Below is a transcript of the conversation with North Carolina Budget Director Art Pope. Please note: transcripts are created on deadline and may not be in final form. It may be updated or revised in the future. The authoritative record is the audio file.
S: This is the State of Things from the Museum of Natural Sciences in downtown Raleigh, I’m Frank Stasio.
You know its not often that the state’s budget director is a household name but that’s the case here in North Carolina. Governor Pat McCrory appointed Art Pope to be his state budget director last year, but he has been a prominent figure and well-known figure in the state for many years. He served four terms in the North Carolina House of Representatives, also chairman and president of Variety Wholesalers, a retail chain with more than 350 store around the southeast, including Rose’s and Maxway stores in North Carolina. Art Pope is major financial player in the state, his family foundation donates millions of dollars every year, hes also received strong criticism for how his money has influenced state politics. He is a North Carolina native who philosophy and vision are both influential and controversial and he joins us in the studio today, Art Pope thanks for joining us, good to have you.
P: Thank you for having me.
S: So you were born in Fayetteville but you spent most of your life in Fuquay-Varina, or what is now Fuquay I guess.
P: My family lived in Fuquay, a small town in eastern North Carolina, but my mother grew up in Fayetteville and used to work in Highsmith Hospital. So when it came time for her children to be born rather than traveling west to Raleigh, she traveled back east to the old hospital where she worked. I grew up in Wake County.
S: Tell us about growing up.
P: I started off in Fuquay, it was a small time. It was a tobacco market back then when that was really important to the economy, the September tobacco markets are almost more important than Christmas time. But I did move to Raleigh in the 1960s and attend public school in Raleigh, also went to private school for high school education. Also went to University of North Carolina at Chapel Hill and after Chapel Hill went to Duke law school.
S: Everybody that we’ve talked to says you are deeply interested in political philosophy and the underlying philosophies and theories in politics. When did you start having an interest in politics?
P: Probably primarily in high school, I had a really good history teacher and he actually started teaching John Locke in high school. So I started reading Two Treatise of Government when I was a junior. I didn’t understand the introductory explanations by the college professors but I could read Locke’s own writing and that gave me a fairly good idea, so when I went to UNC my father wanted me to be a business major but instead I was political science major so I got an honors degree in political science. And when I went to law school it was in part because that in ways applied political theory and had excellence teachers as well like Jurisprudence.
S: Your father did own a business, a chain of stores that he took over from his father. He wanted you to go into business. What was your sense of business? Was it no way or was it just more interested in politics?
P: Not so much interested in politics but I was interested in law and again, political science formed the background but I was very interested in being my own person, self-supporting and a law degree offered that best opportunity. And indeed when it came time to graduate Carolina, my father wanted me to go to MBA school, but I chose to go to law school, and my father is a big Tarheel fan and I went to Duke no less.
But I do want to say this because there has been some comments about this but my father always very supportive of all his children. He was very clear about what he thought was best but he was very supportive of us making our own decision. And I did go into law practice for a couple years here in Raleigh. And then when I got the opportunity to work on the Jim Martin campaign in 1984, it was the first time I really got fully involved in politics, took a leave of absence from my law firm to do that. And then when Governor Martin became governor, I was his special counselor for state boards, commissions and agencies back in 1985. That was a mid-level position but it was a great opportunity to learn and listen to things and really learn a lot.
S: Jim Martin of course a Republican governor, the last Republican governor before the current governor pat McCrory. He was a guy who believed in lower taxes, what did you learn from him and what did you learn about government when you actually got the job?
P: Well first of all I learned you can be in politics and serve in elected official and be an absolutely moral, upright gentleman or women. I grew up during Watergate and I was not a fan of Richard Nixon by the way and Watergate just absolutely horrified me, that was one reason why I didn’t join the Republican Party when I turned 18. But Jim Martin showed that you can be honest, committed and have good government. That was one of the first positives. Jim Martin was a pragmatist, he was a conservative but he was a pragmatist. He was a Republican governor with a Democratic majority legislature. So I learned very early on you had to work with the majority, and learned that you don’t have to compromise your principles but you have to work to achieve common goals.
S: I got to take you back a couple steps because when you were studying political science at UNC-Chapel Hill, you helped found the libertarian party which I understand you ran away screaming from after not too long, tell us about that.
