In 2013, the North Carolina General Assembly passed a pro-growth tax reform bill, which has vastly improved the state’s economy and is a model for other states. The bill creates a flat income tax; eliminates the estate tax; and lowers the corporate income, franchise, and sales taxes while broadening the latter tax to other services. Since the reforms were implemented, the state’s economy has grown 30 percent faster than the national average and created a projected $400 million revenue surplus for the 2014–15 fiscal year.
A key component of the reform was lowering the corporate income tax from 6.9 percent to 5 percent in 2015. Further decreases are scheduled if revenue continues to meet targets. North Carolina has reduced its corporate taxes to remain competitive with bordering states and encourage business investment. In the Rich States, Poor States report produced by the American Legislative Exchange Council (ALEC), one of the authors’ “golden rules” of effective state taxation is: “When you tax something more you get less of it, and when you tax something less you get more of it.” Decreasing taxes encourages investment and innovation, which provides taxpayers with jobs and states with revenue.
According to an ALEC report, in 2011 North Carolina’s economic outlook ranked 26th in the nation. After the reforms took effect, North Carolina moved up to fourth in the 2015 rankings. The economic outlook rankings attract investors and assist in retaining businesses in the state.
North Carolina also broadened the tax base to include other services to avoid creating budget holes. It also applied the sale and use taxes to other goods so that rates may be set lower, and it eliminated the local privilege tax, helping businesses expand. North Carolina has been conscientious about spending since implementing the tax cuts, which has further bolstered the state’s prosperity.
North Carolina should serve as a model for other states struggling financially, and Illinois should serve as an example of what not to do. In the face of a budget deficit, the Illinois legislature increased personal and corporate income taxes but refused to restrain spending, and some in the state are pressing for a progressive income tax. Illinois’ rising taxes and unattractive business climate have created a businesses and population exodus, causing an even greater decrease in state revenues while state spending continues to increase precariously.
States can learn from North Carolina’s reforms and avoid the mistakes Illinois continues to make. Ultimately, states must commit to keeping taxes low and spending at a reasonable level.
The following documents provide more information on taxes and sound fiscal policy.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
The Inequity of the Progressive Income Tax
Kip Hagopian of the Hoover Institution contends the most compelling argument against the use of the progressive income tax is that it is inequitable: “Under a progressive income tax, the welfare of one group in a society has been increased at the expense of the welfare of a different group.” Hagopian dismantles arguments for the progressive income tax and proposes a new doctrine of tax fairness.
Why North Carolina Got The Highest Grade On Cato’s Fiscal Report Card
North Carolina’s economy has grown 30 percent faster than the national average while the state government runs a revenue surplus. The Cato Institute gave Gov. Pat McCrory (R-NC) an A grade for his contribution to the groundbreaking tax reform act passed in 2013.
Rich States, Poor States 2015 Edition
North Carolina leapt toward the top of ALEC’s annual economic performance ranking and is likely to rank even higher in 2015. The rankings are based on the state’s tax burden, number of employees, state GDP, and several other factors.
Judges for Higher Taxes, Not Pension Reform, in Illinois
Forbes and Fox News contributor Stephen Moore expresses his frustration with the economic problems in Illinois and argues the state must lower taxes and reform pension policies to reverse its budget deficit.
The Potential Effect of Eliminating the State Corporate Income Tax on Economic Activity
Laura Wheeler, a senior researcher at the Fiscal Research Center of the Andrew Young School of Policy Studies, summarizes studies of the effect of changes in the state corporate income tax on economic activity. Wheeler uses the results of those studies to estimate the economic effect of eliminating a state’s corporate income tax, concluding low state corporate income taxes spur investment and employment in the state.
The Historical Lessons of Lower Tax Rates
Examining the historical results of income tax cuts, Daniel Mitchell of The Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
North Carolina Tax Revenue Exceeding Expectations Following Tax Cuts
The Tax Foundation argues North Carolina’s $400 million budget surplus is a result of its corporate tax decrease and spending restraints. Tax revenue exceeded expectations, probably as a result of increases in business incomes.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Logan Pike, Heartland’s state government relations manager, at [email protected] or 312/377-4000.