Christmas was almost a week ago but residents of the ninth most populous state in the U.S., North Carolina, will get another present this New Year’s Day, which is when the new and reduced state income tax rates – both personal and corporate – take effect.
When the clock strikes midnight to mark the start of 2019 on the east coast, North Carolina’s personal income tax rate of 5.499% will drop to 5.25%. The state’s 3% corporate tax will decline to 2.5%. This latest round of state tax relief, enacted as part of the budget approved in 2017 by the Republican-controlled North Carolina General Assembly, takes effect one year after a vast majority of North Carolinians received a federal income tax cut from the Tax Cuts & Jobs Act.
This latest reduction in North Carolina’s income tax rate comes at a time when the Census Bureau’s new population figures, which show Americans continuing to move from high to lower tax states, are generating nationalheadlines.
What North Carolina has accomplished over the past five years should give hope to those who live in states with uncompetitive and growth-depressing tax codes. Before North Carolina lawmakers enacted their landmark 2013 tax reform, the Tar Heel State had the highest personal and corporate income tax rates in the region. Today, except for the no income tax states of Tennessee and Florida, North Carolina now has the lowest personal income tax rate in the southeastern U.S. and the lowest corporate tax rate in the nation among the 48 states that impose such a levy on businesses.
Every Tax Cut Is Kansas: A Tired Charade Continues Into A New Year
However, in an attempt to paint one small state as the poster child for all rate-reducing tax reform, writers for national media outlets and progressive pundits provide disproportionate coverage of state finances in Kansas. Less than two days before the close of 2018, New York Times columnist Paul Krugman was once again tweeting about Kansas as part of an attempt to advance his argument that lowering tax rates is bad policy.
Notice that Krugman and company never write or talk about North Carolina’s finances. They avoid mentioning North Carolina, even though that tax cutting state, in addition to having an economy that is not only much larger than that of Kansas, is much more representative of the national economy as a whole in its diversity.
North Carolina is also a state that conservatives themselves would hold up as a model for tax reform, as opposed to Kansas, a state that has increased spending at an unsustainable clip since it cut taxes in 2012 and has more recently enacted tax hikes on income, sales, and tobacco products.
While enacting more than $5 billion in tax relief over the past half decade, North Carolina lawmakers, unlike their counterparts in Kansas, have also kept spending in check, roughly in line the the rate of growth in population and inflation. The result has been perennial budget surpluses in recent years, along with the largest rainy day fund in North Carolina’s history in excess of $2 billion. All of this was accomplished while returning billions of dollars to state taxpayers. While a deluge of ink about Kansas has been spilled across the Acela corridor, it’s been crickets from the national media on North Carolina’s achievements.
North Carolina has attracted an influx of people, businesses, and jobs following the enactment of rate-reducing tax reform in 2013, along with other significant regulatory and education policy reforms. States that have taken their rates in the opposite direction, up, likewise have had the opposite experience that North Carolina has had when it comes to population migration.
Take Illinois, a Democratic machine-run blue state that can’t pay its bills and has raised its state income tax rate by 32% at the same time that North Carolina has cut its state personal income tax rate by, coincidentally, 32%:
Illinois’s population has declined by 157,000 over the past five years, which is equivalent to the mid-sized city of Rockford,” noted an editorial in the Wall Street Journal’s last weekend edition of 2018. “According to research outfit Wirepoints, more than 114,000 residents left the state on net in 2018 and nearly 1.5 million people since 2000. Cold weather? While Illinois’s population has declined by 0.8% since 2010, Indiana’s has grown 3.1% and Wisconsin’s by 2.2%.”
North Carolina, among the top recipients of Illinois and other high tax state refugees, is dropping its income tax rates again on New Years Day, and in doing so will become an even more attractive place to live, do business, and invest. Income tax rate cuts also take effect in Missouri on New Year’s Day, as do business tax cuts in New Hampshire that were approved in 2017. Lawmakers Texas, South Carolina, Arkansas, and other states are looking to follow North Carolina’s lead in passing rate-reducing tax reform in 2019.
In the coming year, both state legislative chambers will be controlled by one party in every state except for Minnesota, the first time since 1914 that that has occurred. As such, while gridlock will be the name of the game in Washington, there be plenty of activity in the states in the new year.
I am Vice President of State Affairs at Americans for Tax Reform, a Washington-based advocacy and policy research organization founded by Grover Norquist in 1985 at the request of President Ronald Reagan. My writing and commentary have been published in The Economist, Reute…