Carolina Journal Weekly Report

November 25, 2002

In This Issue:
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Feature 1 - A New Twist on Taxes

Feature 2 - Flying High in N.C.

Feature 3 - Professor Doubts Incentives
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Feature 1
A New Twist on Taxes
Governor's commission proposes sweeping changes

An advisory commission to Gov. Mike Easley on Tuesday tentatively proposed a far-reaching overhaul of North Carolina’s tax code that would impose a sales tax on services, broaden the tax base, and lower overall rates.

Among other changes in the state’s tax structure, the commission recommended that the state restrict future tax cuts to onetime tax rebates that could be withheld during budget crises; allow local governments to levy certain taxes without specific legislative approval; and transfer Medicaid program costs from counties to the state government, to be paid for by extending a half-cent sales tax that was scheduled to expire June 30.

The panel also proposed in its draft that the state remove all caps on the sales tax, simplify the state income tax by eliminating most adjustments to federal definitions of income, and eliminate or reduce tax credits used to attract businesses to the state.

The commission listed its guiding principles of ensuring that the revenue system be simple, efficient, equitable, competitive with other states, and consistent in providing revenue.

Dr. Michael L. Walden, a North Carolina State University economist and an adjunct scholar with the John Locke Foundation, said he agrees with the panel’s overall goals. But he said he’s concerned that one part of the equation might not pan out. “What worries people is that they might broaden the base without lowering the rate, leaving people with higher taxes overall,” he said.

The commission focused primarily on the sales tax, because of sagging state revenues during recessions. Last year, the tax generated more than $3.7 billion in revenue, yet fell 6 percent short of projections. General fund revenues lagged by $500 million, or 4 percent short, in fiscal 2000-01 and $1.55 billion, or 11 percent short, in fiscal 2001-02.

The services sector offers a dependable source of untapped revenue, the report said, because the state’s economy is growing more dependent on services, thereby diminishing the growth in the sales tax base, which is based primarily on goods. The Department of Revenue found that the possible tax base of services would nearly double the existing sales-tax base of goods and utilities. As such, the report said, the sales tax rate could be reduced from the current 6.5 percent to as little as 1.75 percent if all goods and services were taxed at that rate.

Easley created the 16-member commission in March and named Tom Ross, executive director of the Z. Smith Reynolds Foundations, as its chairman. The commission has met monthly since then. The panel expects to release its final report in early December.

Ahead of the Curve

• Much of the discussion last week about who will be elected House speaker next session centered on former Republican, turned Reform Party, back to Republican Rep. Steve Wood from High Point. In his Daily Journal column for Carolina Journal online Nov. 18, John Locke Foundation president John Hood considered the possibility that current Democratic House Speaker Jim Black might pick off Republicans to support him, despite a 61-59 GOP majority. Hood discussed possible Republican defectors, wondering about Wood, “Was he recruited by Black himself to clinch a close leadership fight?”

In its editorial Nov. 20 the High Point Enterprise intensified the speculation, invoking Hood’s “assertion” that Wood may have been recruited by Black. One reason the idea is being bandied about is that Wood voted for Black as speaker in 1999, which resulted in his removal from the GOP caucus. He later ran for his seat with the Reform Party and lost.

Interviewed by CJ last week, Wood was asked whether Black requested his support as speaker for the upcoming session. “That’s not true,” Wood said.

Leo Daughtry won a caucus vote for speaker on Nov. 17, but Republicans are clearly split over his leadership. Wood hasn’t decided who he will support, but said he isn’t part of the caucus. “[Daughtry] presided over my defrockment, when they took that infamous vote to kick me out,” Wood said. “If it takes a vote to kick someone out, it seems it would take a vote to kick ’em back in.”

