N.C. tax cuts will have broad impact

Published 12:00 am Tuesday, February 4, 2014

RALEIGH — Did Gov. Pat McCrory and the North Carolina legislature raise taxes on poor and middle-income families to give tax breaks to the wealthy?
That’s the claim that a motley crew of liberal politicians, journalists, and activists have been trying desperately to peddle since July of last year, when the General Assembly enacted a package of changes to North Carolina’s tax code that included a new flat-rate income tax, higher standard deductions and child tax credits, broader tax bases, and lower business taxes.
As Republican and Democratic lawmakers debated tax reform during the 2013 session, both sides asked the General Assembly’s nonpartisan fiscal staff to run scenarios on how the proposal would affect North Carolina households based on size, income, marital status and other conditions.

Citing these scenarios, Democrats correctly pointed out that the net effect of sales and income tax changes was to raise taxes on some households in certain circumstances, such as married couples with poverty-level incomes. Republicans correctly pointed out that the vast majority of scenarios — for poor, middle-income, and wealthy households — showed a net cut after accounting for all the tax changes.
None of this should have been surprising. I can’t think of a single tax reform measure in which every single household paid less tax than they did before. Tax reform typically involves trading in special tax breaks to get lower overall tax rates. Successful tax reforms are structured so that most people are made better off, not just immediately with more disposable income but also over time as more-efficient taxes allow for higher rates of job creation and income growth.
North Carolina’s 2013 tax package fits this definition of successful tax reform. A new study of its effects, published by the John Locke Foundation with the assistance of the Massachusetts-based Beacon Hill Institute, shows that the average household at every income level will pay lower state taxes in 2014 and beyond than they would otherwise have paid.
The total tax burden will drop by about $150 million a year for households with incomes below $50,000. For those with incomes between $50,000 and $100,000, the net tax savings will approach $140 million a year. Upper-middle-income and wealthy taxpayers will get significant tax relief, as well, reflecting the fact that they were previously paying the highest marginal income tax rate, 7.75 percent, which will drop to the new flat rate of 5.75 percent.

This is only the beginning of the story, however. For one thing, 2013 wasn’t the first year of spirited debate about state taxes. Two years earlier, when Democrat Bev Perdue was governor and Republicans had just taken over the General Assembly, Democrats proposed to extend most or all of a one-cent sales tax they had originally enacted in 2009 as “temporary.” Republicans refused. If Perdue and the Democrats had gotten their way, poor and middle-class North Carolinians would be shouldering as much as $400 million a year in higher sales taxes today. Where were liberal journalists and activists in 2011? In favor of the Democratic plan, of course.
Anyone familiar with the past three decades of North Carolina tax policy would know that Democrats have repeatedly raised state and local sales tax rates while Republicans have opposed those hikes. To claim otherwise is to reveal either ignorance or dishonesty.
Another reason why the nearly $300 million in net tax cuts for poor and middle-income North Carolinians in the 2013 tax package is only the beginning of the story is that it doesn’t include the dynamic effect on the state’s economy. Empirical research suggests that the lower tax rates will make North Carolina a more attractive place to invest, start businesses, and create jobs over the next few years.
McCrory and the legislature didn’t tax average folks more to fund tax cuts for the rich. They crafted a tax reform with broad financial and economic benefits for the vast majority of North Carolinians.
John Hood is president of the John Locke Foundation.