Carolina Journal Weekly Report

December 02, 2002

In This Issue:
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Feature 1 - Tax Problems Acknowledged

Feature 2 - NC’s Subsidized Students

Feature 3 - ‘ACLU for Real Americans’
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Feature 1
Tax Problems Acknowledged
Economic Development Board releases strategic plan

In late October the North Carolina Economic Development Board released its 2002 Economic Development Strategic Plan. The 57-page plan relies heavily on government-funded programs, but also draws attention to North Carolina’s high tax rates and overall tax burden.

The John Locke Foundation, in numerous opinion pieces and policy reports, has questioned the state’s competitiveness on the same tax issues.

The four general goals in the plan are: (1) Develop an outstanding education system and a highly qualified workforce; (2) Establish an aggressive and coordinated state agenda of investment in research, support for technology development and transfer, and effective use of university outreach; (3) Ensure a competitive environment for the recruitment and retention of business, capital investment and job creation; and (4) Foster attractive communities prepared for economic development success.

Under the third goal, one objective was to “develop and maintain North Carolina’s nationally superior business climate that consists of affordable business costs, fair regulation, and an equitable tax system.”

As a progress measure for that objective, the plan called for the state’s marginal income tax rates to be more in line with its competitors by 2005. Additionally, the state’s overall state-local tax burden would have to be competitive in the Southeast and remain below the national average.
This goal may prove difficult unless leaders can reduce spending. North Carolina’s state and local taxes as a percentage of income in the region are second-highest only to Georgia’s, and are now close to the national average.

In addition to these high average tax rates, North Carolina has the highest marginal tax rates on income, investment, and capital gains in the region and among the highest in the United States. The state’s top income tax rate is 8.25 percent and the top corporate tax rate is 6.9 percent.

The board developed the plan around Gov. Mike Easley’s vision of “One North Carolina, where every citizen has an opportunity for a high quality of life, including a good job and a good education, regardless of where they live.”

The 37-member board is charged with developing and updating a plan by April 1 each year. The governor appoints the board chairman and 23 of the 37 members. Since the previous plan was released in July 1999 and never updated, the board has ignored the law for four consecutive years.

The 1999 plan contained some similar goals and also suggested a more competitive tax climate, but did not contain any specific measures.

The new plan and the previous plan can be found on the Internet at www.nccommerce.com/econbrd/plans.

Ahead of the Curve

• According to a report from the Freedom Newspapers chain, 79 of North Carolina’s counties will have raised their sales tax by one-half cent on Dec. 1. After Gov. Mike Easley had withheld $333 million in tax reimbursements the state was supposed to pay local governments, cities and counties were given the option to raise the sales tax to compensate for their loss. Shoppers in counties where the tax was raised will now pay a 7 percent (7 1/2 percent in Mecklenburg County) levy on purchases. The statewide portion of the sales tax is scheduled to reduce by a half-cent on July 1, 2003, unless the General Assembly extends it.

• Even though a vote won’t be taken until early next year, several media outlets are speculating about who the Republicans, who hold a 61-59 majority, will nominate for House Speaker. Last week the attention centered on Guilford County Rep. Steve Wood and who he would support. Wood had been thrown out of the GOP caucus three years ago. Now, even though present House Majority Leader Leo Daughtry won a caucus vote for Speaker nominee, much media attention has been given to Rep. Richard Morgan, R-Moore, and Rep. Danny McComas, R-New Hanover, as potential speakers themselves. Neither Morgan or McComas were candidates for speaker in the caucus vote Nov. 17. McComas told the Wilmington Star-News Nov. 26 that he is disappointed by Daughtry’s comments that Republicans will not share power with Democrats.

Feature 2
NC’s Subsidized Students
Taxpayers pay fourth-highest in nation per pupil

The continuing budget crisis in North Carolina has led to, among other things, cuts (real and threatened) in the budget of the state’s community colleges and universities. It has also led to tuition increases especially in the University of North Carolina system.

But according to the most recent data, taxpayers in North Carolina pay the fourth-highest per-pupil amount in the nation to subsidize public-college students in their state.

Also, N.C. students attending the state’s community colleges or public universities pay the second-lowest amounts in tuition and fees in the nation in either category of institution.

Those findings are according to an October Inquiry paper (No. 14, “Providing Access: Who Pays What for Higher Education in N.C.”) by the Pope Center for Higher Education Policy.

While announcing those results, the Inquiry paper did note the fact that the most recent data are from 1999-2000, and that tuition has increased in both those years as the state has buckled down under a budget crisis. So North Carolina likely has fallen somewhat in those comparisons over the last two years.

Nevertheless, the paper suggests that the state’s standings in those categories as late as the 1999-2000 academic year should alleviate concerns over the long-term impact of the state’s fiscal crisis on the state’s public universities and community colleges.