Feature 2
Flying High in N.C.
Airports busy despite setbacks elsewhere

The airline industry continues to be caught in a severe financial downdraft, as the effects of a weak economy and the aftermath of Sept. 11 send carriers to a second year of heavy losses. These industry wide effects have also been felt locally — US Airways has laid off more than 1,000 employees in Charlotte and Raleigh-Durham-based Midway Airline’s suspended operations in July cost additional jobs. Yet despite setbacks, North Carolina’s main airports remain attractive — and busy — places to fly from.

While fewer people are flying in general, the reductions are especially large on short-haul flights. A recent AAA survey shows that 22 percent fewer people are flying on routes of 200 to 400 miles. With increased security and the delays that might — or might not — be caused by it, time, convenience and cost factors have driven many people to other forms of transportation or not traveling at all.

Compared to the same month two years earlier, traffic in September on United Airlines was off 15.4 percent, off 11.4 percent at Delta, down 12 percent at Northwest, and down 14.6 percent at Continental. Traffic at Southwest Airlines was down 1.4 percent in September 2002 compared to September 2000, but unlike other airlines, Southwest has continued to add capacity. It’s load factor, the percentage of seats it filled, fell 8.9 percentage points over the two-year period to 56.8 percent in September 2002 .

The U.S. airline industry lost $8 billion in 2001 and is expected to lose an additional $8 billion this year. Best-case scenarios have the industry breaking even in 2004 if the economy recovers.

Current market conditions have hit no major airline harder than US Airways. The carrier, which has a major hub and heavy maintenance facilities in Charlotte, lost a billion dollars last year even before September 11. With the shortest average flight length of the six large hub-based airlines (Southwest does not have hubs per se) and a strong presence in the Northeast, US Airways has experienced a disproportionately large reduction in demand. Compared to September 2000, the airline’s traffic this past September was down 26.4 percent. The carrier is operating under Chapter 11 bankruptcy protection.

Despite the generally difficult market conditions, Charlotte/Douglas International Airport (CLT) continues to do remarkably well. The largest US Airways hub in terms of flights, it also has been the least-affected by the airline’s troubles. Given that US Airways has more than 90 percent of the flights out of Charlotte, total airport figures may be taken as a measure of the hub’s vitality. The number of boarding planes in Charlotte (originating or connecting) was 1,091,674 in August 2002, compared to 1,118,850 in August 2001, and 1,026,999 in August 2000. On a percentage basis, enplanements at Charlotte/Douglas were up 6.3 percent in August 2002, compared to August 2000.

Raleigh-Durham International, like Charlotte/Douglas, has attracted new routes even in the wake of September 11. America West began service to Raleigh from Phoenix and Las Vegas in May.

American Airlines has announced plans to begin nonstop service to San Juan, Puerto Rico this month and to San Jose, Calif., in March. American Airlines has also picked up most of the market share that Midway once held. Between the mainline carrier and its American Eagle commuter division, boardings in Raleigh grew from 68,444 in August 2001 (including passengers on TWA, which American acquired) to 96,005 this past August.

Capital Quotes

“Why should Currituck County be above the law? Why should Congressman Walter Jones think he is above the law? They’re nothing more than crooks.”

— Tim Harrison, president of the National Lighthouse Foundation, commenting to the Daily Advance of Elizabeth City on a provision inserted by Rep. Walter Jones, R-3rd, in a bill that would transfer the Currituck Beach lighthouse to Currituck County. Under the National Historic Lighthouse Preservation Act those interested in obtaining lighthouses file applications, with the party deemed best suited to maintaining the lighthouse being awarded control. Outer Banks Conservation Inc., which restored the lighthouse and operates it as a tourist attraction, is also seeking control.

“If we are making the decision on how to spend the funds, we should also have the authority to raise the funds. If the voters don’t like it, they can vote us out.”

—Darlene Garrett, Guilford County school board member, as quoted by the High Point Enterprise suggesting that the board be given the power to impose taxes itself. Such a measure would require approval by the school board, the Guilford County Board of Commissioners, and N.C. General Assembly.

