In 2015, many conservative state lawmakers across the country are retreating from the long-held belief that cutting taxes will generate more revenue and spur economic growth. Kansas, Wisconsin, and, yes, North Carolina along with Arthur Laffer, in their efforts to put into practice the flawed theories of trickle-down economics, have created more problems than improvements, according to a recent Politico piece.
Rather than serve as a beacon of competitiveness in the South, North Carolina instead has become a cautionary tale for other states across the country that are considering tax cuts.
The evidence is mounting that tax-cutting experiments aren’t delivering on the promises made by trickle-down economic theory.
- In neighboring Georgia, a top state leader commenting on potential tax reform acknowledges that the experience of North Carolina and other states that have pursued tax reform has not been painless and that there are trade-offs. A recent piece in the Atlantic magazine highlights the harm that many local counties across Georgia face due to tax cuts passed in recent years.
- In Wisconsin, tax cuts signed into law by Governor Scott Walker have ushered in a period of ongoing budget deficits. As one writer points out, the anticipated budget shortfall of $2.2 billion is roughly half of the shortfall that resulted from the Great Recession, and it is one that was created by tax cuts.
- In Nebraska, a report on tax reform by the staff of the legislative committee on revenue charged with reviewing the prospects for tax reform highlights North Carolina’s challenges with predicting the cost of tax changes and the potential for serious revenue issues from radical changes to the income tax.
- A GOP tax writer in Missouri acknowledged that Kansas did too much too fast regarding tax cuts and noted that Missouri would not follow Kansas’ path. Indiana and Ohio leaders have publicly echoed the same sentiments.
Policymakers in other states being concerned about these tax cutting experiments is not surprising. Extensive academic literature has never presented a consensus that tax cuts will lead to economic growth or generate enough revenue to fully pay for tax cuts. The experience of states now demonstrates the reality when taxes are cut for the wealthy and profitable corporations — notably budget challenges, inadequate investment in core public services that citizens expect their state leaders to support, and no measurable economic improvement.
For North Carolina, the cost of the 2013 tax plan passed by state policymakers continues to grow – revenue is projected to be reduced by nearly $900 million for the current fiscal year. The trade-offs from this self-imposed revenue challenge are under-resourced schools, growing cost of a college education, and a courts system that is inefficient in delivering justice, among others. For Kansas, the costly and damaging tax cuts passed in recent years have resulted in a $279 million revenue shortfall, a downgrading of the state’s credit rating, and massive budget cuts to core public investments such as public schools.
While other states retreat from the flawed economic policy of tax cuts, North Carolina policymakers have not only allowed the next round of tax cuts to go into effect (further rate reductions to the personal and corporate income tax rates went into effect on January 1, 2015), but also appear poised to pursue further cut taxes for the wealthy and profitable corporations – eliminating the personal and/or corporate income tax or the tax on capital gains, for example.
As state lawmakers return to Raleigh this month, let’s hope that they heed the lessons learned from their peers and take their feet off the pedal in pursuit of more tax cuts. Ensuring that the state’s tax system can generate adequate revenue for public investments will play an important role in the Tar Heel State positioning itself to compete in a dynamic 21st century economy. Revisiting the 2013 tax plan and including additional revenue as part of the conversation regarding the state budget should be a top priority as state lawmakers convene for the upcoming General Assembly.