P: It lasted a couple months. Again in 1972 Republican party was just absolutely torn apart by Watergate and back in 1974 and ’76 there were a lot of people who were thinking the Republican Party wouldn’t survive. And so even people like conservative senator Jesse Helms were looking at the possibility of a third party. So when I was a college sophomore, I was looking at what the alternative possibility were and I was reading this magazine called Reason Magazine and heard there was going to be this Libertarian meeting in Raleigh, so I went there with a couple of my friends so because I came with 3 or 4 people I was considered a “leader” even though I was 20 years old at the time. So yes, I was a founding member of the Libertarian Party at that meeting and I stayed with them for about 4 or 5 months through May of that year and the more I saw about it I saw that the people were well-intentioned but not very practical so I terminated my relationship.
S: Well it wasn’t very practical to be a member of the Republican Party back then. Jesse Helms successful and Jim Martin became governor, and Democrats became famously conservative in some ways. Why not become a Democrat in the state of North Carolina? Why did you decide to become a Republican?
P: Well a lot of people may not realize it bur during the ‘60s and ‘70s and really for most of the 20th century, if you wanted to be successful in North Carolina, you needed to be a registered Democrat. Culturally we were a Democratic state, politically we were a Democratic state. If you wanted to be a lawyer of any hope of being a judge, you had to be a Democrat. My father was actually a Democrat and my mom was a Democrat as well. But while I was horrified by the Republican Party of Richard Nixon Watergate, I saw early on that the Democratic Party, especially the national level, was growing government, was losing respect of rights to the individual and I did not see that as being sustainable in the long term, I thought it would consume itself. So very early on I was small-seeded conservative in the libertarian tradition or in the classic liberal tradition as I would say and there I found that the Republican Party was more closer to that and far more open to that than the Dem party was. So yes, in a way I have always been on the side of the underdog because Republicans were the underdog for 140 until they jumped to the majority in 2010.
S: A Minority party perhaps but now people would say that Republican Party represents very few and very influential people who could hardly be called underdogs.
P: I completely disagree with characterization. The Republican Party in 2010 won 59% of the vote in North Carolina and had 41% from Democratic Party. That was a vote of 1.4 million people versus 900,000 from the Democrats. You look at the history of the Democratic Party; they have had large major donors, probably more so than Republicans. You look at the most money spent on a campaign in North Carolina that was by John Edwards who spent 6 million for his US Senate campaign in 1998, and then Erskine Bowles who ran for Senate, he spent 6 million dollars. So you look for the big donors trying to influence elections, you have to look at the Democratic Party, not the Republican Party in North Carolina.
S: You mention 2010; the Republican-controlled legislature began the process of redistricting. You were co-counsel of the leadership but let’s talk about the amount of money spent in that because in that race there were 3 organizations that you were a part of and donated to that represented 72% of the outside spending on legislative races in the state of North Carolina came from 3 organizations that you either sat on the board of donated to. Art, you influenced the top 3 in that race.
P: In 2010, you ought to start with the numbers. The Democratic Party spent 15.3 million dollars according to the North Carolina Board of Elections, the Democratic Party and its legislative candidates. That contrasted to Republic Party who only spent 11.6 million dollars. So the Democrats were outspending Republicans. Now you add on to what you are talking about, the independent expenditures. There were independent expenditure groups supporting the Democratic groups as well as the conservative groups who were supporting the Republican groups or characterized as supporting them. When you add in the independent expenditures, the Democratic Party plus independent expenditures by progressive organizations, the NCAE, the union affiliates by the teachers, they spent 17.5-something-million dollars whereas for the conservatives and Republicans spent 13.6 million dollars. So the most money was spent by the Democratic Party and the pro-union progressive organizations compared to the pro-business and conservative groups combined. So it was competitive election.
S: Real Jobs NC, Civitas Action, Americans for Prosperity, you helped start them all. Counted those are 3 groups. 72% of the independent spending in that race came from organizations that you sat on or helped found. So we can talk about the numbers of millions of dollars but three jobs on independent spending on a crucial race. So I will say that is wisely spent because it is on legislative races that would then become redistricting races so the Democrats may not have spend so smart. 3 groups, 72% of the independent spending, Art Pope that was you.
P: and the Reynolds Foundation that finances Blue NC, Democracy NC spent about 2 million dollars on civic engagement, voter registration, and get out the vote. Reynolds Foundation controlled by Leslie Winner, a former Democratic state senator just as I’m a former Republican House member. But you don’t hear about their spending.