According to the report:

• The average cost in tuition and fees for an in-state student attending a public, two-year institution in North Carolina in 1999-2000 was $778, less than half the national average of $1,647 and the second-lowest in the nation.

• The average cost in tuition and fees for an in-state student attending a public, four-year institution in North Carolina in 1999-2000 was $2,054, only about 60 percent of the national average of $3,376 and also the second-lowest in the nation.

• The average amount appropriated per full-time-equivalent student enrolled in public institutions of higher education in North Carolina was $7,066, which was 40 percent higher than the national average of $5,061 and the fourth-highest amount in the nation.

The Pope Center Inquiry paper arrives amid news from the College Board (www.collegeboard.com) that public-college tuition experienced its highest one-year jump in 10 years.

The College Board’s “Trends in College Pricing 2002” reports that the average tuition at private four-year colleges increased $1,001 (5.8 percent) to $18,273; at public four-year colleges, $356 (9.6 percent) to $4,081; at private two-year colleges, $690 (7.5 percent) to $9,890; and at public two-year colleges, $127 (5.8 percent) to $1,735.

The report shows that other states are experiencing their own fiscal problems.

“As tax revenues decline,” said College Board President Gaston Caperton in the report, “public colleges have searched for other sources of funding and for many, that has led to tuition increases.

“But despite this year’s increases, public colleges and universities are still a remarkable value.”
To view a PDF file version of the Pope Center Inquiry paper, look on the Internet at http://www.carolinajournal.com/exclusive/110502.pdf.


Capital Quotes

“I’m not saying who would be the pro tem or what party they would be. But change is good, especially when you have a $2 billion debt, massive tax increases, a Medicaid crisis… Why would anyone want to continue with the same leadership?"

— Sen. Patrick Ballantine, R-New Hanover and minority leader, talking to The Charlotte Observer about the possibility of electing someone other than Sen. Marc Basnight, D-Dare, as President Pro tem when the N.C. Senate reconvenes in January. With Republicans now holding 22 of 50 seats in the chamber, a coup against Basnight would require only four Democratic votes. Ballantine claims to have two Democrats lined up, with another willing to vote against Basnight if Ballantine can find a fourth vote.

“We should have moved a little faster than we did. It’s taken us some time to get off the mark.”

— Len Sanderson, highway administrator for the N.C. Department of Transportation, commenting to the News & Observer of Raleigh about the state’s efforts to remove billboards along scenic highways. The DOT has $1.75 million to remove signs, but has spent only $669 to date. The DOT’s inaction is in part a result of very different values placed on signs by the billboard industry and the DOT.

“Between the two of them, we now have people on staff that know English, French and German. Now we can work with the rest of the world.”

— Charles Edwards, interim Global TransPark chief executive officer, discussing the GTP’s recent personnel moves with The Kinston Free Press. Longtime GTP Vice President of Communications Jim Sughrue was let go in October as part of the state budget cuts. By hiring two interns already on staff to assume Sughrue’s responsibilities, the GTP reduced the number of people working on communications and marketing from three to two and reduced its costs.

Feature 3
‘ACLU for Real Americans’
Institute for Justice to open chapter in North Carolina

The Institute for Justice — a nonprofit public-interest law firm dedicated to economic liberty, school choice, private property rights, unlawful taxation, freedom of speech, and constitutional limits on the power of government — is coming to North Carolina early next year.

Founded in Washington D.C. in 1991 as the premiere libertarian arm of justice in the United States, the institute, with an annual budget of $5 million, has grown over the past 11 years, said attorney Clint Bolick, vice president of the institute and national director of state chapters.

“Our mission is to defend fundamental individual liberties,” he said. “I sometimes refer to us as the ACLU for real Americans.”

Up until now, he said, most of the litigation executed by the organization has involved federal constitutional issues. As a result, Bolick said the institute decided to branch out and open state chapters across the country in hopes of focusing on state constitutional issues.

One reason North Carolina was selected, Bolick said, was because the state’s court system as a whole tends to be more conservative than the state government. “This gives us lots of abuses to challenge,” he said, “and a good forum in which to challenge them.”

The state chapter will be located in Raleigh.

Bolick said they hired attorney Michael Byrne as the executive director of the North Carolina office. A former John Locke Foundation employee in the early 1990s, Byrne has spent the past six years as a civil litigation lawyer.

Byrne is completing the groundwork needed to get the office off to an organized start. His preparation includes an in-depth study centering around the constitution of North Carolina. “It’s a fascinating document,” Byrne said. “It represents the protection of individual freedom.”

Bolick said the institute is anticipating an opening date in January. When that happens, he said, the organization will boldly launch a lawsuit, demonstrating from day one how serious they are about their legal efforts in North Carolina.

“We never do anything quietly,” he said. “Everyone who works at the Institute for Justice works here because they have a passion for freedom and for translating principles for freedom into reality. We’ve found the law to be an effective tool for restraining the excesses of government.”

