Doing Better at Doing Good

NC tax reform will have major implications for next generation

June 22, 2013 

There are times when stark choices about the future of our state arise – and we seem to be at one of these crossroads now.

The debate is trapped in the wonky world of tax reform. But the implications of this debate are very real and worth paying attention to – especially for our next generation.

In a nutshell, the N.C. House and Senate are promoting a tax reform agenda that seeks to fundamentally shift the flow of resources in our state. Specifically, both chambers are seeking to significantly reduce personal income and corporate taxes, which would shrink state revenue. They have differing views on whether to recover that lost revenue through a sales tax increase, the elimination of exemptions or deductions for certain activities or simply to function with less revenue.

The argument for these strategies is that they will ultimately make our state more competitive – reducing the tax burden for income-generating individuals and companies that can then be re-invested in our state. It may also make North Carolina more attractive for companies looking to relocate.

So will these changes make us more competitive?

From 2001-2010, The Institute on Taxation and Economic Policy did a side-by-side comparison of nine states with a “high-tax” rate vs. states with no income taxes along three dimensions of economic growth. On two dimensions, Real Per Capita Growth and Real Median Household Growth, the “high tax” states outperformed the low-tax rate. On the third dimension, Average Annual Unemployment Rates, the states performed equally.

With state and local taxes already relatively low – estimated to be about 2 percent of a business’ costs – there is also debate about what kind of tangible impact a tax reduction would have on investment or location decisions by corporations benefiting from a tax break.

The budget

But there’s no question that the tax reductions being considered would have outsized implications for our state’s budget. Corporate income tax comprises 6 percent of all tax revenue – or roughly the entire state budget for our community colleges and vocational training schools.

Revenue generated from personal income tax is even more profound. At $10.5 billion, personal income tax comprises more than half of our budget – or the equivalent of our entire K-20 system. Cutting this revenue would send shock waves – putting further pressure on county and city budgets, increasing the chances of teacher layoffs, and undermining the infrastructure that supports businesses (all of which has already been under stress through the recession and lingering downturn).

The possibility of staying “revenue neutral” or keeping revenue at current levels (as Gov. McCrory keeps promoting) is also uncertain. The General Assembly’s own Fiscal Research Division estimates the House and Senate tax reform plans will cost the state at least $1 billion a year once the changes take affect.

Proponents of these moves argue that the state should be moving to a tax system more based on taxing what people consume (i.e. a sales tax). This would have serious implications, significantly shifting the tax burden to lower-income families. Since these are the North Carolinians who must spend most of what they earn to make ends meet, the subsequent impact on local economies of increasing their tax burden needs to be accounted for by lawmakers.

Overall a good idea?

Overall, is this really the direction we want to take?

CEO surveys regularly rank North Carolina among the top 3 places in the nation to do business, citing factors like a skilled workforce, strong transportation infrastructure, and a great quality of life. This is also true of the entrepreneurial community.

With the proposed tax cuts, these attractive conditions will likely erode. With spending on K-12 education comprising 55 percent of our overall budget, it is impossible to imagine reduced revenue not negatively impacting our schools. At 22 percent of the budget, health and human services are also in line for a hit – not to mention the growing economic disparity that will result from shifting tax burdens to those with lower incomes.

To stay competitive, we need world-class schools and health-care systems. We need great teachers and good roads. We need all of our citizens playing from a level playing field, with a real opportunity to create better lives for themselves and their children. This requires investing in our future, the way we have at key points in North Carolina’s past – not betting on a set of proposals that have not proven effective in other states.

As an entrepreneur recently shared during a forum on tax reform, “this doesn’t look good for my business or the kind of state I want to raise my kids in.” We’re inclined to agree.

Christopher Gergen is founder of Bull City Forward & Queen City Forward, a fellow with Fuqua’s Center for the Advancement of Social Entrepreneurship at Duke University, and the author of "Life Entrepreneurs." Stephen Martin, a director at the nonprofit Center for Creative Leadership, is author of the forthcoming book "The Messy Quest for Meaning" and blogs at www.messyquest.com. They can be reached at authors@bullcityforward.org and followed on Twitter through @cgergen.

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