By overriding a veto from Gov. Roy Cooper (D-N.C.), the Republican-controlled North Carolina legislature enacted a new budget today that cuts the state’s personal and corporate income tax rates. Under this new budget, the state’s flat personal income tax rate will drop from 5.499 to 5.25% in January of 2019, and the corporate tax rate will fall from 3% to 2.5%, which represents a 16% reduction in one of the most harmful forms of taxation. The newly-enacted budget also cuts the franchise tax rate for S-Corporations.
This new budget, which received bipartisan support from a three-fifths super-majority of state lawmakers, builds upon the Tar Heel State’s impressive record of pro-growth, rate-reducing tax reform. Unfortunately, this latest round of tax relief in North Carolina will garner far less media coverage than the tax changes implemented in Kansas five years ago, even though North Carolina’s population and economy are both more than three times the size of Kansas's.
It's remarkable how much progress North Carolina has made in improving its business tax climate in recent years, going from having one of the worst businesses tax climates in the country (ranked 44th), to one of the best today (now 11th best according to the non-partisan Tax Foundation). When Republicans took total control of the North Carolina government in 2010, the state had the highest personal and corporate income tax rates in the region, at 7.75% and 6.9%, respectively. Thanks to enactment of multiple rounds of tax relief, beginning with the landmark 2013 tax reform act, North Carolina will soon have a personal income tax rate that is 30% lower than what the top rate was only four years ago. The corporate rate, having been reduced by more than 63% since 2013, is now the lowest corporate income tax rate among states that impose such a tax.
North Carolina, more than any other state in recent years, has provided a model for what pro-growth tax reform and conservative fiscal policy looks like, and it deserves more attention from the national media than it receives. Democrat opposition to rate-reducing tax reform proposals in state capitals and at the federal level, such as Speaker Ryan’s House Blueprint or the Trump administration’s tax reform proposal, almost always involves a reference or allusion to Kansas these days. Opponents of tax relief proclaim that what has happened in that one small state since it cut taxes five years ago, and made mistakes in the process, somehow proves that passing any form of tax relief, at any time, at any level of government is a bad idea.
However, the Left’s obsession with Kansas actually demonstrates what a weak hand Democrats have to play in opposing federal tax reform, or rate-reducing tax relief in the states. Because a more representative sample involving aggregate data looking at all 50 states debunks the liberal assertion that high levels of taxation and spending do no economic harm, they have resorted to cherry-picking one state, Kansas, and alleging that one case study to have determined that any sort of rate-reducing tax reform is inadvisable. It’s an absurd premise, but it’s all they’ve got.
One problem with the Left’s obsession with Kansas, and Democrats’ decision to make it central to their nationwide tax relief opposition strategy, is that the single Kansas case study that Democrats want the world to believe is so conclusive can be countered and rebutted with many more case studies from other states, North Carolina being one of the most prominent, that have passed rate-reducing tax reform in recent years and are prospering.
One of the biggest mistakes Kansas lawmakers made was their failure to rein in spending at the same time that they cut taxes. In fact, in the same year that Kansas lawmakers passed a $4.5 billion tax cut in 2012, they increased spending by over $432 million, which represented a 7.6% spending hike. That is a recipe for trouble, and it is a major reason why Kansas lawmakers came back and raised taxes at the beginning of June, which followed their passage of regressive tax hikes in 2015.
North Carolina didn’t make the same mistake as Kansas. Since they began cutting taxes in 2013, North Carolina legislators have kept annual increases in state spending below the rate of population growth and inflation. As a result, at the same time North Carolina taxpayers have been allowed to keep billions more of their hard-earned income, the state has experienced repeated budget surpluses. As they did in 2015, North Carolina legislators are once again returning surplus dollars back to taxpayers with the personal and corporate income tax rate cuts included in the state’s new budget.
The national media and Democratic politicians don’t want to talk about North Carolina’s experience with tax reform and fiscal policy, because it destroys their Kansas-centric strategy to opposing tax relief. It’s not just North Carolina that opponents of tax reform have to ignore. They have to ignore the experience of other states that have approved tax relief in recent years – states like Texas, Tennessee, Florida, Arizona, and Indiana – and are outperforming high-tax states in terms of job creation, economic expansion, and population growth. Opponents of tax relief also have to ignore the experience of the nine states that do not have an income tax.
In the decade from 2005-2015, the nine states with zero income tax saw population increase by an average of 12.9%, while population in all 50 states rose by 8.8%. During that same period, the nine states with the highest income tax rates saw population grow by only 6.6%. The nine states with zero income tax also had economic, personal income, and payroll growth that outpaced all states on average, and outperformed the high income tax states to an even greater extent.
It’s not just North Carolina and other states' experience that debunks the bogus claim that Kansas proves that all tax relief is to be avoided, but also a great deal of social science. John Hood, chairman of the John Locke Foundation, has taken the time to survey over 680 peer-reviewed academic journal articles on fiscal policy published over the past quarter century. According to Hood, “the preponderance of peer-reviewed research finds a negative relationship between state taxes and measures such as job creation and income growth.”
In announcing his opposition to the new budget, Gov. Cooper portrayed the income tax cuts as a giveaway to the rich. Cooper's claim is flat out false. In fact, despite what the first term Democratic governor has misled the public to believe, this new budget will actually shift the income tax burden from the middle class to to higher income households. When the income tax cuts takes effect in 2019, households with annual income below $100,000 will contribute a lower percentage of total income tax collections than they presently do. Meanwhile, this budget will have households with income greater than $100,000 paying greater share of total income tax collections than under current law.
With this latest round of personal and corporate income tax relief, Senate President Phil Berger, Speaker Tim Moore, and their colleagues in the General Assembly are strengthening North Carolina’s impressive record of pro-growth tax reform. While this latest round of tax relief will benefit individuals, families, and employers across the North Carolina who will get to keep more of their hard-earned income, it will also help lawmakers in other states and in Congress by demonstrating the positive results that come from passing rate-reducing tax reform, coupled with spending restraint.
