North Carolina was once a growth champion of the national economy. Between 1981 and 1999, North Carolina’s average personal income growth was the 4th fastest in the nation. Since 2000, however, North Carolina’s personal income growth premium relative to the national average has significantly slowed. Average personal income growth has been the 26th fastest in the nation between 2000 and 2011. And, the change in North Carolina’s economic fortunes is visible across many different economic measures.
North Carolina’s tax policy is an important contributing factor to the state’s economic slowdown. Taxes in the Tar Heel state have never been optimal, but have worsened over time. For instance, North Carolina’s tax burden was lower than the average state and local tax burden during the 1980s and 1990s when North Carolina’s economic growth rate was substantially faster than the nation’s. The reverse is true during the 2000s, when North Carolina’s economy fell behind national and regional growth rates.
Implementing a pro-growth tax reform can help reinvigorate North Carolina’s substantial growth premium once gain. There are many pro-growth tax reforms that would benefit North Carolina. Sound economic theory, as well as empirical evidence, strongly suggest that state income taxes are the most harmful to state economic growth, and consumption-based taxes least harmful.
To that end, legislative leaders have been discussing a plan to eliminate the state’s personal and corporate income taxes, and move to a more consumption-based tax system. In order to evaluate the benefits to North Carolina’s economy from implementing such a tax reform plan, the Civitas Institute has partnered with the consulting firm of Arduin Laffer and Moore Econometrics to produce a study that concludes eliminating the state’s income taxes with a more consumption-based system will create more jobs and bigger paychecks for North Carolinians.