The Leaflet – North Carolina’s Bold Tax Reform Passes

Published July 18, 2013

North Carolina’s Bold Tax Reform Passes


Yesterday, the North Carolina Legislature passed a comprehensive and bold tax reform bill after months of debate. Once signed by Gov. Pat McCrory, the measure will flatten and lower the individual and corporate income taxes. It also will repeal the estate tax, cap the gasoline tax, and make various other changes. The reforms are drawing favorable reviews from North Carolina residents, public policy groups, and lawmakers from other states.

One of the keys to North Carolina’s reforms is that they close multiple tax expenditures in the individual and corporate income tax code. This allowed lawmakers to flatten and lower the income tax rates for everyone, making the system simpler, flatter, and likely to economic growth in the state.

Matt Glans, senior policy analyst at The Heartland Institute, points out, “Across the country, 34 states have progressive income tax systems. Only seven states have flat tax systems. The remaining nine states have either no income tax, or a limited income tax on individuals.” Research has shown progressive income tax systems across the world negatively affect economic growth and dis-incentivized certain economic activities, such as entrepreneurship and investment.

In 2013, many states said they were going to make income tax cuts and tax reform a top issue, but only a handful were able to get anything passed. North Carolina’s bold tax reforms could help push other states to pass similar pro-growth tax reforms in 2014.

This week’s edition of The Leaflet features research and commentary addressing progressive taxation, auto insurance mandates, Ohio Medicaid reform, and subsidizing phones.

John Nothdurft
Director of Government Relations
The Heartland Institute


Research & Commentary: Progressive Taxation
Budget & Tax

One of the primary tax reform debates taking place in several states is an argument over which type of tax system most efficiently raises revenue for the government while not unduly burdening taxpayers or harming economic growth.

Currently, 34 states have progressive income tax systems, while seven states have flat tax systems. The remaining nine states either have no income tax at all or a limited income tax on individuals, taxing only dividend and interest income.

Under a progressive tax system, tax rates increase as the taxable income amount increases. Progressive taxes are a form of income redistribution, with the taxes paid by higher income earners used to cover government services for lower income earners. While supporters of the progressive tax argue this is both fair and an example of social justice, these taxes violate democratic tax principles by placing an undue burden on certain groups of taxpayers. Even under a flat tax, those who earn higher incomes pay more in taxes, the “social justice” progressive tax proponents claim to seek.

Progressive taxes are problematic for several reasons. First, as a 2008 Organisation for Economic Co-operation and Development working paper explained, progressive income tax systems across the world have demonstrated a negative effect on economic growth. By increasing taxes on higher income earners, progressive tax systems dis-incentivize certain economic activities, such as investment, entrepreneurship, and financial risk-taking – activities that are the engines of economic growth and more commonly undertaken by those with higher incomes.

Progressive tax systems also create unique difficulties with predicting tax revenue and preparing state budgets. Progressive tax systems result in tax revenues that are more volatile than flat tax systems. As the economy waxes and wanes, tax revenue received from taxpayers, especially those in the upper brackets, rises and falls. When the economy improves, more individuals and corporations move into higher tax brackets and pay larger percentages of their higher incomes in taxes. Relying on a small percentage of higher income taxpayers for a larger percentage of revenues often generates larger budget gaps during economic recessions.

Lawmakers considering switching to a new tax system should considering moving away from the progressive tax model while moving towards a flatter tax system. This would help improve economic growth by removing double taxation, attracting capital, and improving the business climate.



Research & Commentary: Auto Insurance Mandates and Minimum Rate Regulation
Finance, Insurance, and Real Estate

Individual mandates are commonly applied to auto insurance: Forty-nine states and the District of Columbia currently require that drivers carry at least liability auto insurance. Despite compulsory auto insurance mandates being in place in nearly every state, the number of uninsured drivers is not improving and has even begun to climb during the recent recession, with many financially burdened families beginning to allow their coverage to expire without renewing.

Mandating at least a minimum level of coverage is intended to solve this problem by increasing the pool of insured motorists, but experience has shown mandates are difficult to enforce in a real-world setting. When minimum coverage becomes too broad and expensive, drivers will choose to go without insurance, regardless of what the law requires.

In this Research & Commentary, Matthew Glans argues minimum auto insurance mandates will have the opposite effect of what was originally intended. “States with higher auto insurance mandates should consider reforms that bring them back down to a reasonable level. Keeping the mandated minimums low and keeping the decision on how much coverage to buy in the hands of consumers is a better way to encourage drivers to buy new auto insurance coverage.”

FGA Offers Recommendations for Ohio Medicaid Reform
Health Care 


This Health Care News article reports the Foundation for Government Accountability released a report detailing eight reasons Ohio should not expand Medicaid. Republican Gov. John Kasich currently supports expansion despite opposition in the state’s legislature.

The study “offers several concepts for additional reforms Ohio could undertake instead of expanding Medicaid. Variations on several of the reforms he recommended are included in the Medicaid reform bill proposed by Rep. Barbara Sears (R-Monclova Twp.). Her proposal relies on the assumption Ohio could take billions in new federal funding by expanding Medicaid, but in the future ‘shall cease to cover the group, and any subgroup of the group’ if ‘the federal medical assistance percentage for expenditures for Medicaid services provided to the group or subgroup is lowered.'”

Urban Poor Among Those Subsidizing Phones for Nation’s Wealthiest Locales

In this Heartlander digital magazine article, Mary Petrides Tillotson examines the efforts of the Federal Communications Commission to end waste in a federal phone subsidy program. Tillotson examines a recent study from the Alliance for Generational Equity that found a significant part of the subsidies intended for poor urban areas actually went to wealthier communities.

“Before the 2011 reforms, federal subsidies provided up to nearly $24,000 per year per phone line in certain high-income areas including the island of Maui in Hawaii, Colorado resorts, and gated communities in Arizona. The subsidies have been going to approximately one-half of one percent of the nation’s households. Maximum subsidies per line are smaller now but still far more than the actual costs to provide phone service.


“Phone service is available anywhere in the country, without subsidies, for $600 per line per year, said Thomas Hazlett, one of two authors of the study, ‘Unrepentant Policy Failure: Universal Service Subsidies in Voice and Broadband,’ published by the Alliance for Generational Equity, or AGE.


“‘It’s very hard to believe that people in these very wealthy communities would be without phone service if it were not for poor people in urban areas subsidizing them,’ said study coauthor Scott Wallsten.”

Education Savings Accounts Give Mothers Tears of Joy

Heartland Research Fellow Joy Pullmann notes Arizona’s recently expanded education savings accounts program is bringing tears of joy to mothers around the state.

“One-fifth of Arizona kids—some 200,000 children—are eligible for an ESA this fall. The expansion puts about $3,000 more into the account each year, for an annual total of about $6,000 per child. (Special-needs children get different amounts, often more, depending on their diagnosis.) Arizonans pay $8,000 per student attending public schools, on average. The expansion allows children who would enter kindergarten at a D- or F-rated school to receive an ESA instead. Previously, students had to attend the poorly rated school for a year. The program is also open to foster children, special-needs students, and military dependents.

“In Arizona, support for school choice of this startling variety is bipartisan. Democratic state Sen. Barbara McGuire resurrected the bill on the last day of session after it had previously failed by one vote on the Senate floor.”