NC Budget and Tax Center

North Carolina is a cautionary tale for tax cuts, new series shows

New evidence shows that North Carolina’s economy fell behind other states in the Southeast after cutting taxes, while locking in harmful cuts for schools and widening racial inequalities in the state.

A billion dollar shortfall looms in 2020.

These are the main points of a new blog series released today from the Center on Budget and Policy Priorities (CBPP).

  • Tax cuts haven’t caused economy to surge: The CBPP analysis shows that in the years before the tax cuts, which cost the state $3.5 billion annually, took effect in 2014, North Carolina’s economy generally grew faster than the national economy and in line with neighboring states, even though North Carolina had easily the highest personal income tax rates in the region and much higher rates than it has today. Since the tax cuts took effect, North Carolina has lagged behind the overall region’s growth in jobs and GDP.
  • Thanks to tax cuts, large budget shortfalls loom in NC: North Carolina is harming its future by weakening its education system and other public investments that underlie economic vitality in the long run. Over the past decade, North Carolina has cut per-student funding for K-12 schools and higher education by 7.9 percent and 15.9 percent, respectively, after adjusting for inflation.  The tax cuts make it nearly impossible for North Carolina to restore these education cuts, let alone make new investments — such as expanding high-quality preschool — that would better position the state for the coming decades.
  • NC’s tax cuts reinforce racial barriers: This shift has added to the barriers faced by African-Americans, Latinos, and Native Americans trying to get ahead in today’s economy at a time when states should be working deliberately to undo them. More than three-fourths of the net tax cuts since 2013 have gone to the top 1 percent of taxpayers.  And because the tax cuts were so lopsided in favor of the highest income North Carolinians, black and Latino North Carolinians now pay a larger share of state taxes, while white people pay a smaller share.

North Carolina Experience Echoes Kansas’s Failed Tax Cut Strategy

CBPP’s North Carolina blog series builds on the organization’s previous work documenting the failure of personal income tax cuts in Kansas and other states to produce a better economy. A recent analysis found that Kansas’s tax cut experiment was a valid – and failed – real-world test of supply-side economics.

As happened in Kansas, thanks to tax cuts, large budget shortfalls are looming in North Carolina. The legislature’s budget experts project that the state will avoid shortfalls through the upcoming 2019 fiscal year, but face major fiscal challenges after that. They project that North Carolina will face a shortfall of $1.2 billion in 2020, rising to $1.4 billion two years later, in 2022.

Faced with such large shortfalls, the state will face a choice: cut funding for state services such as schools, health care, transportation projects and the like, or reverse course on the tax cuts.  The funding cuts have led to declining teacher pay, low per-pupil spending, and soaring tuition.

Kansas, which like North Carolina faced large budget shortfalls after enacting deep income tax cuts, reversed course last year, repealing major parts of the earlier tax cuts in hopes of restoring fiscal stability.

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