“I’ve been through this so many times, I could do this for them in two days rather than the 60 days it took them. I’m looking forward to an early court date to decide this so we can proceed.”

— Gene Boyce, Raleigh lawyer representing a group of counties and municipalities suing to recapture moneys withheld by Gov. Mike Easley, discussing the state’s answer with the Associated Press. The state is seeking to have the suit dismissed, contending that localities, as a creation of the state government , do not have the power to sue the State of North Carolina. The issue will be decided by a Wake County Superior Court.

Feature 3
Professor Doubts Incentives
Businesses relocate because of other factors, surveys show

Government’s use of economic incentives as a tool for luring business and industry is widespread. But a management professor at the University of North Carolina-Chapel Hill says little research has been done to measure the success of the enticements.

“Very few states have examined to see whether the policy works,” Professor Dennis Rondinelli said at a John Locke Foundation luncheon Nov. 18.

Rondinelli has researched international competitiveness issues and other aspects of interaction between public entities and the private sector. Recently he coauthored, with Elon University management Professor William Burpitt, two studies on the effects of economic incentives in North Carolina.

A study published in Policy Sciences in 2000 addressed whether government incentives attract and retain international investment. The professors surveyed executives of 118 foreign-owned businesses in North Carolina, asking them to rank the importance of 11 factors that contributed to their decision to locate in the state. Respondents said labor force factors were most important, followed by transportation, quality of life, and business climate.

“Consistently at the bottom (of the rankings),” Rondinelli said, “were incentives and state marketing efforts.”

Another study, scheduled to be published next year in The Journal of World Business, surveyed 78 foreign-owned companies in North Carolina. The professors this time asked executives what the determining factors were, without giving them preselected criteria, in deciding to locate in the state.

“Virtually none of them mentioned in their responses ‘state incentives,’” Rondinelli said. “They were looking for good places to do business.”

He said companies primarily sought locational assets, such as transportation, communications systems, education, and labor pools. Once the decision was narrowed or finalized based on those factors, Rondinelli said, corporations usually looked at available incentives in order to reduce costs for setting up shop.

One example Rondinelli cited was automobile manufacturer Mercedes’ location of its plant in Alabama. He said the company admitted that it decided where to locate based on the more important factors, then once it decided, explored what incentives were available. Now that incentives are offered by many states and localities, governments end up in bidding wars for promising companies, Rondinelli said.

“Once localities offer incentives,” he said, “they tend to wipe out each others’ incentives.”

Because competition between governments to get business within their borders is often fierce, many times they end up overbidding for a company. “Then the cost of incentives often outweigh the benefits that are received,” Rondinelli said. He called the phenomenon the “winner’s curse.”

Often this results in unintended consequences, such as the relocation of workers from outside the jurisdiction rather than the creation of jobs for the unemployed in the immediate area.

On The Cutting Edge

Accountability in Education

• One of the chief arguments against the wider implementation of accountability in American public education — comprehensive and properly administered testing, well-defined standards, and an effective report card system — is that it is too expensive. In fact, critics say accountability is so costly it must come at the expense of such educational aims as reducing class size or increasing teachers’ salaries.

But one comprehensive study argues that in proportion to the cost of other education programs, the cost of accountability is minuscule.

Statewide expenditures range from a low of $1.79 per student in fiscal 2001 (South Carolina) to a high of $34.02 (Delaware) — while Arizona’s fairly comprehensive accountability system, often cited as a model for other states, costs $8.72 per pupil.

Even if every state spent as much as Delaware does per student on accountability, the cost still would amount to only 0.4 percent of the total per-pupil expenditure in the nation’s public schools.

Researchers also examined the common criticism that accountability systems result in “teaching to the test.” The study notes that annually revised tests and outside proctors who deliver, administer, and return tests to the test-grading company would cost no more than $4 per student, which is less than 0.05 percent of U.S. school spending per pupil.

