by Brian Balfour, senior vice president of research, John Locke Foundation

If Louisiana wants to look for inspiration for tax reform, they could do no better than North Carolina.

Aggressive, yet sensible, tax cuts paired with fiscal restraint is what made North Carolina “The national model for conservative tax reform,” according to Patrick Gleason, vice president of state affairs at Americans for Tax Reform, in a 2017 column he wrote for Forbes.

North Carolina’s successful tax reform story began in 2011, when the newly elected Republican legislative majority reduced the state sales tax rate from 5.75 percent to 4.75 percent, a reduction of 17 percent, in a move that saved consumers nearly $1 billion annually.

Tax reform continued in 2013, when the legislature simplified the personal income tax from a multi-tiered schedule to one flat rate, with a higher standard deduction, starting in 2014. The top rate had been highest in the southeast and 11th highest in the nation but has since dropped to the lowest in the southeast thanks to reform.

In 2013, the North Carolina Chamber of Commerce credited the state’s “historic” reforms for “…dramatically improving the state’s competitiveness regionally and nationally, positioning our state to be a leading competitor for jobs!”

The nonpartisan Tax Foundation also underscored the competitive advantage tax reform gave North Carolina in a 2014 article by the Winston-Salem Journal. “The group said North Carolina made the largest ever one-year ranking upswing. However, it was not an unexpected jump since the group projected in October 2013 that tax reforms would ‘transform one of the worst tax codes in the country into one of the best.”’

Meanwhile, continued increases in the standard deduction have exempted still more income from taxation.

“More than 1.5 million working families in North Carolina owe no income tax on their earnings now that the state’s standard deduction has tripled,” reported House Speaker Tim Moore’s office in April 2019.

To make North Carolina more competitive and provide more money for all employers to invest, tax reform also reduced the corporate tax rate from 6.9 percent – highest in the southeast – to 6.0 percent in 2014, and then to 5.0 percent in 2015.

Taking a somewhat cautious approach to the corporate tax rate cuts, the 2013 legislation included revenue triggers to additional rate cuts, dropping the rate below 5 percent. This meant that certain revenue targets needed to be met to trigger subsequent annual one percent reductions of the rate. These targets were met, and the corporate tax rate has fallen to 2 percent, the lowest of any state with a corporate tax.

The reforms transformed North Carolina from one of the worst states to do business to one of the best. According to the Tax Foundation, North Carolina’s state business tax climate leaped from a dismal seventh worst in the nation in 2012 to 17th best the following year. Continued tax cuts have enabled our state to climb to 10th best in 2021.

The changes worked. The resulting economic improvements have been remarkable:

  • Unemployment is down. As of Feb. 2020, before our Gov. Roy Cooper imposed some of the nation’s strictest lockdowns, North Carolina’s unemployment rate had fallen to just 3.8 percent, only 17thhighest, compared to 10.6 percent back in 2010 –  8th highest in the nation at that time.[1]
  • Household income is up. North Carolina’s median household income grew by a very healthy 47.2 percent from 2012 (the year before the major tax reforms) to 2019, easily the highest in the southeast and significantly outpacing the national average of 34.7 percent. [2]
  • Budget surpluses – not budget deficits – have become the norm. Pro-growth tax policies, plus more responsible budgeting decisions, have led to six consecutive state budget surpluses, each totaling in the hundreds of millions of dollars.  Prudent spending restraint allowed the legislature to build up the state’s rainy day fund to a record $1.9 billion prior to 2018 Hurricane Florence, a fund that still stands at $1.1 billion today (Jan. 2021).[3]

 

Sources:
[1] Bureau of Labor Statistics, figures from Feb. 2020; before Gov. Cooper’s March Executive Order shutting down “non-essential” businesses. Available online at: https://www.bls.gov/
[2] U.S. Census Bureau; Current Population Survey, Table H-8 Median Household Income by State. Available online at: https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-households.html
[3] State of North Carolina, Office of State Controller. General Fund Monthly Financial Report, Jan. 2021. Available online at: https://files.nc.gov/ncosc/documents/files/GFMR/2021/Jan_2021_Gen_Fund_Monthly_Report.pdf