Today, Carolina Journal Radio’s Mitch Kokai speaks with Barry Poulson, a leading authority on tax and expenditure limitations laws in the United States and Francis De Luca, State Director of Americans for Prosperity North Carolina. AFP brought Dr. Poulson to North Carolina recently to discuss a policy paper called “A Taxpayer Protection Act for North Carolina.” (Go to http://www.carolinajournal.com/cjradio/ to find a station near you or to learn about the weekly CJ Radio podcast.)
Kokai: The Taxpayer Protection Act for North Carolina — Dr. Poulson, what does your paper spell out?
Poulson: Well, I think what essentially the paper spells out is what North Carolina would look like with a Taxpayer Protection Act in place, and it talks about the need for a Taxpayer Protection Act. I think North Carolina has gone through a period where the tax burden has increased very rapidly. Today, taxes account for about 11 percent of the state’s income — state and local taxes. And that’s the highest level of taxes in the state’s history, and that reflects a decade in which the tax burden has increased very sharply. This last decade, North Carolina essentially went from a low-tax state to a high-tax state. It’s now ranked as the 19th highest-tax state in the country. Now the problem is, in my view, that while North Carolina has allowed its tax burden to be increasing, other states — especially states in the Southeast — have either held the line or actually reduced the tax burden.
The result is that North Carolina has become very uncompetitive in terms of the business tax climate in the state. If you compare North Carolina with other states in the Southeast, there is only one other state that has a higher tax burden. In terms of business tax climate, the Tax Foundation finds that North Carolina now has the worst tax — business tax — climate in the Southeast. And it ranks among the worst 10 states in the country. So what this study shows is, if you have a state like North Carolina that has gone through this type of a period, shifting from a low tax burden to a high tax burden, first of all it has had a negative impact on economic growth.
This state’s economic growth was — the state was growing more rapidly than the national average up to 1997. Last decade this state’s growth has fallen below the national average. And the most shocking statistic for me is that last year, North Carolina actually ranked in the bottom 10 states of the country in terms of economic growth. So what this study shows is that when you start raising taxes to the extent that North Carolina has, what you should expect is that people are going to start voting with their feet. They are going to start leaving the state — businesses will leave, families will leave — in search of a larger tax burden — excuse me, a lower tax burden. And this is exactly what happened over the last business cycle.
Kokai: For those who are not familiar with it, what does a Taxpayer Protection Act do?
Poulson: Basically, a Taxpayer Protection Act would reverse this whole process. And it would do so by limiting the growth of revenue and spending both at the state level and the local level. There are several bills in the legislature this year for a Taxpayer Protection Act at the state level. Basically what this would require is, it would set a limit to the growth of state revenue and spending equal to inflation and population growth.
It also would link this to an emergency fund and a budget stabilization fund. And the result would be that this type of limit would not only constrain the growth of government, it would stabilize the budget over the business cycle. And one of the things that we do in this study is to simulate this. We basically ask, “What would North Carolina have looked like over the last decade with this type of Taxpayer Protection Act in place?”
What we find is that state revenue and spending would be 22 percent lower today. We find that the state could have set aside 3 percent of the budget in an emergency fund. It could have set aside 10 percent of the budget in a budget stabilization fund, and most importantly, it could have taken surplus revenue and used that to introduce tax cuts. Our proposal is that North Carolina needs to cut the income tax rate from 8 percent to 4 percent, and it needs to cut this income tax rate in half if it is going to begin to compete with other states in the Southeast. This is, of course, what we did in Colorado.
Kokai: Francis, why did you decide this was a good time to put together this report and bring in the high powered Barry Poulson to put it together for you?
De Luca: Well, June is typically budget season in North Carolina. We have the legislature doing their budget and we have all your cities and counties across the state doing their budgets. So, we figured it was a good time to remind people about the real problem. People complain about taxes being too high.
