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NC Budget and Tax Center

Once again, sober analysis shows that tax cuts don’t create prosperity. A report out today looks at how states that cut personal income taxes have fared in the years that follow; the answer is, not that well. Bold promises about tax cuts are usually followed by harsh realities. Here are a few of the key results:

  • Job growth slower than the nation in 4 of the 5 largest tax cutting states in recent years. North Carolina is actually the one state that did outperform the nation since the recent tax cuts, but that means that its not the tax cuts that are doing the work. For example, Kansas passed even larger tax cuts that North Carolina did, and it has lagged behind the nation, and behind most of its neighbor states, since then.
  • Personal income grew more slowly in 4 of the 5 states that cut personal income taxes the most in the last few years. Even with anemic income growth nationally, most of the states that cut personal income taxes were sub-par performers. This includes North Carolina, where the average worker has seen the value of their wages slip further behind the national average.
  • The five states that cut taxes the most aggressively in the 1990s did worse than the rest of the country during the next economic expansion (2000-2007). Some tax cut cheerleaders say we simply need to be patient, that the good times will come, but that not what the data say. States that cut heavily in the 1990’s saw an entire economic cycle come and go without growth taking off.

Of course, none of this is a surprise to people who pay attention to history. Most rigorous studies have found that cutting state taxes has little or no effect on economic growth. Businesses are worried about a long list of costs before they consider the personal income tax rate, so its not a game changer for where they decide to invest. Likewise, people don’t suddenly decide to work harder because they stand to earn a few more cents on the dollar, particularly if they have to pay most of that back in higher sales taxes, worse schools, or deteriorating roads. Cutting personal income taxes in not a magic elixir, but expecting it to cause an economic boom is magical thinking.

NC Budget and Tax Center

On Wednesday, the Senate Finance committee heard presentations that made the case for more changes to the state’s tax code. While beginning with many of the economic realities in North Carolina—stagnant and falling wages, persistently high poverty, and slow growth— the presentation prescribes the wrong medicine: more cuts to the income tax in favor of applying the sales tax to more goods and services.

It’s a surprising conclusion to reach as prior “reform” efforts based on income tax cuts for the wealthy and profitable corporations have not allowed North Carolina to invest in the state’s economic recovery. It’s even worse with evidence mounting that shifting more of the tax load onto average people is causing real damage.

It’s clear that more tax cuts for the wealthy and profitable corporations aren’t the best tools to address the economic issues highlighted in the presentation. Tax cuts do nothing to address the fact that workers aren’t seeing their wages grow, despite increasing productivity. Tax cuts that primarily benefit the wealthy and profitable corporations do not help alleviate poverty. Instead, such an approach jeopardizes the ability of the state to invest in pathways to opportunity—the schools, research and development, and business start-ups that create a vibrant economy.

We have long advocated for tax reform, and a genuine and thoughtful plan to modernize our tax code is still needed today – not in spite of 2013 tax changes, but because of them. But shifting the state away from the income tax to rely more on sales taxes, as the leadership presented yesterday, will make things worse, not better. It will not help address the ups and downs in revenue collections and will mean that everyday North Carolinians carry more of the tax load while wealthy taxpayers get a tax cut. This is especially true if such tax shifts don’t seek to offset a greater reliance on sales tax with a strong state EITC.

Here is what should be the focus of legislators’ reform efforts: Read More

NC Budget and Tax Center

During yesterday’s tax reform debate on the House floor, we heard a lot about the need to cut personal income taxes so that small businesses can create jobs and the economy can grow.  This is a growing refrain among advocates for tax cuts for the wealthy, so common in fact, that policymakers made it once before—in 2011, when they passed an exemption of business pass through income, an exemption that they are now repealing (apparently the tax cut didn’t work).

As with many of the claims made during the debate about taxes this session, the idea that personal income tax cuts spur job creation is just not borne out by the facts.

Personal income tax cuts for the wealthiest taxpayers do not target actual small business job creators. Only 2.7 percent of personal income taxpayers are owners of small businesses that have employees, according to the U.S. Treasury Department. Moreover, profits from small businesses with paid employees account for less than 4 percent of the total income earned by households with incomes over $100,000 nationally.  There is no evidence that businesses owned by high income taxpayers have more employees than those owned by lower income taxpayers, and as a result, no reason to provide tax cuts that disproportionately benefit those with the highest incomes.  And for many small business owners of any income level, there is often limited interest in growing the size of their business—consider a family restaurant, for example—so again, cutting these business’s won’t lead to job creation.

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NC Budget and Tax Center

During yesterday’s Finance Committee debate over the latest iteration of the Senate’s billion-dollar tax cut plan, the bill’s sponsors repeatedly referenced the need to improve North Carolina’s economic competitiveness as the chief reason to cut income taxes.  While generating new job creation and economic growth is clearly a top priority for North Carolina, deep tax cuts to corporate and personal income tax rates are just not an effective way to accomplish these goals.

Much of the “evidence” tax cut proponents have cited in support of their proposals have been thoroughly debunked—both by the research of academic economists and the actual experience of states that pursued these policies. For example, out-of-state groups like the Tax Foundation have misleadingly claimed that “23 of 26” academic studies have shown that taxes hurt economic growth, but it turns out that these studies were either misquoted, cherry-picked, or failed to address the issue of tax policy at the state level.

Instead, a full look at the evidence reveals that tax cuts just don’t deliver. A panel of highly-respected economists from the state’s leading universities came before the Senate Finance committee last month and gave their much more rigorous and informed  response—one also at odds with the Tax Foundation study and the views of Senate leadership. In their experience, these economists said, there was no economic consensus that cutting taxes would lead to improved economic growth.  And they also noted that it would be important to consider the negative effects of reducing state spending if that was the way tax cuts were “paid for.”

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STATEMENT FROM THE N.C. BUDGET & TAX CENTER:

Senate tax proposal shifts burden from the rich to the poor

RALEIGH (May 7, 2013) — The Senate leadership has released a proposal that will harm working families and the broader economy.

By cutting income taxes and expanding the sales tax to more goods and services, the Senate leadership has pursued a shift in tax burden from the rich to the poor, not tax reform. The result is a plan that not only requires low-and middle-income families to pay more while the highest income families pay less, but also reduces the state’s ability to invest in a foundation for economic growth by cutting state revenues by $1 billion each year. That is equivalent to the entire community college system OR the combined budgets of the DHHS Divisions of Aging, Child Development, and Child Health and the Judicial Branch and NC Biotechnology Center.