Politics & Policy

The States’ Income-Tax Repeal Revolution

Many states are considering it — what would it do for North Carolina?

It’s been a good week for tax reform. In the past few days, Louisiana governor Bobby Jindal, Nebraska governor Dave Heineman, and Kansas governor Sam Brownback have all called for their states to eliminate their income taxes and replace the revenue with sales taxes.

The latest to join the tax-reform tide is North Carolina, where the legislature and Republican governor Pat McCrory have announced that tax reform is at the top of their to-do list. Governor McCrory has stated he wants to look at the possibility of eliminating the income tax altogether.

#ad#This could be the beginning of a nationwide trend so, naturally, everyone’s asking the same question: What will replacing income taxes with sales taxes mean for the states that try it? North Carolinians need not wonder, however, as there’s already a detailed description of how this move will improve the lives of the Tar Heel State’s citizens.

A study published by the Raleigh-based John W. Pope Civitas Institute, of which I am president, evaluates the economic benefits of from eliminating the personal income tax, the corporate income tax, and the franchise tax. In place of these old taxes, the reform calls for replacing that revenue by increasing the state sales tax slightly and expanding the tax to previously tax exempted goods and services. Some have referred to this as “taxing services” such as lawn care and legal fees. Civitas’s study assessed a plan currently being crafted into a bill that will be introduced to the legislature perhaps as early as next month.

Under this proposal, the state would have gained 217,000 to 378,000 additional jobs over the past decade. Given that the state currently suffers from an abysmal 9.2 percent unemployment rate, a quarter of a million extra jobs would have been a happy development.

Another benefit would be bigger checks come payday. Had this reform been instituted in 2001, the total personal income of Tarheels would now be between $14.4 billion and $25 billion higher, a 4 to 7 percent increase over what it was in 2011. That’s an additional $1,500 to $2,600 in income per worker. If the plan were instituted today, North Carolinians would see their annual rate of personal-income growth jump by 0.38 to 0.66 percent percentage points.

North Carolina’s top income-tax rate is currently 7.75 percent, making it by far the highest in the region. The state also has the region’s highest corporate-tax rate. These combine to make our tax burden the 17th highest in the nation. After a two-decade period in the 1980s and ’90s when our incomes increased at the fourth-fastest rate in the country, we’ve fallen dramatically behind, coming in at 26th-fastest in the past decade. Eliminating and replacing the income tax would go a long way to reversing that trend.

There’s also the small matter of economic growth. The Civitas report demonstrates that states without a personal income tax have average annual growth rates 0.5 percentage points higher than do other states, while states without corporate income taxes average a full percentage point higher each year.

North Carolina could implement the plan without hurting the state’s bottom line — that is, the plan would be revenue neutral, while growing paychecks and boosting growth.

Given the research, it’s no wonder that North Carolina, Louisiana, Nebraska, and Kansas are all considering eliminating their income taxes and expanding their sales taxes. At a time when state governments from coast to coast are debating how to boost their economies and close their deficits, serious tax reform might see the light of day for the first time in years.

And these states are poised to lead the way, as eliminating the income tax is the best place to start.

— Francis DeLuca is the president of the John W. Pope Civitas Institute. You can read the full study at www.noincometaxnc.org,

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