Services provided by the institute are available at no charge to the client. Instead, Bolick said the organization relies exclusively on voluntary private donations. “We have the best lawyer job in America,” he said. “We get to choose our cases and clients, we don’t charge and, best of all, the people we sue are bureaucrats.”

The Institute for Justice generally represents the underdog, he said, or the “David versus Goliath” cases, with the organization defending the “David” in the litigation process.

For the most part, Bolick said the institute is using the American Civil Liberties Union model for expanding the organization across the United States. He said the office in North Carolina will sponsor two lawyers and one support staff member. “This model delivers a lot of bang for the buck,” Bolick said.

However, he said, that’s where the similarities to the ACLU end. “The ACLU is usually on the other side of our lawsuits,” Bolick said.

On The Cutting Edge

Electricity Pricing

• During the summers of 1998 and 1999, electricity prices in the Midwest soared to $7,000 or more per megawatt-hour, compared to a typical price of $30 to $50. One factor contributing to this volatility is that relatively few retail customers pay real-time prices that vary with changes in supply and demand. Recent research suggests that using RTP can generate vast savings.

Analyzing data from Duke Power’s RTP rate program, researchers found the savings are substantial. As theory would suggest, RTP customers reduce their demand for electric power during peak hours.

By reducing demand during key hours, Duke Power’s load is about 70 megawatts less per day. Absolute quantity changes are largest at peak hours, but these changes are dwarfed by percentage changes in price that may be as large as 500 percent on a very hot day.

This leads to substantial cost savings to customers. Individually, customers using the RTP program avoided costs of $3.90 per megawatt per year for additional generating capacity. This translates into a long-term savings totaling $2.7 million per year. Even with price caps as low as the $150 recently imposed in California, short-term savings associated with the response to RTP can be substantial.

The longer a customer uses the program, the more adept they are at using the system. Long-time customers were 5 percent more responsive to price changes than newer customers.
RTP programs may offer simple ways of coping with escalating electricity costs.

Researched by John A. List and David Lucking-Reiley, “Bidding Behavior and Decision Costs in Field Experiments,” Economic Inquiry, Vol. 40, No. 4, October 2002.

Democracy and Inflation

• Many argue that democracy itself is a primary cause of inflation. According to this theory, politicians must win support from the masses and engage in prolific spending to finance their popularity. A recent study investigates this hypothesis.

Researchers used data from developing countries over the past 50 years. Developing countries are especially prone to bouts of inflation. Since 1957, over two-thirds of the 133 developing countries have experienced inflation of over 25 percent per year. Over one-third have experienced inflation of over 50 percent per annum.

The authors found that democracy can be a force for inflation if excessive inequality is present. Inequality was measured through Gini coefficients — measures of the inequality of income distribution with 0.00 representing perfect equality and 1.00 representing perfect inequality.

In countries with a Gini coefficients generally below 0.40, democracy appears to restrain inflationary pressures. After that threshold, the effect reverses, and democracy and widespread political representation appear to generate inflation.

The inequality forces politicians to engage in inflationary spending to redistribute income. Inflation punishes wealth accumulations and alleviates debt, an attractive outcome to a country with a large poor population.

Researchers argue that the findings help explain why different countries have had different inflationary experiences when establishing democracies. In Latin America, wealth distribution is very lopsided. Thus, their democracies engage in inflationary spending to redistribute income. In contrast, transition countries in Eastern Europe had Gini coefficients very close to 1.00 due to Soviet policies. Conse quently, their democracies avoided inflationary policies.

Researched by Raj M. Desai, Anders Olofsgard, and Tarik Yousef, “Democracy, Inequality, and Inflation,” Georgetown University, Edmund A. Walsh School of Foreign Service Working Paper, May 2002.

Bio-Pharming

• The U.S. food industry loved biotech when that industry was researching and developing genetically modified food crops. But now a rift is developing between the two industries over biotech companies’ plans to move into genetic modification of food plants to produce drugs and chemicals.

So-called bio-pharming exploits the ability of plants to make medically important proteins at far less expense than fermentation factories. Corn, for example, can be modified to supply human monoclonal antibodies, antibodies to treat herpes simplex virus, enzymes to treat cystic fibrosis and trypsin for making insulin.

Many food executives fear that these properties might accidentally wind up in their products. Food trade groups are pressing the biotechnology industry to make pharmaceuticals only from non-food crops such as tobacco — but food crops such as corn, potatoes and tomatoes are the plants of choice for many researchers.

Politically powerful trade groups for the $500-billion food sector are preparing to lobby federal regulators for new rules that would make life far more difficult for bio-pharming firms.

The Department of Agriculture already requires bio-pharming inventors to keep their experimental crops a certain distance from fields of related plants.

Reported in the Wall Street Journal, November 5, 2002.

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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