North Carolina’s Tax Bill Has Ominous National Implications

July 17, 2013 at 3:58 pm

The radical tax bill that North Carolina lawmakers passed today—and that Governor Pat McCrory is expected to sign — has two dangerous implications for other states.

  • It redefines “tax reform” to include proposals that fail the fundamental tests of fairness and revenue adequacy.
  • It threatens a new tax-cut war among the states that, in the end, would benefit no state’s economy.

Let’s look at each of these points in turn.

Redefining “tax reform.” The bill eliminates or caps a few deductions or exemptions, some of which clearly deserved to be eliminated.  But it doesn’t merit the name “tax reform” that supporters have given it because it shifts tax burdens from the most well-off to the middle class and poor and because it slashes revenues at a time when state government is already strained for funds.

North Carolina’s bill gives enormous new tax breaks to the wealthiest taxpayers and most profitable corporations while raising taxes on many lower- and middle-income households.  The legislature’s own fiscal research agency says a family of four with income of $250,000 will get an income tax break of $2,434, while a family of four with income of $20,000 will get a tax cut of $3 — which will be more than offset by the state’s planned elimination of its Earned Income Tax Credit.

In fact, because the bill also raises sales taxes, the independent North Carolina Budget & Tax Center estimates the net result will be higher taxes for the 80 percent of North Carolina families with incomes below $84,000.

Meanwhile, the plan will cost the state over $600 million per year.  North Carolina doesn’t have anywhere near large enough a budget surplus to pay for that, so Governor McCrory initially recommended that tax reform be revenue-neutral.  But he later abandoned that idea, and both houses of the legislature have passed budgets that would cut K-12 staff, raise college tuition, cut funding for affordable housing, and make other cutbacks, in part to pay for the new tax bill.

Threatening a new tax-cut war among the states. North Carolina’s economy outperformed the nation’s last year, but its current unemployment rate of 8.5 percent is among the nation’s highest.  State leaders argue that cutting taxes (particularly income taxes) will provide a competitive edge.  There are two problems with this argument, however.

  • First, it’s not likely to work.  Numerous academic studies haven’t found a consistent connection between tax cuts and state economic growth.  Recent history also shows that deep cuts in income taxes don’t fuel growth:  the states that cut taxes the most in the 1990s grew more slowly over the next economic cycle than other states.

    The frequent claim that rich people will flee higher-tax states for lower-tax ones turns out to be a
    myth.
  • Second, despite this lack of empirical support for the tax-cut strategy, some policymakers in other states undoubtedly will cite North Carolina to push for tax cuts of their own.

    Several national organizations, including the
    American Legislative Exchange Council and Americans for Prosperity, have made large state-level tax cuts for the wealthy a major part of their agenda.  Already, Virginia gubernatorial candidate Ken Cuccinelli has proposed deep cuts in personal and corporate income tax rates.

    As neighboring states seek to mimic North Carolina, any advantage the state might have hoped to gain over the others will disappear.  When every state enacts the same tax break, all they’ve done is ratchet down their ability to pay for good schools, roads, police and fire protection, and all the other critical services that make them places where people and businesses want to stay for the long haul.

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More About Nicholas Johnson

Nicholas Johnson

Johnson serves as Vice President for State Fiscal Policy. You can follow him on twitter @NickCBPP.

Full bio | Blog Archive | Research archive at CBPP.org

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