With such cheap solutions to the problem of teaching the test, there is no reason for any accountability system to have less than sterling integrity. Thus, accountability is so cheap compared to other educational reforms that almost any cost-benefit analysis will favor it over other reforms.

Reported in NBER Digest, September 2002; based on Caroline Hoxby,“The Cost of Accountability,” NBER Working Paper No. 8855, March 2002, National Bureau of Economic Research.

Diesel Cars

• Because of tax incentives, one out of every three new cars sold in Europe is powered by a diesel engine. In France, more than half the cars are diesel. By contrast, diesel accounts for less than 1 percent of U.S. car sales.

Europe’s embrace of diesel-powered cars has left refiners there with a glut of gasoline, which they are sending to the United States. The process is helping keep U.S. gasoline prices in check, despite fluctuations in world crude-oil markets.

European gasoline exports to the United States have climbed 82 percent since 2000. While crude-oil prices have moved between $18 and $30 a barrel this year, pump prices for gasoline in the United States fluctuated only two cents a gallon between April and September.

European refiners say the United States, where consumers have failed to accept diesel with the same enthusiasm as the French, Italians, and Germans, is the only market that can handle the quantities of excess gasoline Europe produces.

Demand for gasoline here is up nearly 3 percent this year, while demand is down 2 percent in western Europe and is expected to continue to decline as more Europeans shift to diesel cars.

The increased European shipments have crimped U.S. refining profits and experts say they could further discourage U.S. refiners from making investments to expand their refining capacity. Federal regulators have demanded that refiners upgrade plants to meet new requirements for low-sulfur gasoline and diesel fuels.

Reported in the Wall Street Journal, 10-28-2002.

“Social Exclusion”

• In Australia, a new concept, “social exclusion,” is displacing an older and more familiar one: the idea of “poverty.” The term “social exclusion” can mean almost anything and can be applied to almost anybody, and unlike the word “poverty” it always implies causation. Identifying someone as “socially excluded” fixes in advance the presumption that they are not to be held responsible for their condition — and is language that apportions blame and guilt to justify redistributing people’s money, critics warn.

They also argue that language is not neutral. If universities, the media and government departments decide to use one kind of terminology while rejecting another, sooner or later, the rest of us follow suit, and then the new terminology takes on an intellectual life of its own. Hence, the problem with “social exclusion.”

People are “excluded” if they are unable to participate in a style of life deemed “normal” in their society. “Social exclusion” occurs at the top as well as the bottom of society as privileged groups withdraw from participation in mass society. Blamed are higher earners, who are shirking their social obligations, and government, which lets them get away with it.

But the claim that there is a deprived stratum of people who cannot participate effectively in social life turns out to be empirically untrue.

The main cause of poverty today is lack of employment, and the principal solution to poverty lies in getting more welfare claimants into work. The language of social exclusion obscures these simple truths, critics argue.

Reported in Policy, Winter 2002, Vol. 18, No. 2, Center for Independent Studies.

Coming Up

• On Jan. 27, the John Locke Foundation will welcome renowned author and reporter Bill Gertz to speak at a special luncheon. The national security and defense writer has just released his new book, Breakdown: How America’s Intelligence Failures Led to September 11.

Gertz is an internationally recognized newspaper reporter who has specialized in writing major stories on a wide variety of defense, intelligence, and international security issues.

A veteran defense writer who specializes in coming up with inside stories, often based on classified documents, he is widely viewed as one of the best reporters in his field. His sources within government are extensive. Gertz has broken a number of stories with international implications. As former CIA Director R. James Woolsey put it, “When I was DCI [Director of Central Intelligence] Bill used to drive me crazy because I couldn’t figure out where the leaks were coming from. Now that I’ve been outside for two years, I read him religiously to find out what’s going on.”

For more information or to pre-register, contact Kory Swanson or Thomas Croom at (919) 828-3876 or events@johnlocke.org.

 

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