- Critics of North Carolina’s proposed tax cap amendment are claiming the cap will have major negative repercussions for the state
- Such charges are not grounded in reality
- Georgia’s experience with a tax cap provides a useful example
This November, North Carolina voters will decide on a constitutional amendment to lower the state’s income tax cap from 10 percent to 7 percent.
Left-leaning groups claim the lower cap would threaten the state’s financial health. This is an unfounded concern. If you’re still not convinced that lowering the tax cap is a good idea, let’s take a look at Georgia, North Carolina’s neighboring state that adopted a similar measure four years ago.
In 2014, Georgia voters approved a constitutional amendment that capped their income tax at 6 percent. The measure passed with 74 percent voter approval. Georgia’s cap did not actually lower taxes; it simply forbade future General Assemblies from raising the income tax. The amendment effectively capped the rate at 6 percent. Similarly, North Carolina’s amendment would not lower taxes, since the individual and corporate income tax rates are already well below the proposed 7 percent cap at 5.5 and 3 percent, respectively.
How has Georgia fared under their income tax cap? They seem to be doing well.
Every state is different, but North Carolina is similar to Georgia in significant ways. Both states are within the Southeastern region of the United States. They share cultural, demographic, and industrial commonalities. They both enjoy robust financial health and low unemployment rates. The states also have similar-sized economies. Georgia’s GDP for 2017 was $554 billion while North Carolina was only slightly behind at $538 billion. Because of these similarities, Georgia’s experience can provide insight into what lowering the tax cap could hold for North Carolina.
Opponents of North Carolina’s tax cap amendment claim the amendment will produce three major adverse consequences: 1) Education and other state spending will be harmed; 2) the state will not be financially prepared for another recession; and 3) the state’s bond rating will suffer. Using Georgia as an example, let’s examine these claims.
Claim 1: Education and other state spending will be harmed.
Georgia has steadily increased its K-12 Education state spending since 2011. The 2014 tax cap had no negative impact on that upward trajectory.
Georgia’s state contribution to per pupil spending is less than North Carolina’s due to differences in funding mechanisms. Still, the per pupil figures are still useful for comparison because the two states have been on a similar upward trajectory (see figure below).
Since 2014, Georgia’s education expenditures have continued to increase, indicating that their income tax cap had no negative effect on the state’s education spending. In fact, Georgia fully funded its education formula for the first time this year and the state has increased education spending by $2.5 billion from fiscal years 2014 to 2019.
In North Carolina, the opponents of the tax cap amendment have made extreme allegations regarding the catastrophic effects of lowering the tax cap on education funding. Georgia’s experience reveals the claims to be unfounded hyperbole intended to block needed limits on government spending.
Claim 2: The State will not be financially prepared for another recession.
Although Georgia has only had its 6 percent tax cap since 2014, the income tax rate in the state has actually been at 6 percent since 1969.Georgia policymakers had the fiscal discipline to avoid tax increases during the last recession. This stability in the rate provides an opportunity to examine the effects that the cap would have during another recession.
One of the reasons that Georgia was able to weather the 2008 recession without raising taxes is because of the presence of a rainy day fund. The cyclical nature of the economy allows state policymakers the opportunity to prepare for downturns by putting money aside during periods of growth. By contrast, North Carolina has historically relied on tax increases to sustain high spending levels.
The potential for tax increases disincentivizes savings. Lowering the income tax cap forces lawmakers to think more critically about their spending priorities.
In fiscal year 2017, Georgia’s rainy day fund constituted a larger share of its general fund budget than North Carolina’s did. Georgia’s fund had savings equal to 10 percent of its annual General Fund spending, while North Carolina’s rainy day savings was equal to 8.3 percent of annual General Fund spending.1
Emboldened no doubt by their sizeable savings, Georgia lowered its tax rates in 2018 for the first time in almost fifty years.
The tax cap, if anything, seems to stabilize or promote economic growth as businesses and residents are reassured that locating in Georgia will not result in higher tax burdens during future recessions.
Claim 3: The State’s bond rating will suffer.
Lastly, critics of the tax cap amendment claim that the state’s bond rating would be threatened by adoption of the amendment. This has certainly not been Georgia’s experience.
Like North Carolina, Georgia also enjoys AAA bond ratings from all major rating agencies. Both states have maintained this status for at least 15 years, including Georgia’s implementation of the lower tax cap in 2014. Clearly, Georgia’s tax cap implementation did not harm its AAA bond rating.
Last month, the rating agencies issued North Carolina’s most recent set of across-the-board AAA ratings, fully aware of the upcoming vote on the constitutional amendment to lower the income tax cap. One agency, Standard & Poor’s explicitly stated that they did not anticipate the bond rating would be affected by the passage of the tax cap amendment.
When we review Georgia’s recent experience with adopting a lower tax cap, we find none of the dire predictions made by critics of the amendment came to fruition. If anything, Georgia’s economy seems to be thriving as individuals and business enjoy the security of knowing that their income tax rates will not increase in the future. Because of the similarities between the states, such lessons are very helpful for understanding future impacts should North Carolinians vote to adopt a lower tax cap this November.
- National Association of State Budget Officers. “Fiscal Survey of the States, Spring 2018.” Table 30. https://higherlogicdownload.s3.amazonaws.com/NASBO/9d2d2db1-c943-4f1b-b750-0fca152d64c2/UploadedImages/Fiscal%20Survey/NASBO_Spring_2018_Fiscal_Survey_of_States-S.pdf