The incoming Obama administration offers a helpful model for North Carolina

One of the most encouraging signals from the soon-to-be Obama administration is its evident commitment to stability. In keeping with the President-elect's personality and values, it's increasingly clear that the coming inauguration will likely herald a new era of calm and sober realism in the White House. In contrast to his predecessor's inclination to trust "his gut" and the "invisible hand" of the market, Obama and his team seem much more inclined to rely upon a combination of detailed research and analysis and careful deliberation in fashioning their policy prescriptions.

After eight years on an economic, fiscal and foreign policy roller coaster that has exhausted the world, Americans have in essence hired the smartest, most disciplined person available to put them on a new and smoother road. The new road may not have many highs in the short run, but in the long run, the outlook appears much more promising and sustainable.

A model for North Carolina?

This sober and disciplined approach of the new national administration ought to provide a kind of "how to guide" for North Carolina's incoming leadership team – especially when it comes to the single most obvious challenge confronting it: the state revenue shortfall.  

For decades, North Carolina's revenue system has borne a striking resemblance to the national policy roller coaster of recent years. When times were good, revenues were really good. A modest jump in the overall economy could produce a large budget surplus. And, of course, when times were or are bad (like right now) revenues were really bad. Hence the current budget shortfall of 10-15% at a time when overall economic activity is only down a small fraction of that amount.

Of course, some of this roller coaster effect is beyond the control of state elected officials. When capital gains are down, they're down and lower incomes and income tax receipts are inevitable. Moreover, unlike the federal government, state leaders have very little ability to affect the behavior of businesses and consumers because of constitutional bars on deficit spending.

Still, despite these limitations, there is much that can and should be done to chart a smoother and healthier course.  The first and most obvious step is comprehensive tax reform and modernization.

For years, experts, academics and multiple study committees have concluded that North Carolina's 1930's-era tax system needs modernization. The shortcomings are obvious and include:

• The sales tax is still designed as if the state's economy was exclusively goods-based rather service-based.
• Business taxes are rife with loopholes and special breaks that let many large and profitable corporations escape income taxation altogether.
• The personal income tax hits lower income working families at almost the same rate as the super rich.

All of these flaws contribute to the system's nagging inadequacy and current, painfully obvious volatility. Even before the current shortfall that's afflicting the state, revenues were not keeping up with inflation and population growth – much less the dire need for improved public services in everything from education to mental health to criminal justice. Now, of course, the situation is at a crisis point with lawmakers confronting a shortfall of as much as $3 billion if they hope to keep services merely at present levels in 2009-'10.

A new and smoother road

Happily, the solution to all of this does not involve rocket science. It lies in the adoption of a more modern, broadly applicable tax system. To put it simply, North Carolina must cast its revenue net in a wider and fairer pattern. Instead of just taxing the same things and constantly raising rates merely to stay even (as we've been doing when it comes to things like the general sales tax rate and tobacco and alcohol taxes) North Carolina must tax more transactions that currently escape taxation altogether. Cast the net widely enough and the state will actually be able to lower the sales tax rate while bringing in a comparable (and more predictable) pot of money.

The same is true when it comes to corporate income taxes. If we do away with the morass of tax breaks and exclusions and costly and unproven corporate "incentives," North Carolina can actually lower the overall corporate profits tax rate while collecting more revenue in a fairer and more predictable way.       

A similar approach will work with the personal income tax where the state's essentially flat rate structure (along with federal deductions and other breaks) currently allow the wealthy to pay a much lower share of their incomes in total state and local taxes than is paid by the middle class and the poor. To cast the net in a wider, fairer and more predictably reliable fashion, the state ought to adopt a larger number of income tax brackets. As with the sales and corporate income taxes, this would permit the actual lowering of rates on people in the middle and the bottom while creating an overall pot that stays much more in sync with the general economy. 

Mustering the political courage

As noted, the real challenge in effecting such a transformation of the state revenue system is not a matter of "how." State leaders have known for years of the merits of modernization and reform and have pussyfooted around the issue on multiple occasions.  The problem of course is in the politics. How does one muster the political "umph" to take on and overcome the daunting roadblock posed by numerous special interest lobbies – the lawyers, the architects, the entertainment industry – in tandem with the market fundamentalist, anti-government crowd who hope to use the current crisis to completely disable and de-fund our system of public structures?

The answer, it seems, must come from an emulation of the approach taken by the incoming national administration in three obvious areas:

1. Win over the business community. Sure, corporate executives hate change and hate taxes, but most of them hate instability and a crumbling public infrastructure even more. If North Carolina's new leaders really work together in a concerted and thoughtful way, it is likely that they can win over enough of the business establishment to make a political difference.
2. Kill them with facts. As in most areas of life, there's no substitute for being the smartest, best prepared person in the room. Like the new team in Washington, North Carolina's new administration can win a lot of policy battles and new adherents by soberly and methodically marshalling and disseminating the facts and analyses that support the case for real reform.
3. Level with the public. For too long, North Carolina leaders of both parties have made pandering to voters' worst instincts (especially on things like taxes) their default political strategy. While many will continue to adhere to this practice, it seems worth a try for the Perdue administration to try something new. It may be a hard sell, but with the Obama administration poised to make real headway via such a "high road" approach that features an open call for people to pull together in short-term sacrifice, it would be tremendous waste not to follow suit in North Carolina.

In short, it's essential that North Carolina's new leaders follow the Obama team's obvious intention to live and sell stability. Just like the majority of their fellow Americans, North Carolinians long for a sustained break from the roller coaster. Yes, people want growth and progress but mostly they want to know that there is a safe, predictable and hopeful future.

Cast in such light, all kinds of challenging but fact-based policy proposals – even something as difficult as comprehensive tax reform and modernization – can have real political viability. Now, in this period of crisis, is the obvious time to try.