There’s a common refrain in NC political discourse the past few years that Republican tax cuts have led, or will soon lead, to prosperity in North Carolina. Unfortunately, rhetoric about the effect of the tax cuts tends to simplify the matter well past the point of real usefulness. One particular framing of this is especially common:
“Since 2014, North Carolina has seen increased median income and sharply lower poverty rates. Tax cuts work!”
An only slightly better version of this is: “Since 2014, North Carolina has outperformed the nation on (GDP/Employment/Personal Income) by (percentage) and the Southeast Region by (even bigger percentage). Tax cuts work!”
These are nice, tight bullet points but they do not engage with the question in any real way. They say nothing about North Carolina’s pre-tax cut performance on those metrics or about the past/present numbers in other states that did not cut taxes similarly. By looking at those additional data, we can get a better idea of whether there has been a change in economic performance (so far) correlating with the change in policy.
North Carolina’s neighboring states provide a good backdrop for this kind of comparison. NC’s tax cuts have been highly regarded by outlets such as the conservative-leaning Tax Foundation; NC’s ranking in their Business Tax Climate Index has improved from 44th in the US in 2012 to 12th in 2019. Our neighbors have mostly remained in place: South Carolina’s ranking improved only one spot from #36 to #35, Georgia from #34 to #33, Virginia from #26 to #22, and Tennessee dropped from #14 to #16. If the theory that NC’s state tax cuts have already had a great economic effect in NC holds, NC should show substantially improved standing post-2014 relative to these peers.
The results of this comparison do not, however, provide much in support of a North Carolina-specific boost from the tax cuts. Whether you look at most any state-level economic indicator, North Carolina’s statistics follow the same pattern as those other four states both before and after 2014.For example, the poverty rate is indeed down since 2012…back to 2008 levels, just like all our neighbors. Real median household income is indeed up since 2012…back to 2007 levels, just like all our neighbors. Unemployment is indeed down 0.5-0.9% below pre-recession levels…just like all our neighbors.The same basic pattern holds true for job growth, GDP, and personal income. Chartable historical state-level data for these metrics can be found at the St. Louis Federal Reserve (FRED)or the US Bureau of Economic Analysis (bea.gov).
It matters, because both the simple fact of the tax cuts themselves and the specific structure of the cuts carry significant opportunity costs. One downstream effect of the tax cuts is that here in NC public education is routinely pitted against taxes (when lower real funding levels are acknowledged at all), while our neighbors manage to sustain public ed funding levels we can only find aspirational. I once estimated it would take about $1,200 more per pupil to get from 2017-18 NC K-12 expenditure levels back to 2008-09 levels, once we account for enrollment, inflation, increased benefits costs and the K-3 class size mandate. NEA figures show that South Carolina and Virginia each spend more than $2,000 more per K-12 pupil (state AND local) than North Carolina. Georgia spends $1,000 more per pupil. It’s the difference between “we can’t have that” and “we already do.”
Another reason it matters is that the tax cuts in North Carolina have clearly prioritized relief for some taxpayers ahead of others. While expansion of the so-called Zero Tax Bracket should be acknowledged, effective tax rates decreased much more for higher-income taxpayers than anyone else. The table below shows numbers from the NC Department of Revenue (DOR) for resident taxpayers in tax years 2013 and 2016 (the last year available).
|# of Returns (2016)||1,527,184||1,023,024||877,912||462,290||131,154||27,862|
|Avg Income (2016)||$12,737||$36,053||$71,233||$134,488||$284,222||$1,276,852|
|Avg Cut (2016 vs. 2013)||$38||$40||$126||$546||$2,147||$19,146|
Then there’s the state corporate tax cuts. As seen above, evidence that they’ve brought much differential improvement in employment or median income to NC is pretty slight. This is perhaps less surprising in light of the findings of a recent Congressional Research Service study on the TCJA, which found little to no first-year effects from the recent federal tax cuts on wages or on capital investment. On the other hand, the Congressional Joint Committee on Taxation estimated in 2013 that about 75% of corporate tax incidence falls on income groups over $100,000 per year, and moreover there’s good reason to think out-of-state investors are among the chief beneficiaries of our state-level cuts. As NC DOR notes:
The State receives a significant portion of its corporation income taxes from a small number of large multi-state firms. Nearly fifty-nine percent of corporation income tax was attributable to corporations with Federal Taxable Income of over $25 million that apportioned less than 25% of their income to North Carolina. The economic success, sales patterns, and tax planning decisions of this relatively small number of large, multi-state companies can significantly affect North Carolina’s corporation income tax revenues.
Tax cuts aimed more cleanly at the $30k-$70k FAGI group passed in 2017, but the effective rate cuts for that group remain a tiny fraction of those awarded to higher incomes. The usual justification for ordering priorities in this way is that it was necessary to fuel economic growth. With evidence of differential growth missing or at least hard to find, it’s reasonable for those folks to wonder why they had to be last in line.
The idea that the GOP tax cuts were a prerequisite for our current level of prosperity is ahistorical and flies in the face of the fact that nearby, similarly conservative states have managed to prioritize public investment more highly without obviously harming their own economies. Superficially gaudy improvements in the poverty rate and median income are actually mostly reflective of the business cycle and are also shared with other states. It’s time to reject the idea that the alleged benefits of the tax cuts are simply an accepted premise, place the burden of proof back on the people who favor them, and acknowledge and re-evaluate the tradeoffs forced by continuing to maintain and extend them.