S: Well this spending went directly into campaigns that I am talking about, not to outside organizations.
P: No they did not go directly into campaigns, they went into lectionary communications and issue advocacy which is informing the public, informing the voters about how legislatures voted when they were in the legislature. It was not expressed advocacy, it did not go directly to campaigns, it would be illegal for them to go directly to campaigns so I respectfully disagree to your characterization.
S: We’ll come back and continue to talk about how that money was spent when we continue our conversation with Art Pope on the State of Things…
Alright, before the break Art we were talking about how that money was spent in 2010, just to go through it again- Real Jobs NC, 1.5 million dollars in that race, Civitas Action and Americans for Prosperity, 300,000 or something like that, close to 400,000. Top 3 independent groups spending on that race. And you say it was education campaigns, but you are soft pedaling it, when you are talking about somebody’s voting record, you are really telling voters who they should vote her, this become a kind of election or a campaign ad when are directly targeting somebody’s voting record whose running for elections. Isn’t that a campaign ad?
P: Is it not a campaign ad when it is not expressively electing or defeating a candidate. It is about the First Amendment just like your radio show, I’m sure you talked about candidates during the 2010 elections, did you ever interview about their campaign going on during 2010. Well you are broadcasting a radio show about the elections and that broadcast may have influenced people about how they voted. So just as UNC-Chapel Hill radio is a public broadcasting and not to mention the News & Observer, WRAL TV, they can spend money broadcasters to voters. They can even endorse a candidate outright, the News & Observer does. That is communicating with the public, that is part of our civic life. That is Americans for Prosperity do as well.
S: When you have that money and you spend it on, let’s see, targeted races 27 and 20 of them were successful. 20 were won by Republicans in 27 races that were targeted. So that campaign designed to educate the voters, resulted in 20 victories for Republicans and that was money you spent on that. I know you sometimes takes umbrage when people accuse you of spending your money and influence to influence the political process unduly. This is what they mean Art, this is what they are talking about.
P: Frank, first let’s be precise. When you say “your money,” I did not spend 1.5 million dollars or 300,000 dollars. Groups I was associated with and glad to support spent that money just as a teacher affiliated with the NCAE spent hundreds of thousands of dollars on the election and just as the McClatchy Corporation threw its publication in the News & Observer. Gosh knows how much it costs to publish a newspaper with news coverage but also endorsement of there. So lets be precise, yeah I do take umbrage when you imply that I spent a million or millions of dollars when I did not. Yes I am a member of the Republican Party but let’s put it in context. You want to ignore this, the Democratic Party and all those affiliated with and tied to them spend 15.3 million dollars on legislative races to 11.6 million dollars for Republicans. And again, the progressive groups when you combine that, Democrats still outspent the Republican conservative groups. But despite Democratic organizations, progressive and pro-union organizations spending the most money, they didn’t buy the money, they didn’t buy the election with that money. Instead the voters are well-informed by a wide variety of sources including mailers, TV ads, newspaper and your radio show. They chose overwhelmingly by 59% to vote for Republicans. They voted for Republicans because of failed policy in the Democratic Party, because of corruption in the Democratic Party, which the primary example is Jim Black. They were ready for a change. That is a they way democracies work.
S: Jim Black, by the way, was a Democratic House Speaker who was jailed for taking bribes. That is who you were referring to and you are absolutely right. Let’s talk about the organizations you founded, Real Jobs NC like you said, that spent 1.5 million dollars on that race and Variety Wholesalers, the corporation you are now CEO of, a family corporation, gave 200,365 to the Republican sate leadership committee that set up the spending 1.5 to Real Jobs NC. Why did you set up Real Jobs and Americans for Prosperity, what was your goal is setting those up in North Carolina?
P: First of all, thank you for giving me the opportunity to correct the record. I did not found Real Jobs NC, it was founded by other individuals. I was one of the early board members, my company did contribute to it, in fact my company’s contributions were about 200,000 dollars. But they spent a total of about 1.7 million and sometimes people attribute the entire 1.7 as it came from me which is not correct. Again, Real Jobs NC as its name says wanted to point out how we create real jobs, how do we alleviate poverty, not by simply having handouts for temporary help but have a state where we can have permanent job growth, less regulation, lower taxes so people can keep more of their own hard earned paycheck so they can start their own business and create jobs. So that’s what Real Jobs was about, and Americans for Prosperity has been a long-term grassroots group. I can’t remember the exact number back in 2010 but I think it was well over 100,000 and it gives people of all parties, whether Republican, Democrat or Independent to come together and support their issues. So it is expressively nonpartisan and over half its members were independent or Democrat, not Republicans.