But really, taxes are a symptom of a spending problem, and what we have is, the levels of government spending, the amount of government spending at all levels, is just growing exponentially. Starting at the top, this year the budget proposals in the legislature range from about 7.1 to 7.9 percent increases. And going back to what Dr. Poulson so eloquently explained on the TPA [Taxpayer Protection Act] is that the population and the inflation factor really calls for a growth of around 3.8 percent.
Kokai: As a maximum, right?
De Luca: As a maximum. 3.8 percent is what population/inflation increased last year in North Carolina. So if you look at that compared to what they are looking at spending, they are going to double the spending compared to what the real need is in terms of the increase in spending. And 3.8 percent at the state level translates to about a $700 million increase in the budget. So if $700 million does not enable the legislature to address some of the — as they would put it, ‘critical needs’ — we probably need a new batch of legislators to address the problem. Because left untouched is the $18.5 billion that they are spending year in and year out without ever giving a second thought.
And that is one of the things that a Taxpayer Protection Act would do — is cause them to go back and look at existing spending to make sure it’s being efficiently used, that it’s meeting core requirements, and also maybe force them to establish metrics for what the government does. Let’s go ahead and measure what government does and see: Is this a core competency that needs to be performed by government? If it isn’t, let’s eliminate it and use that money to do something else that is more vital.
But we also would apply this across the state at the local level. And that’s where your listeners, their county commissioners and their city councils who are now looking at what they are going to do with the property rate, what they are going to do with their garbage fees, their trash pickup fees, their water and sewer fees, whatever other fees — this would apply to all of that so that they can get a handle on their local spending and reign that in, too.
And at the end of the day, what we see this as, is cutting taxes across the board. Economic growth will outpace government spending if you allow it to perform naturally. If you put in these artificially high tax rates, it will choke off [private] spending and the only thing that will grow will be the government sector.
Kokai: Some people may hear this and say, “Well, this is all nice in theory,” but Barry Poulson, you alluded to at the end of your last answer, the fact that this was put in place in Colorado. How has it worked out in Colorado?
Poulson: Well, that’s right. I think in the 1980s Colorado looked a lot like North Carolina. Our economy was stagnating; we had a graduated income tax with a high marginal rate of 8 percent. And what we did in Colorado was to introduce the most effective tax and spending limit in the country — the TABOR Amendment in 1992. Prior to 1992, government grew more rapidly than the private sector. After 1992, government grew less rapidly than the private sector. We also at that time replaced our graduated income tax with a flat income tax.
We reduced the top rate from 8 percent to 5 percent. When we did that, we also linked our state income tax to the federal income tax, which broadened the base. Now this was important because it closed many loopholes and exemptions. And we also adopted the more generous standard deduction in personal exemption in the federal income tax. The result of this was, not only did we end up with a more efficient tax system — a flat-rate income tax — but it was also more equitable because essentially in Colorado, low-income families pay no state income tax.
The closing of loopholes and broadening of the base, of course, is going to generate more revenue, and it means that higher-income families who usually exploit exemptions and loopholes are no longer going to do that. So, what I discovered several years after we introduced this flat-rate income tax is, our flat-rate income tax was actually more progressive than the old graduated income tax because of that combination of reforms.
And most importantly, what we did by the late 1990s as the TABOR Amendment kicked in and we started generating surplus revenue, we rebated $3.25 billion of surplus to taxpayers in tax rebates. Governor Owens at that point said, “Well, this is ridiculous. Why are we simply collecting surplus and returning it rebates? Let’s cut the income tax further.” So, we cut the income tax to 4.5 percent, we cut the business, personal property tax — we cut the sales tax, we cut a variety of other taxes and fees. And what we created in Colorado was one of the best business tax climates in the country.
We are rated among the top 10. North Carolina is on the bottom 10. Not surprisingly, just about the time your economy started to stagnate, our economy was the second most rapidly growing state in the country in the late 1990s.