Politics & Policy

North Carolina Wows with Its Impressive Tax-Cut Successes

(Dreamstime image: Larryhw)
And the good news keeps on coming: more jobs, more money for schools, higher pay.

State governments are constantly competing for people and businesses, and North Carolina has proved that cutting taxes is a great way to come out on top. Since 2013, Governor Pat McCrory and the state legislature have cut taxes by an astounding $4.7 billion — and the result has been economic growth, job growth, and even additional tax revenue that could spur yet more tax cuts in the years ahead.

North Carolina’s tax cuts to date have included reducing personal income taxes for every single working family in the state, lowering the corporate tax to the lowest rate in the country for states that still levy one, and eliminating the death tax entirely. To help patch budget holes, the state also eliminated exemptions to the sales tax to broaden its base and even the playing field.

The results speak for themselves. GDP growth — generally considered to be the most comprehensive measure of economic strength — was No. 1 in the country from 2013 through 2015. The state’s 13.4 percent growth far exceeded the 9.9 percent average for both the Southeast and the nation as a whole. 

Then there are jobs. North Carolina’s labor-force growth in 2015 came in five times stronger than the national average, and the state is projected to add a total of 90,000 jobs in 2016 alone. In total, nearly 295,000 jobs have been added since 2013, and the unemployment rate — which was over 10 percent just five years ago — has been cut to 4.9 percent as of October 2016.

But North Carolina’s tax reforms haven’t just been good news for taxpayers and job-seekers. They’ve also created massive revenue surpluses, countering much of the rhetoric from opponents who claimed that tax cuts would blow a hole in the state budget. 

North Carolina finished the fiscal year that ended June 2015 with a $445 million surplus. Through the first six months of the 2016 budget year, the state took in over half a billion dollars more than it did in the same period the previous year, the State Controller’s Office reported. Continuing the positive trend, the state finished the fiscal year that ended June 30 of this year with a $191 million more in tax revenue than expected.

The increased revenue is a result of higher personal income tax and franchise tax revenues, which taxes businesses based on how much they earn in a year (even if they post a loss). According to the governor’s office, these higher revenues are the result of more jobs and higher-than-expected wage growth and business profits following from the tax cuts — proof that tax cuts can actually increase revenue.

While cutting taxes, North Carolina has also controlled government spending so as not to crowd out private investment.

The increased revenue has not only put North Carolina on more stable financial footing; it has also allowed the state to increase pay for public employees and bring average teacher pay over $50,000. North Carolina teachers’ pay has increased faster than that of any state in the country since the start of the 2014 school year, and is up almost $10,000 since 2013 — a more than 20 percent increase.

Overall K-12 educating spending increased $314 million in the 2016 state budget, and the surpluses have even allowed the state to expand its Opportunity Scholarship school-choice program, which accounts for just 0.5 percent of total K-12 spending but provides a lifeline for thousands of students. 

Best of all, the good news is far from over. In 2017, the top personal income-tax rate will automatically fall below 5.5 percent, and the corporate income-tax rate will fall to 3 percent. Under current law, the total tax cut on North Carolinians’ earnings will top $6 billion by 2020. The legislature wants to cut tax even further this year by reducing the individual rate again or possibly by repealing the franchise tax, which would put more dollars back in the pockets of working families and further reduce the cost of doing business.

#related#Significantly, taxes play a huge factor in determining a state’s competitiveness, but they are not everything. While cutting taxes, North Carolina has also controlled government spending so as not to crowd out private investment, reformed welfare to encourage work, maintained its status as a right-to-work state, and reduced regulatory burdens to make it easier to do business.

Because of these reforms, North Carolina’s business-tax climate has improved from 44th to 11th since 2013 according to the American Legislative Exchange Council.

In many ways, North Carolina has effectively showcased the ability of free-market reforms to create economic opportunity and prosperity. Principled lawmakers in the Tar Heel State plan to build on these successes in 2017 and beyond. Legislators elsewhere would be wise to follow their lead, too. 

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