S: You started your terms in the legislature, four in total in 1988 and eventually elected to the General Assembly. The Republicans were in a minority and you were elected from a district that majority Democrat. Tell us about your victory and your time in the legislature when it was dominated by Democrats.
P: After serving Martin in 1985 I did go into business in 1986 and the legislature again has been Democratic since Reconstruction. I wanted to serve and I heard Senator Floyd McKissick speak about why he believed in public service as a calling because he wanted to make our government better, more effective and better serve the people. I shared the same goals as the Democrat candidates do. We may disagree on how to do that but I did run for House Distrcit 61 against a four-term incumbent Democrat in a Democrat-leaning district and I ran on issues, I hadn’t ran on my qualifications as a lawyer, business person and somebody who had served Governor Martin but on the issues. If I had ran on party affiliation then the Democrat candidate who had, he was an incumbent, and the Democrats out-numbered the Republicans 2-1. I won my first office with support from Democrats and I always ran in a Democrat leaning district. I have looked to Democrats as well Independents and Republicans, and just again my parents were Democrats and I grew up in a Democratic family
S: What was it like to work in that legislature; again you are working in the minority with a long history of Democrats in control. Was it frustrating? How difficult was it to be a minority party trying to get things done.
P: It was not frustrating, it was more challenging. In fact that year in 1989 Republicans formed a coalition with dissident Democrats and elected Joe Mavretic as a coalition speaker, overturning Liston Ramsey. Ramsey had been Speaker for four terms and was ruling the legislature with an iron fist, not allowing open meeting and true democratic process so we formed that coalition. So again one of the first things I learned with Governor Martin was working with a Democrat majority. As a member of a Republican minority party, forming a coalition with dissident Democrat majority, but there even after that you work on one-on-one basis with legislatures of both parties. You try and solve policies that actually solve problems and get bipartisan support for it and also you don’t care who gets credit. Republicans used to complain if they had a good bill it would never see the light of day until a Democrat co-sponsored it on a different bill. That didn’t matter to me, if good legislation got passed then it got passed. And in my first two terms I would pass the first open meetings law that applied to the General Assembly, but I did that Democratic representative George Miller had a similar bill and we combine dour bills and he supported it and got enacted to law. I was actually one of the authors of what he call “the rainy day fund” in 1991. That’s working with a senator Goldsten from eastern North Carolina, a Democratic senator who had it on the Senate side. When he couldn’t get any support on the Senate side on the senate side then I make some progress on the House and say “Okay, can’t do it first” then make the Democrats move it through. My actual bill failed but it got included in an amendment to the overall state budget. That is how you make legislation work. Whether you are the minority or the majority.
S: You actually got high ratings as a legislature in your first term for the amount of legislation you got passed as a minority legislature, rated pretty effectively by the Press Corps that year. You ran for Lieutenant Governor in 1991, you lost that race and then you sought the Chief of Staff for then Speaker Brubaker, again there unsuccessful.
P: Frank that is not true. I did not seek a job from the Speaker-nominee at the time Harold Brubaker. Harold Brubaker I served with in the House at the time approached me with a job, we had discussions and the job he ended up proposing I turned down, so again appreciate the opportunity to correct the record.
S: Well we will check that source but that’s what we’ve got here so I will stand by that for the moment.
P: What is your source? I know there was a story put out by Richard Morgan who is not exactly a big fan of mine but Richard Morgan was not there in that conversation.
S: Well what I am trying to get at is what you learned from all of that. There are these discussions going around now to get some levels of control within the Republican party to move up to some leadership in the Republican Party. You were nominated for Lt. Governor but lost that race. Where did you think your political career was going at that point?
P: You take a step back and again I was a freshman in 1989-90 session. By the 1991-92 session, my second-term I was elected Republican Join Caucus leader by members of the House and Senate, so I was one of the leaders in the Republican caucus House and Senate that term. I ran for Lt. Governor and won a three-way Republican primary by a 10% margin and ran against two more experienced Republican legislators. 1992 was not a good year, I got the same vote as our candidate and president that year so that’s the way elections work, they get decided that way. So I was trying to balance back then and trying to balance now being involved in public service, and politics is about being public service, trying to raise a family and be in business. I have done a constant balancing act since then and when I ran for Lt. Governor it was also a decision to do it full-time or very little part time, because I just could not continue in the legislature with my family and business at the same time so from 92 to 1999 I stayed in private life. In 1999, Chuck Neely who held my old legislative seat stepped down and decided to run for Governor. So I was asked to serve again which I did run again in 2000. 2002 the session went from April to November and I just could not keep up that pace even with living in Raleigh, raising a family and taking care of the family business.
