unlikely that Art Pope, free-market absolutist, would publicly push back against an economic proposal from his own organization, and that he would even acknowledge the concept of “regressive taxation.” (Civitas policy analyst Brian Balfour: “One problem that we find when you try to analyze the tax structure through this progressivity/regressivity lens, is it’s attempting to accomplish some social engineering goals.”)

Maybe Pope is serious about serving at the pleasure of the governor, as he said he would. Maybe it’s an attempt to recast himself as a More Reasonable Guy than was previously suspected while employing a common tactic: Propose the outlandish and negotiate backwards from there. (Democrats tend to backpedal from their own 30-yard line.)

Certainly everyone knows the tax system has to be reformed; is this just a chance for Pope and McCrory to soothe Democratic apprehension by appearing to compromise? If so, why would they do that when they have a supermajority in the legislature?

Who knows what’s going on underneath that bald pate?

The session begins Jan. 30. I imagine we’ll find out soon enough.

Categories: Poking the Hornet’s Nest