North Carolina is an Economic Success Story in These Tough Times
Most state legislative sessions have adjourned at this point in the year, and the state legislative season is winding down. Yet, these have been tough months for state lawmakers, as they have had to deal with budget quagmires coming out of the Covid recession.
Some states are having to make difficult decisions about which portions of state government to cut. As early as November 2020, New Mexico Gov. Michelle Lujan Grisham called on all state agencies to reduce spending requests by up to 5% for the 2021-22 budget year. In December, Illinois Gov. JB Pritzker ordered more than $700 million in spending reductions. And in January, Ohio Gov. Mike DeWine called for $390 million in across-the-board budget cuts for state agencies to balance the Buckeye State's budget.
And yet, other states are deciding to increase taxes on individuals or corporations. Arizona voters approved Proposition 208, which creates a new income "surcharge" on wealthy Arizonans and creates a fifth tax bracket, increasing the highest marginal income tax rate from 4.5% to a staggering 8%. And in April, New York lawmakers passed a budget, signed by Gov. Andrew Cuomo, which will increase state corporate and personal income taxes by $4.3 billion per year.
Then there is North Carolina. The Tar Heel State was ravaged by the Great Recession, hitting the fifth-highest unemployment rate in the nation at 11.4% in mid-2009. In 2011, state lawmakers began a series of budget reforms to meet the state's constitutional mandate of a balanced budget. Since that time, state budget growth has stayed at or below the combination of population growth and inflation - which means that legislators wisely chose to prevent the size of government from growing faster than its supporting economy.
Then in 2013, then-Gov. Pat McCrory and the state legislature began cutting taxes. They lowered personal income tax from a top rate of 7.75% to a flat 5.75%, cut the corporate rate from 6.9% to 5%, and eliminated the death tax. All told, state lawmakers have passed four separate tax reform packages since 2013. Additionally, lawmakers reformed welfare to encourage work and prevent the state from falling further into debt to the federal government. As a result, North Carolinians have prospered. Before the Covid-recession, North Carolina's unemployment rate was down to 3.6%, and median household income has increased by more than $13,000 from 2013 to 2019.
North Carolina's tax reforms are the key reason the state came back from ranking an abysmal 44th in state business tax climate in 2013 to finish in 10th place in a 2021 Tax Foundation report.
Thus, North Carolina is in a much more advantageous position than many states in 2021. Republican legislators and a Democrat governor not coming to a budget agreement for a few years helped prevent massive spending increases, but North Carolina now finds itself with a $4 billion revenue surplus. That's a problem that any other state would love to have.
Counter to the national narrative, North Carolina lawmakers are putting their feet on the gas of the state's economy. On June 9, North Carolina Senate passed a bold new tax reform package, with bipartisan support, which will cut personal income tax rates from a flat 5.25% to 4.99%, increase the standard deduction, and phase out the state corporate income tax by 2026.
Will it help North Carolina? Likely so. The corporate tax phase-out alone will radically boost the state's economy. According to a 2019 academic study published by the Civitas Institute, ending North Carolina's corporate income tax will increase state gross domestic product by $17 billion or by 2.1%, and lift statewide salaries per employee by $1,546 over the next decade.
These new tax cuts are not a done deal. There is still the political issue of a Republican legislature negotiating with Gov. Roy Cooper (D) on the state budget. However, North Carolina's economic and fiscal track records speak for themselves, and tax cuts are likely to be politically popular with voters finally able to return to work after a year of unemployment deep dips in their income.
Nothing is stopping other states from becoming the next success stories by reforming taxes without bloating government spending. For any state legislature looking for a formula to generate economic growth, lawmakers can adopt the North Carolina model. If they do so, they might soon discover that the only unknown factor is just how much additional innovation, job growth, and even state revenue might result from unleashing opportunity.
Donald Bryson is president of the John Locke Foundation, a nonprofit public policy organization in Raleigh, North Carolina.