S: Tell us about founding the John Locke Foundation, the conservative think-tank you created in 1990. What was the genesis of that for you?
P: At first I thought about in 1985 when I was special council to Governor Martin. Governor Martin was actually the second Republican after Jim Holshouser, but there really weren’t any good policy proposals, no sources of good information or knowledge, research for him to build am agenda as an alternative to the status-quo Democratic agenda. There was a group already in North Carolina called North Carolina Center for Public Policy funded by the Reynolds Foundation. And they did some excellent work but no matter what the issue, you could count on the solution being “regulate more, spend more and raise taxes to pay for spending and regulation.” So there was no alternative, no balance to the North Carolina Center for Public Policy. In fact Governor Martin had us go to Tennessee to work with Lamar Alexander for education reform proposals, he had only been there for two years longer than we had as Republican governor in Tennessee. So we looked at national models like the Heritage Foundation I thought would help North Carolina’s public policy debate to have an alternative voice and so when I was in position to do something with that with the Pope Foundation providing seed money, and so we start the John Locke Foundation in 1990.
We talked about that race in 2010 and a lot of ways to look at how that money was spent but the important thing is Republicans did gain control and it was a crucial year when it came to redistricting and now you have heard a lot of complaints about the gerrymandering that is done every 10 years by every party in power has really created some safe districts for Republicans and has tipped the balance. What do you say to the charges particularly when we look at the number of votes cast for Democratic national representatives in the 2012 election far exceeding those for Republicans and yet the Republicans contained control of the House because of redistricting. Has this become a problem, redistricting?
P: I have always been opposed to gerrymandering or redistricting, that is why in 1989 I co-sponsored legislation with Skip Stamm for a nonpartisan redistricting commission before we knew we would have a majority for 1991 redistricting. 1999 I did the same thing again, I introduced nonpartisan redistricting commission before we knew it was going to have the majority. And I’ve been involved in litigation, including the Shaw v. Reno litigation that went up to the United State Supreme Court that upheld the original 12th district that went from Gastonia back then to Greensboro and Durham was a unconstitutional ratio of gerrymandering. So I have always been opposed to that. Likewise, in 2001 I was one of the plaintiffs in the Stephenson litigation, which said instead of allowing legislatives to draw lines wherever they wanted to and gerrymander them, you had to follow the constitution what was called the “Whole County” provision, not unnecessarily split counties as long as you were in compliance with the federal law including “One Person, One Vote” and the Voting Rights Act. So I have a long record opposing that because in 2010, when Republicans won majority of the vote. Those were districts drawn by the Democratic legislature
S: The 2012 election
P: Okay, the 2012 legislative election I believe Republicans still got the majority of the votes with the majority of the seats. Those districts were gerrymandered (?) (muffled)
There are two things. There are partly drawn in compliance of the Voting Rights Act. This is very complex legal issues and am I going to give you a short summary. Under the Voting Rights Act you cannot break up concentrations of minority voters in order to submerge them into surrounding majority so they cannot have effective representation. And there is a theory called retrogression as well, once a majority minority district creates an African- American district you cannot retrogress and reduce it. So under the Voting Rights Act we have the 12th District and the 1st District which are a majority African-American and the simple fact in North Carolina means majority of Democratic voters are concentrated in those districts. When you do that the consequences of surrounding districts to tend to be less African-American and more Republican-leaning? That is part of it, and then there is some old-fashion gerrymandering absolutely.
S: But you served as counsel to the legislative leadership that was drawing those maps out of the 2012 elections. You’re opposed to gerrymandering, you say its not the right thing to do but you are Council to the groups doing this, what did you tell them?
P: You know very well as an attorney, an attorney-client privilege I cannot speak about a bias I gave to clients. I will say this- what I did not do was give any advice on the congressional redistricting and my legal advice with in compliance to the law.
