- Critics said NC’s historic tax reforms would cause budget shortfalls and not help the state’s economy
- They were proven wrong on both counts
- The state experienced five consecutive budget surpluses, and economic growth has outpaced national averages on several measures
North Carolina’s historic tax reforms of 2013, along with subsequent improvements, transformed North Carolina from one of the worst states to do business to one of the best. At the time of the 2013 reforms, the Tar Heel state was burdened with the 7th worst state business tax climate in the nation, according to the Tax Foundation. Immediately after the 2013 reforms, that ranking shot up to 17th best. Continued tax cuts have enabled our state to climb to 15th best in 2020.
Such improvements have better prepared North Carolina for the current coronavirus economic shutdown. Budget surpluses have helped legislators build up a substantial rainy day fund. A more hospitable economic climate will enable a quicker recovery. Bigger paychecks for workers over the years means that household are better prepared to weather the economic storm than they otherwise would be.
Reforms produced budget surpluses, not shortfalls
Over the past decade the top personal income tax rate in North Carolina declined from 7.75 percent to 5.25 percent. Meanwhile, the standard deduction has increased, exempting more low-income workers from having any state tax liability at all. “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.
Critics, however, have repeatedly warned that the tax cuts would cause budget shortfalls. Time and again, they’ve been proven wrong.
As early as the fall of 2014, Democratic state legislative candidate Sarah Crawford warned of a pending shortfall for the FY 2014-15 budget of a billion dollars. This was echoed in October 2014 by the left-wing NC Policy Watch, which warned “the $62 million revenue shortfall in the first quarter of the state’s fiscal year foreshadows what’s to come by the end of the fiscal year.”
In February 2015, Policy Watch doubled down on their budget shortfall predictions, warning “the rate of revenue growth is raising too few dollars and will put the current fiscal year budget (FY 2014-15) out of balance.”
A few short months later, when it became clear that the state would end up with a significant surplus, not a shortfall, Rob Schofield of Policy Watch declared with a straight face: “The surplus is not a huge surprise.”
The organization that had warned multiple times over several months of a budget shortfall is now pretending to not be surprised by the surplus.
Additionally, leftists proceeded to condemn the surplus.
Senate Democratic leader at the time, Dan Blue, ridiculed the $400 million surplus as a “so-called budget surplus,” and that “Seniors, small businesses and middle-class families across North Carolina got slammed on Tax Day.”
The same people that denounced the tax cuts because it would cause budget shortfalls, were now outraged that the tax cuts resulted in a budget surplus.
But that wasn’t the end of it. Undaunted by being proven so wrong in the first full year of the tax reform era, opponents have once again more recently warned of shortfalls. This February 2018 Center for Budget and Policy Priorities article insisted “large shortfalls loom in North Carolina’s future.”
Indeed, North Carolina is now on pace for its sixth consecutive budget surplus since the historic 2013 tax reforms. As reported by the Office of the State Controller, as of February: “The Fiscal Research Division estimates that General Fund revenue is $289.6 million above the revenue target for the fiscal year.”
This, of course, will be altered significantly by the economic shutdown, but is indicative of how strong economic growth resulting from the tax cuts continued to produce revenues that exceed expectations.
Tax cuts boosted job growth, household incomes
Not only were critics proved wrong about budget shortfalls, they were also proven wrong regarding the tax cuts’ impact on the economy. Critics insisted that at best the tax reforms would do nothing to help job creation and economic growth, and at worst would actually make the economy worse.
Instead, the resulting economic improvements have been remarkable.
A 2016 paper by the Richmond Federal Reserve highlighted some of the early returns the tax reform provided. “By most measures, North Carolina has had one of the stronger-performing state economies over the past few years and has experienced significant improvement in its performance relative to the rest of the nation,” the paper noted.
“Last year, North Carolina’s real personal income grew about 3.9 percent, compared to the national average of less than 3.4 percent. The state’s unemployment rate, well above the national average from 2008 through 2013, equaled the national rate of 4.9 percent in June. Looking at all these figures plus statistics on housing, corporate equity, and other factors, a March 2016 Bloomberg News article concluded that the state ‘has gained the most economic ground over the past three years of any U.S. state.’”
Looking at more recent data, we find that the early robust economic results have continued:
- Unemployment is down. Today, North Carolina’s unemployment rate is just 3.6 percent, nearly identical to the national 3.5 rate, and tied for only the 21st highest rate,[i] compared to 8th highest back in 2010.
- Job growth outpaces national average. From Jan. 2013 to Jan. 2020, the number of employed North Carolinians grew by 14.9 percent, outpacing the national job growth rate of 10.8 percent.[ii]
- Household income is up. North Carolina’s median household income grew by 29.5 percent from 2013 to 2018, significantly outpacing the national average of 21.6 percent and the southeast region’s average of 23.1 percent.[iii]
- GDP continues to grow. According to the Raleigh News & Observer, from the fourth quarter of 2013 through the second quarter of 2019, North Carolina’s gross domestic product (GDP) rose by 27.2 percent, better than the national average rate of 26.1.
The bottom line: North Carolina’s tax reforms have worked. Critics who predicted massive budget shortfalls were proven woefully incorrect. The budget surpluses have enabled North Carolina to build up a sizeable rainy day fund that was desperately needed in response to Hurricane Florence and will be desperately needed to help handle the fiscal fallout from the coronavirus economic shutdown.
Moreover, the tax cuts have helped facilitate robust job creation and economic growth, which translates into bigger paychecks and more opportunities for working North Carolinians.
[ii] North Carolina Department of Commerce, Labor Market Data & Tools, accessed March 31, 2020. https://www.nccommerce.com/data-tools-reports/labor-market-data-tools
[iii] U.S. Census Bureau; Current Population Survey, Table H-8 Median Household Income by State