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September 21 2017

How North Carolina's Tax Overhaul Triggered a Boom

by Charlotte Hays

As Congress prepares to consider the first serious tax reform in decades, the old talking points are being trotted out: the Republican proposals will destroy the middle class and send the economy into a downward spiral.

Not so fast, says North Carolina Senator Thom Tillis. In this morning's Wall Street Journal, Tillis, a Republican, touts a 2013 tax code overhaul in his state that triggered an economic boom and put more money in the state coffers. This, argues Tillis, is something Washington should look at in redesigning the tax code for the rest of us.

In overhauling the state tax system, North Carolina had three principles, according to Tillis: simplifying the code,  lowering rates, and broadening the tax base. North Carolina replaced a progressive tax system with a flat rate of 5.499%. That, Tillis notes, was the rate for everyone. Formerly, 6 percent had been the lowest rate. The standard deductions were increased and the death tax was repealed.

North Carolina's 6.9% corporate income tax was reduced to 6% in 2014 and 5% in 2015. Further reductions would occur only if the state hit its revenue targets. The targets having been hit, the state's corporate tax fell to 3% in 2017 and another reduction appears likely for 2019.

How did North Carolina pay for this tax relief? The state expanded the tax base, closed loopholes, and reduced spending on entitlement programs. The earned earned-income tax credit for people who paid no taxes was eliminated.

So what happened? Did North Carolina go broke while citizens suffered? Not at all:

The results over the past four years have been impressive by any standard. The Tar Heel State has gone from having the least competitive tax code in the region to having one of the most competitive in the nation, according to the nonpartisan Tax Foundation. More than 350,000 jobs have been created, and the unemployment rate has been cut nearly in half. The state’s economy has jumped from one of the slowest growing in the country to one of the fastest growing. Survey after survey cites North Carolina as one of the best states in which to run a business.

Let's stop to note that, while spending on entitlements was cut, there were more jobs. All and all, which is better for society--and for individuals--entitlements or jobs? Just asking.

Tillis continues:

While overhauling North Carolina’s tax code now seems like a no-brainer, at the time it was difficult and highly controversial. Republicans controlled the governor’s mansion and both houses of the General Assembly, but there were disagreements within the GOP on how to implement tax reform. The key to success was keeping all options on the table until the full effects could be modeled. While heated debates occurred during the negotiations, lawmakers always pulled themselves back to shared principles. We made compromises and achieved consensus.

When droves of lobbyists and special interests were rushing to state legislators’ offices with their wish lists of exemptions, we made it clear that guerrilla tactics would not be well received and that our commitment to consensus was steadfast. To address the conflicting priorities of different industries and businesses, we engaged North Carolina’s tax professionals and chief financial officers to assess how our reform would affect their companies. Taken as a whole, they were pleased.

Meanwhile, a well-mobilized opposition on the left stoked fears that tax reform would cause shrinking state revenues and require massive budget cuts. This argument has been proved wrong. State revenue has increased each year since tax reform was enacted, and budget surpluses of more than $400 million are the new norm. North Carolina lawmakers have wisely used these surpluses to cut tax rates even further for families and businesses, to increase education funding, to raise teacher pay, and to replenish the state’s rainy-day fund.

But can Washington follow in North Carolina's footsteps and succeed?

An army of lobbyists on K Street will descend upon Capitol Hill like a horde of zombies, seeking special carve-outs. Democrats, led by the dynamic duo of “Chuck” and “Nancy,” are voicing new concern about federal spending while demanding revenue neutrality—a hypocritical change of tune after they ran up historic deficits the last time they were in power.

Yet I know Washington can succeed in this effort. North Carolina has shown that although tax reform may be difficult, it isn’t all that complicated. The American people have been waiting for a better tax code for decades, and virtually every Republican officeholder in Washington was elected with a promise to enact one. Tax reform would help spur job creation and cement American competitiveness in the 21st-century global economy. Congress has every reason to get it done—and no excuses not to.

Read the whole piece.

 

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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