S: Tim Heffler was hired to do that. This all came out of Project Red Map of the Republican State Leadership committee, which spent a lot of money on that 2010 election. A project designed to get control of those maps in 2010. Red Map was the project, Tim Heffler was the map drawer. And you can go into two directions with this, you can either draw minorities apart and disperse them or pack them all into one district and then dilute their voting power. Tim Heffler says in an email, “The plan is to incorporate all significant concentrations of minorities’ voters in the Northeast in the 1st District.” That’s North Carolina, and that sounds like an attempt to dilute minority votes, to get them all in one district and if they are all voting for one minority candidate, let’s get them out of other districts.
P: I cannot speak for Mr. Heffler and what he was saying then but I can speak for myself and I will say again to the Shaw v Reno case, that’s where I was the lead plaintiff intervener, and there you saw that absurd 12th District where minority voters were spread all over the state in a very contorted fashion where added to one district and sometimes the district is as wide as one lane going up I-85 going up the Piedmont. That is an unconstitutional ratio of gerrymandering because it is not in compliance with the Voting Rights Act, it was done to create a minority district, an African-American majority district that didn’t hurt adjoining Democrats. In fact, the Democrat for redistricting in 1991 and 2001 were overturned not pre-clear by the Justice Department because they were not in compliance with the Voting Rights Act and they were procured to protect white incumbents, Democrat incumbents. Those were plans I opposed, so the 2011 redistricting plans from Congress and the legislature drawn by Republicans were the first plans pre-cleared by the Justice Department right out of the box and didn’t have to go back and re-draw it, unlike the plans drawn by the Democrats in 1991 and 2001. So the Republicans do have a far better record of having less racial gerrymandering. But I’ll repeat my own record. Shaw v Reno, a plan to intervene on gerrymandering, Stephenson litigation to limit both parties, either parties from drawing districts across party lines to benefit their members and again my record showing for nonpartisan redistricting commission which I still support.
S: I’m talking with Budget Director Art Pop and we haven’t really talked about the budget yet so let’s do that. You are going to have to cross the street pretty soon and get ready to work with the short session on making adjustments but let’s talk about the last budget that was passed. There has been a lot of criticism that the state is actually fallen short. If you look at spending in pre-2008 levels the numbers keep going up, we still haven’t caught up with the pre-recession numbers. Instead of going straight to the budge, I will go to the revenue side. The state decided to cut taxes, especially corporate taxes and individual income taxes at a time when it could be rebuilding some of that spending done earlier. Why cut corporate taxes, why cut individual taxes at a time when the state could use that money to replenish what was lost?
P: It was not simply a tax cut, it was tax reform. Governors Hunt, Easley and Perdue had all been talking about the need for tax reform, our current tax system, especially the corporate and income tax, were basically antiquated systems dating back to the 1930s and they had failed to do so. How you tax does affect the economic growth, it restricts slow economic growth or speed it up. So we did pass historic economic tax reform and the key part of it was lowering and flattening North Carolina’s personal income tax rate to a single 5.8% but also increase the individual exemption to make sure even those at the lower levels benefited from it as well. Likewise, those on the corporate tax was reduced several percentage points over time. So it lowered the taxes and broadened the tax base to make it more uniform, again uniform and simplicity is one of the goals. Make the sales tax more uniform including collecting a sales tax on goods- for example not on the service contract that went with the stereo you bought or the TV. So it is both broadening and reform. The goal was to also make taxes simpler and stimulate job growth in North Carolina, and we think it is affecting the state’s decreasing unemployment rate. It is absolute true though that for a variety of reasons, we have about 450 million dollars of less revenue this year than originally forecasted by the economists. Part of that about is not identified to tax reform, but because in 2013 income collections were lower. Tax rates make a difference and when the federal government increased taxes for 2013, people realized their incomes tax rates compared to 2012 rates were lowered- dividends, capital gain, bonus payments- anything they could to maximize their payments in 2012 was minimized in 2013. So that cost us to collect 220 million dollars less than we thought. Likewise we had forecast for earning growth were lowered this year due to the economy, not the tax collection. And part of it is the tax collections, but the good news is that the new personal income tax came with a new withholding table. The first time we’ve had a new withholding table since 1989. And because working families are paying less in taxes in that new withholding rate, the amount withheld from state employees tax increases from state employee…. The amount withheld from state employee payroll is about 20% lower and that hurts the state of North Carolina but that helps their family budgets.
