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Two Sides To Story: Cutting Income Tax Is Poor Strategy or Will Eliminating Put More Money In Your Pocket?

Compiled by Jesse Wood

March 21, 2013. Since his campaign for the governorship, Gov. Pat McCrory has made it known that he is open to cutting or outright eliminating the state’s income tax.

Gov. McCrory
Gov. McCrory

His campaign’s website states: “North Carolina’s income tax burden is the highest in the region and the ninth highest in the nation. Lowering the income tax to give North Carolina families and businesses relief will be a top priority in the McCrory administration. A high personal income tax is squeezing our state’s top job creators and driving them to other states while taxing our workers’ productivity.”

The idea of cutting or eliminating the state’s income tax and raising the state’s sales tax, which combined with the local sales tax is 6.75 to 7 percent across North Carolina, is floating around the N.C. General Assembly.

While some liberal groups such as the N.C. Justice Center think this is a poor strategy, conservative groups such as the Civitas Institute believe eliminating the income tax will put more money into people’s pockets.

See releases from the two groups below:


N.C. Justice Center: Cutting personal income taxes would be poor strategy for supporting NC’s economic growth

North Carolina policymakers are currently pursuing personal income tax cuts despite the unimpressive recent experiences of other states that have tried this approach and despite academic literature finding that state personal income tax levels do not affect economic growth.

NC Justice Center
NC Justice Center

States that made deep personal income tax cuts in the 1990s and 2000s did not perform particularly well in later years, according to a new report from the Center on Budget and Policy Priorities. The biggest tax-cutting states in the 1990s had slower income growth than other states on average, and states that enacted major personal income tax cuts in the 2000s prior to the recession were as likely to lose economic ground as to gain it.

“The evidence is clear: it would be a huge mistake for North Carolina to cut income taxes,” said Alexandra Forter Sirota, director of the Budget & Tax Center, a project of the North Carolina Justice Center. “It won’t help our economy one bit, and it will mean cutting funding for services that businesses and families rely on every day, like good public schools, universities, and roads.”

Of the states that cut personal income taxes in the 2000s, those that experienced strong economic growth were oil producing states whose success likely resulted not from the income tax cuts, but instead from a sharp rise in oil prices and other factors unrelated to the tax cuts. Non-oil-producing states that cut personal income taxes saw their economies decline compared to the rest of the country.

Similarly, the states that cut taxes the most in the 1990s performed worse than other states on average in later years. These results are consistent with most academic studies, which typically find that state personal income tax levels do not affect economic growth, as the report details.  One reason for these findings is that states must balance their budgets, so tax cuts must be paid for by raising other taxes, cutting services, or some combination of the two. Doing these things hurts the economy and counteracts any benefit of the income tax cut.

 “With their revenues still deeply damaged by the recession and their reserve funds depleted, states have little margin for error right now,” the report reads. “Gambling on a personal income tax cut would put fundamental public services, which in most states are heavily dependent on personal income tax revenue, at risk.”

State income tax cuts would hit at a time when North Carolina is already facing serious funding problems due to cuts from the federal government. Cuts in federal funding over the next several years under the 2011 Budget Control Act will hurt North Carolina’s ability to provide services important to the state, such as good public schools, clean water, and safe communities. Across the board spending cuts known as sequestration will cause additional damage. State income tax cuts would only compound this problem.

“Rather than taking an approach that has failed to produce results in other states, North Carolina should focus on investing in educating our children, building state of the art infrastructure, and protecting the safety and well-being communities to spur economic growth in the future,”  Sirota said.

Read the full report here: http://www.cbpp.org/research/index.cfm?fa=topic&id=40 


Civitas Institute Study: Eliminating the Income Tax Will Put More Money in North Carolinians’ Pockets9

The Civitas Institute released a report recommending a tax reform plan that would replace North Carolina’s income tax with a consumption-based tax. The report—“More Jobs, Bigger Paychecks: A Pro-Growth Tax Reform for North Carolina”—demonstrates how North Carolina’s current income tax system harms the Tar Heel State’s economy and regional competitiveness, as well as how a consumption-based tax would reduce the overall tax burden on citizens, increase the rate of personal income growth, accelerate job creation, and improve the state’s economic strength.

CIVITAS-flame-cutoutThis reform is currently being discussed by the state’s legislative leaders.  The report was authored by Arduin, Laffer, & Moore Econometrics, in partnership with the Civitas Institute.

“Replacing the income tax with a consumption-based tax will restore North Carolina’s economic health and benefit all of our state’s citizens,” Civitas Institute President Francis DeLuca said. “Government data show that North Carolinians need more jobs and bigger paychecks, and that’s exactly what they will get with this proposal.”

North Carolina’s current income tax rate is higher than that of any other state in the region. Topping out at 7.75 percent, the income tax has led to an overall tax burden that is the 17th worst in the nation. This burden has also stymied the state’s personal income growth rate, which fell to the 26th fastest in the nation in the last decade after measuring 4th fastest in the previous twenty years.

The proposed consumption-based tax would replace North Carolina’s personal income tax, corporate income tax, and franchise tax. In order to keep the reform revenue neutral, the sales tax would expand to include all services currently taxed in at least one state, close current tax loopholes, increase the real estate conveyance fee, and implement a business license fee.

The report shows that states without personal incomes taxes averaged a 0.5 percent higher annual growth rate than other states between 2002 and 2011, while states without corporate income taxes grew a full 1 percent more per year. In North Carolina, the proposed tax reforms would increase the average annual rate of personal income growth by 0.38 percent to 0.66 percent more per year, according to the study.

 “Had a consumption-based tax reform been implemented in 2000, North Carolina’s total personal income would be as much as $25 billion higher today, or about $6,000 to $10,400 for a family of four,” DeLuca said. “It would also have led to the creation of as many as 378,000 more jobs—a huge number for a state with 9.3 percent unemployment.”

To access the study, click here: http://www.nccivitas.org/2012/more-jobs-bigger-paychecks/

For the study’s executive summary only, click here: http://noincometaxnc.org/files/mjbp-exec.pdf

For a policy brief summarizing the study, click here: http://noincometaxnc.org/files/mjbp-brief.pdf