Replacing North Carolina’s existing income, corporate, sales, and estate taxes with a new consumed-income tax dubbed the USA Tax could generate 80,500 new jobs in the first year, while boosting the state’s economy by $11.76 billion.
Those numbers are based on an outside analysis of tax reform proposals included in the John Locke Foundation‘s new book, First in Freedom: Transforming Ideas Into Consequences for North Carolina. JLF is releasing the book as new North Carolina Gov. Pat McCrory and a Republican-led General Assembly turn their attention to potential tax reforms.
Even a scaled-back version of the USA Tax, combined with a slight lowering of the sales tax rate and elimination of income, corporate, and estate taxes, would lead to a $4 billion economic impact and 10,000 new jobs in the first year, according to the analysis from the Beacon Hill Institute at Suffolk University in Boston.
“It is our belief, backed up by economic theory and quantitative analysis, that the proposals made here to transform North Carolina’s income tax into a consumption-based USA Tax, while abolishing the state’s corporate and estate taxes, has the potential to generate strong incentives for businesses in the state to expand while attracting and stimulating new investment, economic growth, and job creation,” said Dr. Roy Cordato, JLF Vice President for Research and Resident Scholar.
An Unlimited Savings Allowance, or USA, Tax, would fundamentally change the way North Carolina collects taxes, Cordato said. “By taking saved income out of the tax base, both the principal and the interest are taxed, but only once when they are ultimately spent.”
Cordato devotes much of a full book chapter to the history and ongoing problems associated with North Carolina’s existing tax system. “North Carolina’s tax structure penalizes economic growth and is a factor inhibiting our state’s success in the 21st-century economy,” he writes. “Saving, investment, and entrepreneurship, which are the engines of capital formation and economic growth, are double-taxed — and sometimes, because of the corporate income and estate taxes, they are triple-taxed.”
Replacing North Carolina’s current revenue sources with the USA Tax would build on existing tax code improvements tied to traditional IRAs, Roth IRAs, 401k and 403b plans, along with health savings accounts and college-savings plans, Cordato said.
The process of filling out state tax returns “would not change a great deal,” Cordato said. The book describes proposed changes to the tax code, including the introduction of a Carolina USA, “a new savings vehicle available to all taxpayers who file income tax in the state.” Banks, mutual-fund companies, and other financial firms would be allowed to offer Carolina USA accounts to anyone with income tax liability in North Carolina.
JLF’s “first-best” proposal scraps North Carolina’s personal and corporate income taxes, sales tax, and estate tax and replaces them with a USA Tax at a rate of 8.5 percent. In addition to the first-year impact of 80,500 new jobs and an $11.76 billion increase in the state’s gross domestic product, the impact grows to almost $13 billion and 89,000 jobs by 2017, according to the Beacon Hill Institute analysis.
A “second-best” proposal maintains the state sales tax at a rate reduced from the current 4.75 percent to 4.5 percent. North Carolina leaders still would abolish personal and corporate income taxes and the estate tax, while putting in place a USA Tax with a rate of 6 percent. Beacon Hill Institute analysts estimate the impact of this scaled-back reform at 10,000 jobs and $4 billion in the first year, growing to nearly 14,000 jobs and $5.8 billion by 2017.
Ending one tax in particular would enhance North Carolina’s competitiveness, Cordato said. “The elimination of the corporate income tax would make North Carolina one of only four states with neither a corporate income tax nor a gross receipts tax and the only state in the eastern half of the U.S. with neither tax,” he explained. “This would make the state very competitive, acting as a magnet for economic expansion.”
Cordato acknowledges successful tax reform is not easy. “There will be special interests that benefit from the current tax code that will resist change,” he said. “But for the general welfare of North Carolinians, state policymakers should resist these pressures and be willing to make some difficult but constructive choices.”
Copies of First in Freedom: Transforming Ideas Into Consequences for North Carolina are available at the John Locke Foundation’s online store.