S: There have been a lot of analyses of course and you can work the numbers many ways but there are very few analyses that I saw of the individual tax that changes in reform that didn’t show benefits to the wealthiest North Carolinians and few if any, almost no benefit to the working class and lower. So it may show up on their withholding but the ultimately most of the analyses that I saw showed most benefits going to the wealthiest. How does that help the state of North Carolina?
P: Again this all about numbers but most of the analyses I think there is that one analysis put out by the North Carolina Justice Center citing a Washington DC group with the absurd claim that even when you lower everyone’s rates, everyone’s personal exemption that “80% of North Carolinians on average or some such were going to be paying more in taxes.” Even the Washington Post debunked that number and said for campaigns to use that number is just wrong, its not true. So with all due respect, everyone is saying…..
S: I did not say that….
P: In North Carolina we had a graduate income tax so your 7.75% on $100,000, then you’re going to paying more in taxes than somebody who is paying 6% on $30,000 and honestly paying more taxes than somebody who is paying no taxes. So when you lower the rates, those who pay more in taxes benefit more than those who pay no taxes, that is obvious on income tax.
S: Let’s talk about corporate tax as well because again the question is, “Who does it benefit and who could be using it otherwise?” Now let’s talk about the budget, effectively changes in the state education’s budget while nominally more dollars are going in, it has not kept pace with increased enrollment and has not kept pace with enrollment and inflation. So when you look at that, don’t you say, “Let’s take in a little bit more money from those who are able to pay it and spend it on this particular resource that has no way of making money on itself?” This is not a money-making proposition, we cannot privatize education because there is no way to monetize and commodify it so state has to spend on that. Wouldn’t it be good to tax a little higher and replenish some of what was lost in the Recession?
P: Well I appreciate you recognizing at least nominally as you say but in fact spending on education has in fact gone up in North Carolina. In 2008-2009 total spending on general education 21.2 billion dollars and it was actually under Governor Perdue and the Democrats that the spending got cut to 18.9 billion dollars in 2010-2011. And the reason was like you said, the Great Recession, but it steadily increased in 2010-2011 under Republican legislature and Republican governor so that the authorized budget for all of general education is 20 billion, 9 hundred and 98 million. That is a good increase, its about 2 billion increase compared to 2010-2011. Have we made up all the way? No, but we have made progress, we have increased spending on education.
S: Now we will look at corporate tax. There is something that reduction in corporate income tax is going to cost the state according to the General Assembly’s figures and their own analysis somewhere around 217 million dollars. That’s 217 million dollars that could have been put into the education budget. North Carolina consistently over the past ten years is rated #1, 2 or 3 and sometimes 5 in overall business environment. All the while, rating somewhere like 45th in tax. So clearly if you have a good business environment and you hate the taxes, taxes can’t be the biggest factor in your decision as a corporation.. they are moving here. Why cut their taxes when they are happy here and they are eager to do business here already?
P: First of all, corporate taxes are down to where they would have been, but the corporate tax is actually up this year so we actually have more corporate taxes this year than we did last year. That would have been more if the rate had stayed higher. Second, I absolutely agree with you that taxes and incentives are not the sole reason why a business relocates. The primary they locate is proximity to their suppliers, proximity to customers and above all, a skilled and educated workforce. So education is key to a business environment, I think you and I would agree there. However, at the margin, higher tax rates will keep more business from moving to North Carolina but that is not the main reason for tax reform. Existing business in North Carolina, when their taxes are lowered they have more after tax income that gives them more money to invest in their own business and expand and create jobs. Unlike tax incentives, or grant incentives from recruiting a major business from out-of-state to in-state, lower taxes allow all employers in North Carolina- when you say business, you mean employers- all employers keep more hard-earned money to invest and create jobs and yes, spend and create more jobs through spending.
S: But they don’t just create the jobs because they have the money right, there has to be a market. In other words, there has to be demand for my product and if there is a demand then I have to put more workers on or even invest more in plant and equipment. If there is no demand for the product then I am not putting workers on even if you did cut my taxes, then what I am going to do with that is invest it and I am probably not going to invest in North Carolina because the highest return is probably somewhere in China where environmental standards are lower and wages are lower. So a lot of that savings doesn’t come back to North Carolina, it gets invested and probably not into North Carolina unless we’re willing to degrade our environmental standards or work standards to pay a higher return.
