NC Budget and Tax Center

Experts agree: tax cuts make a poor strategy for boosting state’s economy

Today in Senate Finance, legislators heard from four academic economists on the one of the key dimensions of the current tax reform debate—the effect of taxes on economic growth.   Their presentations supported the effort of tax reform but on numerous occasions raised concerns about the potential economic impact of spending cuts that would have to be made if a tax plan was not revenue neutral.

The fact that both the House and Senate have proposed plans that are not revenue neutral but lose revenue should raise concerns. 

Here are some other findings from the research to consider:

Tax cuts have failed time and time again to generate economic growth. Over the last 65 years, changes in tax rates have had virtually no impact on economic growth, and the cut in the top tax rates in 2001 and 2003 failed to generate more savings, investment or productivity.  Additionally, The 9 states with the nation’s highest income tax rates –including California, Ohio, and Maryland—have experienced better economic performance than the 9 states with the lowest income tax rates, including Texas, Tennessee, and Florida.

Despite claims that Tennessee’s no-income tax approach makes the Volunteer State a good role model for North Carolina, it turns out that the opposite is true.  Tennessee models a pathway to poverty, not prosperity. Although Tennessee’s unemployment rate is currently lower than North Carolina’s (largely a function of the ability of the federally supported auto industry to prop up the state’s economy), over the past ten years, the Volunteer State’s economy has not performed as competitively as advertised, either in job creation or economic growth. It has the worst job creation of any neighboring state over the last decade and is half the job creation experienced by North Carolina over the same period. Even more problematically, the jobs created in Tennessee are almost entirely in low-skill, low-wage industries that have kept poverty higher and household incomes lower than in North Carolina.

Personal income tax cuts will not meaningfully improve economic growth.  Panelists agreed that the most economically beneficial tax reform option involves broadening the corporate tax base and lowering corporate rates—but not cutting the Personal Income Tax in the way proposed in HB 998. This idea is supported by the experience of the 6 states with biggest tax cuts in 1990s, which created fewer jobs and generated lower income growth than states that did not cut taxes.

The evidence is clear—income tax cuts are a poor strategy for boosting North Carolina’s economy. As a result, there is no justification for shifting the tax load to middle-class and low-income North Carolinians in order to finance tax cuts for profitable corporations and the wealthiest residents in the state.

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