THE TALLEST TREE IN THE FOREST

March 10, 2021
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Our recent Carolina Partnership for Reform statewide survey showed the economy, budget and taxes topped the list of issues NC voters are concerned with this year.  Voters also overwhelmingly back using the state’s enormous budget surplus for a broad tax cut that would build on the last decade of groundbreaking tax reforms in North Carolina:

 

 

 

 

 

 

 

The reform majority in the State Legislature has produced nation-leading reforms in many policy areas.  Amid this forest of policy and political successes, though, one towers above all the others: Tax Reform and Reduction.

A quick refresher on the results of the reform majority’s key conservative tax reforms over the last decade:

In the interest of brevity and simplicity, this chart omits the complete repeal of the estate tax and hugely important reforms and reductions in other taxes, including the franchise, sales and gas taxes.

Collectively, the tax reforms implemented by conservative reformers in the legislature over the past decade reduced annual state tax collections by around $5 Billion per year.

These tax reform efforts, led by legislators including Rep. Julia Howard, Sen. Bob Rucho, Rep. David Lewis, Sen. Tommy Tucker, Rep. Jason Saine and Sen. Bill Rabon, have been praised nationally as “the gold standard for state tax reform”, “a national model for state tax reform”, “a model for federal tax reform” and “one of the three biggest state tax reforms in the last 30 years”.

Four guiding principles animate North Carolina’s successful tax reform efforts:

  1. Broaden tax bases
  2. Lower rates for all taxpayers
  3. Stop picking winners and losers
  4. Simplify the tax code

Legislators eliminated billions of dollars of tax loopholes and carve outs, broadened the sales and income tax bases to cover a much larger swath of economic activity in the state and substantially reduced the rates of the three major state taxes.

These tax reforms vaulted North Carolina from 44th to 10th in the non-partisan Tax Foundation’s state tax rankings and from the middle of the pack to a perrenial top five rating in ALEC’s Rich States, Poor States assement of state economic competitiveness.

Over the last two years, Governor Cooper and his liberal lemmings in the General Assembly blocked several efforts to further reform and improve North Carolina’s tax code, most notably an effort to modernize North Carolina franchise tax – infamously known as the state “tax on breathing.”

The frustration Republican Legislators feel with Governor Cooper’s intransigence on tax reform and reduction efforts as the state sits on a record budget surplus generated by policies passed by legislative reformers is downright palpable.

However, legislators should resist the temptation of trying to pass narrow, gimmicky tax reductions like sales tax holidays, exclusions on taxation of hand-picked types of retirement income, or a lower tax rate for capital gains than earned income.  These types of tax changes can be politically popular, but they narrow the tax base, fail to reduce taxes for all payers, get government back to picking winners and losers and complicate the tax code – thus failing to conform to any of the four principles of North Carolina’s historic and resoundingly lauded tax reform efforts.

And we’d be remiss if we failed to note that liberals who controlled our state government prior to 2010 loved and passed literally hundreds of these tax carveouts, exclusions, loopholes, gimmicks and special preferences over the years.  The end result was that by 2011 most North Carolinians were left shouldering the highest tax rates and tax burden in the Southeast, while lawmakers themselves and their well-connected friends and wealthy donors benefitted tremendously. If there’s one reason conservatives have achieved historic tax reforms since 2011, it’s the momentous cultural change they made in Raleigh: they set their own interests aside, resisted a culture of self-service and sweetheart carveouts and passed tax policies that benefitted every single North Carolinian.

More vexing for legislators than state-level tax policies…

…are ever-shifting federal tax policies and whether legislators should “decouple” or “conform” or “couple” state tax policy to federal policy. The argument in favor of North Carolina conforming our state tax code to the federal tax code can almost always be summed up by pointing to principle #4 of North Carolina’s tax reforms and one word in particular: “simplify.”

But there are challenges for our state when it comes to conforming with the federal tax code and legislators tackle these challenges in an annual piece of legislation called the Internal Revenue Code or IRC Update that makes the choice of “coupling” with or “decoupling.” The first: unlike the federal government, North Carolina’s state government must balance our budget and many federal tax changes are designed to stimulate the economy through deficit spending.  If North Carolina conformed to the Internal Revenue Code, it would drain state coffers and negatively impact spending on things like education and Medicaid.  The best example of this type of decision is the regular debate that has led the state to decouple from federal tax rules on Section 179 bonus depreciation of capital investments every tax year since 2008.  Another regular debate involves Section 163 limits on the deduction on interest expense.

Second, the United States Congress is no role model when it comes to tax reform.  Over the years, our country’s politicians have turned the federal tax code into a complicated mess, riddled with loopholes and inequities that pick winners and losers and create unnecessarily high tax rates.  In some cases, coupling with the Internal Revenue Code would simplify state tax filing but incorporate federal tax policies that narrow tax bases, increase rates for many taxpayers and pick winners and losers into North Carolina’s tax code. The legislature has chosen wisely to decouple in these circumstances, and the COVID stimulus bills over the past year have created several new opportunities for legislators to do the same this year.

So, what should the legislature do?

Voters have a clear idea: they overwhelmingly support, by a 76% to 17% margin, continuing the principled tax reform that has served North Carolina so well over the past decade.  Voters in every part of the state, of every race, of every age and across the political spectrum support reducing the state income tax rate from 5.25% to 4.9% and raising the standard deduction from $21,500 to $25,000.

Adopting a tax cut in line with this proposal would put Governor Cooper and his liberal legislative lemmings in a very challenging political position and it would continue to bolster North Carolina’s reputation as the national leader on principled, conservative tax reform that drives economic growth.  Who’d have thought we could grow a towering redwood in a forest of Carolina pines?


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