P: And when people look at an investment they are looking at the after-tax return, and the higher the taxes in North Carolina the less attractive it is to keep your own money in North Carolina or invest in North Carolina, so we agree that you need direct spending to create jobs. But by the way the people who are expanding jobs often do get outside investors to borrow money. So again they need to have a good return on their investment, a business model that allows them to grow and succeed and higher more people, employ more people.
S: This becomes to me a very interesting political question and a sense of priorities and where they are. If you’re in a place where they cut spending, you’ve written a budget in 2013 that cuts teacher’s aids, is going to increase class size, it is going to degrade student-teacher ratios and they are going to be higher. That is going to mean teachers are going to be laid off even if they get the increase, so quality of education by those standards is going have to fall in the short term. Why is it not a priority to keep taxes where they are, keep that 217 million dollars plus whatever was added because of improvement in the business environment and put it in education?
P: First of all, education is a priority and I disagree with you the quality of education was hurt. Compared to the low spending on education and teachers laid off under Governor Perdue’s administration and Democrat legislature. Republican legislature and Governor McCrory have increased the number of teachers hired.
S: But you did acknowledge that those lay-offs and those cuts were a direct result of the Recession.
P: Of course I do.
S: Okay, so there wasn’t a heck of a big choice there and so when the Recession is over, business are doing well and….
P: This is one of the worst recoveries we have ever had and taxes were raised during the Recession as well. If you are opposed to regressive sales tax, look at all the times they were raised under Democrats and one of the first things Republicans did in the 2011 legislative session was not lower the personal income, not lower the corporate income tax but not continue the regressive sales tax put there by Governor Perdue and the Democrats. So that helps the economy and that helps everyone. It is only after the sales tax was lowered that they then looked at helping the North Carolina economy, helping families by lowering the personal income tax rate and employers because a lot of employers pay that personal rate as well as the corporate tax rate. And on education, the overall spending on education has increased but its not merely how much you spend, its also how well you spend the money and there is a lot of debate going on whether teacher’s assistances, special grades like 2nd and 3rd grade vs kindergarten and 1st grade, asking how much they contribute to education expenditure. In fact, the General Assembly and the governor’s approach was to leave that decision to the local school district but you can’t sit in the legislature in Raleigh and say I know exactly how much should be spent on teacher assistance versus actual teachers in Guilford county versus North Hampton county or even in the same schools in Durham county. So that responsibility, that choice left to the local level.
S: The privilege tax is on the verge of being eliminated. That is a tax that business pay in localities and municipalities for the “privilege” of doing business. It is wildly disparate and a lot of folks think it needs to be reformed but what happened in this legislative session was that it was eliminated. Again, from a free market standpoint, shouldn’t the market decide if that tax is too high, if that business didn’t like that privilege tax in Charlotte then leave Charlotte. And if they stay, didn’t they tell you that it wasn’t too high.
P: You can argue it both ways from a conservative free market perspective, and in fact we hear more at the national level we have a federal system and so states compete on tax policy. So North Carolina may have a higher income tax than South Carolina but we also have a lower property tax in South Carolina so you can have the states compete for it. That same argument can made among municipalities. On the other hand, you can argue for good government, for conservative principles under the uniform taxation and that the laws should be the same and everybody taxed the same throughout the state and the privilege tax taxed municipalities different from the next so it was better to have a uniform taxation on that. Also, municipalities benefited from the tax reform and were getting more sales tax collections after tax reform than beforehand, so that was getting ready to offset the loss of revenue from making the privilege tax more uniform and Governor McCrory insisted that there be a commitment from the legislature to revisit the issue, there is not a sunset until June 30th, 2015. So there is a commitment by everyone involved, the legal municipalities on behalf of the municipalities, the legislature and definitely by Governor McCrory to work out what is the best way to have local revenue raised.
S: It does seem though there is a bit of an inconsistency there. If you say one size fits all doesn’t work with every school in Raleigh, then why does one size fits all work for every municipality? If you’re in Charlotte, there is a very different business environment than in Durham, those are very different places and if you have moved to Greensboro then you’re in a different place again. Shouldn’t that be up to them and ultimately the market? If that tax is too high then I am leaving Greensboro and if I chase out too many businesses I am getting rid of the mayor and the city council. It seems to me the market had an answer to that Raleigh might not have been in the best position to make.
P: That is an appropriate argument to make, its been made and I will say that one difference is that unlike the states, municipalities are created by the state, their tax authority comes from the state and because the wide disparity in some would even argue abuse of the privilege tax, they thought it best to go back to uniform tax on that law with everyone on that taxation.