John Hood: Liberal opposition to HB2 worked like a charm
By John Hood
RALEIGH — Left-wing activists spent a year complaining that House Bill 2 was hurting North Carolina’s business climate. They eagerly cited opposition from banks, manufacturers, and other out-of-state interests. Most effectively, they pointed to NCAA games being played in other states as evidence that North Carolina was paying too high a price for its intransigence on HB2.The left’s tactic worked like a charm in the short run.
Although opinion surveys found that North Carolinians had mixed views about the underlying issues of bathroom access, business regulation, and religious conscience, voters came to oppose HB2 as a whole by a significant margin because they thought it was hurting the state’s image and economy.
Once it became clear that Senate leader Phil Berger, House Speaker Tim Moore, and Gov. Roy Cooper had worked out a deal to replace and replace HB2, however, progressives found themselves poorly positioned to fight it. Conservative supporters of HB2 had complained for months that fundamental values ought not to be sacrificed for the sake of basketball games. Now, suddenly, LGBT activists were saying exactly the same thing.
But once you concede that sports leagues and other out-of-state interests ought to have a say in the formulation of your public policies, it’s hard to walk that back.
When it comes to economic policy, conservatives have long argued that you can’t just ignore what out-of-state executives, investors, and entrepreneurs think of your state’s choices. To compete for their investment capital, you must keep taxes and regulations at the lowest level consistent with the provision of basic services and amenities.
Economic actors may not have a direct say in these matters as residents and voters of North Carolina. But they essentially foot with their feet, by locating themselves and their enterprises in places where they are most welcome.
In a recent paper for the U.S. Census Bureau’s Center for Economic Studies, Xavier Giroud of the Massachusetts Institute of Technology and Joshua Rauh of Stanford University used previously unavailable data for millions of businesses with locations in more than one state. Some were C corporations, subject to the corporate income tax. Others were S corporations, partnerships, or other firms with pass-through income subject to the personal income tax.
This allowed the authors to test more effectively whether relationships between taxes and business activity were causal or just correlations with something else. They found that higher taxes were indeed likely the cause of lower corporate investment and employment in a state. Corporate taxes were more damaging to economic growth than personal income taxes, although both effects were statistically significant and negative.
In another new paper, just published in the journal Local Government Studies, Jongmin Shon of Rutgers University found that higher state and local sales taxes tend to discourage business investment in a given jurisdiction, particularly within the manufacturing industry where “retail” sales taxes are often misapplied to the purchase of business machinery.
That corporate executives, investors, and entrepreneurs base such decisions on what is most likely to help their businesses succeed and prosper is a fact entirely distinguishable from what you or I might think about it. We can’t talk our way out of it, or wish it into the cornfield. It is simply an element of the system in which we operate, a constraint imposed by reality.
With opposition to HB2, progressives thought they had discovered a similar constraint — unrelenting pressure from powerful out-of-state interests that would eventually compel the Republican legislature to capitulate. But they misread the situation.
Just as most North Carolinians never volunteered to become grunts in some national war over LGBT rights, most sports leagues and corporate interests never signed up for a perpetual twilight struggle. They wanted HB2 gone and something like the status quo ante reinstated so they could return to their normal operations.
Skillful tactics are no substitute for sound strategy.
John Hood is chairman of the John Locke Foundation.