Republicans and Democrats, split over the tax changes moving through Congress, agree on one thing: If you want to see the potential impact of the plan, look to North Carolina.
They just have very different perceptions of what effect North Carolina’s tax reform and cuts — implemented over the last six years — have had on the state.
“We have to do for the nation what we did for North Carolina because it worked,” said Sen. Thom Tillis, who served as speaker of the North Carolina House from 2011 to 2014 and oversaw the tax reform legislation.
He said the reforms, which included large cuts to the corporate and individual tax rates, a doubling of the standard deduction and a broadening of the sales tax base, turned the state’s economy from “one of the worst performing to one of the best.” Republicans captured control of the statehouse in the 2010 elections and have held control since, using their majority to implement regulatory and tax reform.
North Carolina now ranks as No. 11 in the Tax Foundation’s State Business Tax Climate index, higher than its neighboring states and far higher than its 2014 rank of No. 41. The list tends to reward states for keeping tax rates low.
North Carolina Democrats and liberal groups, however, have highlighted what they see as unfortunate similarities between the state plan and the national one being considered now: tax cuts for the wealthy and corporations, and tax increases, through the elimination of deductions, on the poor and working class. Experts who analyzed the plan awaiting a U.S. Senate vote have found that it would help many lower- and middle-class households in the short term, but much of that help is temporary and would give way to tax increases over time.
“This is a cautionary tale,” said Alexandra Forter Sirota, director of the North Carolina Budget and Tax Center, part of the N.C. Justice Center that advocates for the disadvantaged. “There is no economic boost to be gained from tax cuts that primarily benefit the wealthy and force cuts to many of the foundations that families and communities need to thrive. That’s been North Carolina’s experience over the past five years. We know that the road gets worse each day as we continue to lock in an approach that just isn’t delivering opportunity to more people.”
The Tax Cuts and Jobs Act, as both the different House and Senate versions are called, borrows many of the same strategies. The act dramatically lowers the corporate tax rate. It doubles the standard deduction for individuals and couples filing jointly. The House version eliminates the estate tax. It tackles popular deductions — including, depending on the version of the act, those for student loan interest, state and local taxes, mortgage interest and medical expenses.
The bill is expected to increase the national debt by more than $1 trillion, even when accounting for additional economic growth spurred by the cuts, according to the Joint Committee on Taxation.
North Carolina ended the estate tax. It lowered the corporate tax rate from 6.9 percent to 3 percent. It collapsed its individual tax rate to a single rate, lowering it from a high of 7.75 percent to 5.499 percent. The corporate rate will fall to 2.5 percent and the individual rate to 5.25 percent in 2019. The state also broadened its sales tax base, increasing the number of goods and services on which the tax is paid. And, unlike the federal government, North Carolina adjusted its spending along with its taxes, since the state has to balance its budget. The moves have helped the state sock away about $1.5 billion in surpluses into a rainy-day fund.
“North Carolina has been doing quite well in terms of standard economic indicators. If you have to ask me, has the state turned into a basket case? No, the sky was not falling,” said Scott Drenkard, the director of state projects at the Tax Foundation. “It’s pretty hard to make the case that tax reform has been really damaging to the state of North Carolina. You could probably make a better case that it’s been harmful in a state like Kansas.”
National Democrats have tried to tie the federal tax cuts to Kansas, which suffered disastrous effects from its tax overhaul — one that even supporters of tax cuts contend was poorly implemented and included cuts that were too dramatic. Democrats held a hearing trying to tie the national GOP plan to the failed “Kansas Experiment.”
John Hood, chairman of the John Locke Foundation and a proponent of the tax reforms, said tax cuts are just one of many factors that contribute to a state’s economic fortunes and that their benefits are realized over time, not immediately. Still, he said, data suggest that the tax cuts have helped North Carolina.
Job growth is slightly above 8 percent for the state since 2014, a mark that ranks above the national average but behind 13 states including Florida, Georgia, Tennessee and South Carolina, according to the Justice Center.
“On most measures of economic growth North Carolina has been outperforming the national and regional averages. It doesn’t mean we’re the best economy in the country. We’re not. It doesn’t mean we’re outperforming all the other states in the Southeast. We’re not. We are outperforming the Southeast region as a whole,” Hood said. “It would be premature to say North Carolina’s current economic performance is largely a response to the tax cuts. If tax cuts affect economic growth, and I think they do, they mostly affect growth over a period of many years. You don’t cut taxes and all the millionaires leave New Jersey and move to Cary.”
Juan Carlos Suarez Serrato, an economics professor at Duke, said North Carolina is not outpacing its neighbors in any distinguishable way.
“The states are growing very similarly,” he said. “You couldn’t tell there was a reform if you just looked.”
The tax cuts, Forter Sirota said, have deprived the state of about $3 billion annually in tax revenue, if you applied the previous tax rates to the current economic conditions. That number does not include revenue from the estate tax, which was phased out beginning in 2013. North Carolina collected more than $111.4 million from the estate tax in 2012-13. Between 2001 and 2013, the state collected a high of $161.5 million and a low of $23.7 million from the estate tax, which was paid by heirs of estates valued at more than $5.25 million.
North Carolina’s most recent budget projected $23 billion in revenues.
The median worker earns 25 cents less per hour than the worker did in 2009 before the recession, according to the Justice Center. Per-pupil spending on K-12 education is below 2002 levels, when adjusted for inflation, but the legislature has funded teacher pay raises in each of the last few years. The concern, Forter Sirota said, is that underfunding education or infrastructure could have long-term ramifications for the state.
“We know what businesses need to compete is what families and communities also need to thrive. We are not competitive as a state in the things business look to: a workforce that’s trained, infrastructure, networks that get their goods to market,” Forter Sirota said.
She argued that the growth in wages and jobs has been concentrated in Wake, Durham and Mecklenburg counties — the state’s urban centers.
“We have not seen an economic miracle that has delivered job growth in rural North Carolina,” Forter Sirota said. “It has not created middle-income jobs that are desperately needed. Those jobs are not growing at the same pace as they were before the recession. Most working people still are working for less money each hour than they were before the recession started.”
In a blog post this week, Gov. Roy Cooper posted a graphic that compared wage growth in North Carolina to neighboring states between 2012 and 2016. The graph, attributed to the Bureau of Labor Statistics, shows that North Carolina’s highest wage earners have experienced growth that far exceeds their neighbors, but the lowest income earners have not.
“Decisions made by the Republican state legislature have left too many middle class families out of our state’s economic growth. Those decisions rigged the system to let those at the top reap most of the rewards. And as Congress considers major tax changes, the script seems eerily familiar in North Carolina,” Cooper wrote.
The sides have been clearly defined in Washington.
Tillis and fellow Sen. Richard Burr planned to vote for the Senate bill. Nine of North Carolina’s 10 Republican representatives – all but Rep. Walter Jones, who is against increasing the national debt — voted for the House’s version, including Raleigh Rep. George Holding, who helped write the bill as a member of the Ways and Means Committee. No Democrat in either House or Senate voted for the bills.
But perhaps both sides are creating unrealistic expectations for what might happen as a result of the package, said one expert.
Said Drenkard: “Folks that didn’t like the tax reform in 2013 were not saying, ‘This will probably be OK as long as the broader economy was growing.’ That’s not the line of people that voted against the bill in 2013. The line was, ‘This is going to destroy our economy and make our budget look like Kansas.’ You have to resist this temptation, the extremes on both sides of the aisle, to say every single tax debate about, ‘This is the end of the world’ because when it doesn’t happen, my view is you should lose credibility.”
Brian Murphy: 202.383.6089; Twitter: @MurphinDC