Over the past decade, North Carolina’s tax code has undergone a dramatic transformation. Once ranked by the Tax Foundation as having one of the worst tax climates for businesses in the nation, our state now has one of the best. Our top marginal personal income tax rate, once the highest in the Southeast at 7.75%, is now 4.99%. Our corporate tax rate, also once the highest in the region at 6.9%, is now 2.5%.
Because lawmakers didn’t just cut tax rates, but reformed the system itself — broadening some tax bases while restructuring others — North Carolina has continued to experience healthy growth. revenues. Indeed, despite progressives’ repeated and panicky forecasts of deficits, government revenues have generally exceeded its (wisely conservative) revenue forecasts, giving it the ability to fund basic services while bolstering its reserves. savings to hedge against future fiscal crises.
So far, so good. But what should policy makers do next? There is a range of possible answers.
Under the state budget plan passed last year and signed by Governor Roy Cooper, North Carolina’s personal income tax rate will drop to 3.99% by 2027 and its corporate tax rates will be eliminated entirely by 2029. Some Republican lawmakers want to accelerate these rate cuts. . Others want to get rid of personal income tax entirely, while still others want to do the same with North Carolina’s franchise tax, an outdated system that taxes companies doing business in the USA. State based not on their net income but on their net worth. To offset the expected revenue losses from these tax cuts, there is talk of ridding the income tax code of most of the remaining credits and exclusions, or extending the sales tax to additional services sold retail such as accounting, legal advice and medical care. .
North Carolina made the fateful decision long ago to fund public schools and roads primarily with state taxes rather than local taxes. Republicans should keep this in mind when setting their tax reform priorities.
North Carolina’s personal income tax is expected to bring in $14.3 billion in the fiscal year ending in June. State sales tax is expected to bring in $9.6 billion, corporation tax $1.1 billion and franchise tax $840 million.
Given continued spending discipline and even moderate revenue growth, we can eliminate corporate taxes as planned, or even accelerate the phase-out, without jeopardizing basic services. However, pursuing other ambitious reforms will require tough choices.
For North Carolina to completely remove income taxes, for example, we would have to either more than double our sales tax collections (probably by taxing many services at high rates), require local governments to increase dramatically in property or sales taxes to support new financing responsibilities, or a combination of both.
I am in favor of additional growth-friendly tax cuts, such as lowering capital gains taxes and removing business-to-business transactions from the retail sales tax (they were never retail sales). detail first). Nevertheless, our highest priority should be to protect the tax cuts already enacted and planned. Not very exciting, perhaps, but cautious.
John Hood is a board member of the John Locke Foundation and author of the new novel Mountain Folk, a historical fantasy set during the American Revolution (MountainFolkBook.com).