This year North Carolina joined the growing number of states considering major changes to its tax system. Republican legislators proposed in early January a tax reform plan that would eliminate personal and corporate income taxes and offset the cuts with increases in state sales taxes while expanding the latter to cover all services, some of which are currently untaxed. The proposal also would eliminate tax breaks.
In the News-Observer, Senate leader Phil Berger said significant tax reforms are needed to modernize an uncompetitive state tax code and spur economic growth. Berger pointed out the state’s “current 6.9 percent corporate tax rate and 7.75 percent personal tax rate for the highest earners are among the highest in the region.” North Carolina ranks 44th in the Tax Foundation’s State Business Tax Climate Index. Since 2007, ten states have lowered their income tax rates, and several other states are considering similar changes this year.
The Tax Foundation notes personal and corporate income taxes are generally considered the most destructive taxes because economic growth arises from production, innovation, and risk-taking, which are stunted when government takes dollars out of the hands of businesses and individuals. In addition, North Carolina’s complex tax code imposes high administrative costs on the government and high compliance costs on businesses and individuals. Studies also show corporate income taxes place a disproportionate burden on low-income households.
Eliminating personal and corporate income taxes could dramatically improve North Carolina’s economy and generate new jobs. According to a study published by the North Carolina-based John W. Pope Civitas Institute, tax reforms similar to the current proposal could have gained North Carolina an estimated 217,000 to 378,000 jobs over the past decade.
The following articles examine state tax reform from multiple perspectives.
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.”
Rich States, Poor States
The fifth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
North Carolina Tax Reform Options: A Guide to Fair, Simple, Pro-Growth Reform
Writing for the Tax Foundation, Joseph Henchman and Scott Drenkard offer a menu of choices for North Carolina legislators for tax reform that would ensure their state builds on its recent growth and creates an attractive environment for investment, entrepreneurs, and talented workers.
Taxes Really Do Matter: Look at the States
Economists Arthur Laffer and Stephen Moore examine the claim that tax rates don’t matter and thus raising income taxes, dividend taxes, and capital gains taxes won’t hurt the economy. Analyzing the evidence for more than two decades, with data dating back to 1960, the authors find that in any 10-year period, states without an income tax consistently outperformed those with the highest income taxes.
More Jobs, BIGGER Paychecks: A Pro-Growth Tax Reform for North Carolina
The Civitas Institute examines North Carolina’s tax system and proposes a pro-growth tax reform plan, including income tax elimination. “Any tax reform in North Carolina should increase the after-tax income for the next dollar earned and raise the reward to work. Tax policies that increase the incentive to produce, invest and innovate attract industries and entrepreneurs. Increased economic growth, income and employment follow. Tax reform should reduce the penalty from additional work, savings, and investment and subsequently encourage increased work effort, increased wages, increased savings, and greater investments (and subsequently, greater capital accumulation),” the report states.
The Corporate Income Tax: Repeal, Not Reform
In this 2011 Research Spotlight from the John Locke Foundation, Roy Cordato argues corporate taxes represent additional layers of taxation and make the common mistake of assuming corporations do not pass on the cost of taxes to their customers: “The corporate income tax imposes a second and even a third layer of taxation on people’s incomes and is hidden, dishonest, and inconsistent with informed decision making in a free and democratic society.”
The U.S. Tax System: Who Really Pays?
Writing for the Manhattan Institute, Steven Moore examines popular conceptions and misconceptions about the effect of tax rates on economic productivity and fairness. He addresses each of the statements and debunks the attendant myths.
Institute Brief—No Income Tax: The Key to Economic Growth
The Public Interest Institute examines how states with no income tax are doing economically compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.”
Tax Efficiency: Not All Taxes Are Created Equal
Jason Clements, Niels Veldhuis, and Milagros Palacios examine how governments can extract tax revenues in the least costly and economically damaging manner in order to improve economic performance.
The Impact of Tax Policy on Economic Growth, Income Distribution and Allocation of Taxes
There is considerable disagreement about how taxes, especially high marginal tax rates on those with high incomes, influence economic performance and the distribution of income. In this essay, James D. Gwartney and Robert A. Lawson use cross-country data on changes in marginal tax rates since 1980 and find that high marginal tax rates, particularly rates of 50 percent or more, suppress long-term economic growth.
Taxes and Economic Growth: A Strategy for State Officials
Writer Teresa Bauman summarizes a 28-page report by Professor Richard Vedder of Ohio University that answers the question, “Should states adopt a safe haven strategy of low tax burdens to foster economic growth, capital formation, and innovation?” Vedder’s report was released in September 2001 by Taxpayers Network Inc.
Personalizing the Corporate Income Tax
In a Fiscal Fact article, Gerald Prante and Scott Hodge discuss the effect of corporate income taxes on individual households. They write, “Examining income groups, Chamberlain and Prante found that low-income households pay more in corporate income taxes than they pay in personal income taxes. Geographically, households in largely urban congressional districts and metropolitan areas bear a disproportionate share of corporate income taxes today and, thus, would receive a significant boost in living standards if the corporate tax burden were reduced.”
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 and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].