Since the GOP won control of the state legislature in the 2010 elections, state tax rates on retail sales, personal income, and corporate income have all gone down — in the first instance because the newly empowered Republicans rejected a Democratic attempt to extend a previous sales-tax increase, and in the other instances because the legislature slashed income tax rates as part of a tax-reform strategy that also broadened the income tax base (by eliminating special exclusions and credits) and the sales tax base (by applying it to services sold by retailers that also sell taxable goods).
According to a newly released analysis by the legislature’s fiscal staff, the combined effects of the 2013 and 2015 tax changes enacted by the General Assembly and signed into law by McCrory will be to reduce state General Fund taxes by a net of $828 million during the current fiscal year (2015-16) and by $1.3 billion during the fiscal year beginning this July.
Scoring the legislature’s 2011 decision to allow the sales tax rate to drop a full percentage point to 4.75 percent is not so clear-cut. Technically, lawmakers didn’t cut the rate. Instead, they allowed to expire a “temporary” sales-tax hike by Democrats that cost consumers about $1 billion a year. Then-Gov. Bev Perdue demanded that the Republican legislature keep at least part of the sales-tax hike in place. She even vetoed the state budget over the issue. But the General Assembly overrode her veto.
Normally I wouldn’t count a foregone tax increase as a tax cut. But Democratic lawmakers and liberal activists have been inconsistent and incoherent on the matter. During the 2013 and 2015 debates over tax reform, they accused Republicans of “abolishing” the state’s earned income tax credit, a renewable-energy tax credit, and other measures.
That’s not what happened. The GOP-run legislature simply allowed these time-limited credits to sunset as scheduled. If such decisions are going to be described as tax increases, then the vastly more significant decline in the sales-tax rate beginning in 2011 should be treated as a tax cut. It has saved North Carolinians of modest means far more money than they would have received from the earned income tax credit, and more than offset the effects of the 2013 and 2015 sales-tax expansions.
The bottom line is that, depending how you score it, North Carolinians will pay between $1.3 billion and $2.3 billion less in state General Fund taxes next year because of the policy choices Gov. McCrory and state lawmakers made. Most households saw their tax burdens decline, although you may have heard political spin to the contrary. As far as I can determine from looking at fiscal records, North Carolina has never enacted tax reductions of this magnitude in its history.
Whether these tax reductions were a good idea is, of course, a matter of debate. Conservatives believe that by lowering the cost of founding, investing in, and operating businesses, North Carolina’s new tax policies will boost job creation and income growth in our state. Conservatives also place a high value on giving North Carolinians more freedom to spend their own money as they see fit, rather than being forced to spend it on what politicians and interest groups want.
Liberals disagree. They believe our economy would be better off if North Carolina were collecting billions of dollars more in state taxes and using the money to fund schools, public assistance, or other state programs. There’s little hard evidence for their claim, but I have no doubt it is heartfelt.
For both sides of the debate, North Carolina has become a national test case. Conservatives across the country have cheered our tax reforms. Liberals have savaged them. And you can expect to hear much more about them in the months and years to come.
John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.