What should N.C. do? Look west

Imagine a state ravaged by the Great Recession, with tough choices to make to get back on track. The recently elected governor boldly calls for an overhaul of state taxes. Critics predict economic calamity, but tax reform passes. Over the next three years, the state’s economy emerges as one of the nation’s strongest and the governor takes some victory laps.

Any guesses what state we’re talking about?

No, it’s not North Carolina. We’re talking about the California Comeback, and, unlike in North Carolina, it happened while the Golden State was raising taxes, not cutting them. In 2012, voters approved an initiative that raised taxes on the wealthiest Californians. By restoring vital revenue, the move prevented the recession from undermining education and other key investments.

Acolytes of the “tax cuts create jobs” dogma were sure that California was headed for ruin. A parade of right-wing commentators predicted economic collapse. Some governors, including North Carolina’s Pat McCrory, stepped up efforts to lure away California businesses.

At the same time, the N.C. legislature was gearing up to enact the largest tax cut in the state’s history, which would mostly benefit the state’s wealthiest residents. Ever since, folks in Raleigh have boasted that the 2013 tax cuts are responsible for our state’s economic recovery.

We have here a natural experiment. The most fortunate North Carolinians got a tax break and their California counterparts paid more. So what did we learn?

First, California created jobs at a faster clip than North Carolina. From April 2013 to this year, employment grew by 6.7 percent in California, compared with 5.8 percent in North Carolina. Had North Carolina matched California’s job creation pace over the past two years, 30,000 more people would be working here today.

Wages are up too. Average hourly pay in California is now more than $1 higher than two years ago, while North Carolina saw less than half that growth.

It would be wrong to say that California’s economy is doing better than North Carolina’s just because taxes went up for the wealthiest residents. California outperformed North Carolina for a host of reasons that extend far beyond the tax code.

But that is the point. Tax rates have very little impact on a state’s economic performance. What does matter, long-term, is whether states have the resources to provide a first-rate education, state-of-the-art transportation and infrastructure, safe communities and other investments that promote broad prosperity. We should be less concerned about California outpacing North Carolina over the past two years than about North Carolina slipping further and further behind states that haven’t fallen for the tax-cut myth.

All of this brings us to the current debate. The N.C. Senate has proposed yet another round of tax cuts, mostly for large corporations, which would further erode the state’s ability to invest in job growth. Meanwhile, the House passed a budget that makes some long-overdue investments in education, small businesses and economically struggling communities. The tax-cut legion are lambasting the House and praising the Senate.

It would be a big step forward for struggling families if the House and the governor are starting to realize that more tax cuts won’t fix North Carolina’s long-term economic problems. The next few weeks will reveal if N.C. tax policy is still being set by hollow ideology, or if common sense is gaining ground.

In the meantime, when you hear that tax cuts drive economic growth, remember the California Comeback.

Patrick McHugh is an economic analyst with the N.C. Budget and Tax Center.