While defenders say the state’s political leaders have only followed the national trend in raising taxes to fill budget holes, a new report suggests that North Carolina is almost alone in enacting large-scale, broad-based tax increases every year since 2001, which may help to explain why the state’s economy continues to lag the national average.
The John Locke Foundation, a Raleigh-based think tank, used surveys from the National Conference of State Legislatures and the Rockefeller Institute of Government in New York to identify 20 states that have enacted major, statewide tax increases in either 2001 or 2002. (The report notes that several additional states, including North Carolina, are also considering tax increases in 2003, though it is not yet possible to judge the outcome).
Among the 20 tax-increasing states, said report author and Locke Foundation President John Hood, only New Jersey (at $1.5 billion) and California ($1.37 billion) have enacted larger tax increases than has North Carolina (just over $1 billion). Adjusting for the size of the state, Hood found that only three states — New Jersey, Indiana, and Tennessee — had enacted larger tax increases per person than North Carolina in 2001 or 2002.
Furthermore, only two states, New Jersey and North Carolina, enacted major tax increases in both years, and of those only North Carolina is likely to enact another major tax increase in 2003 — the third year in a row.
“The fact that few states have matched North Carolina’s record for raising taxes, particularly on income, helps to explain why our economy continues to underperform,” Hood wrote.
He noted that since the middle of 2001, North Carolina’s personal income growth (3.98 percent) has lagged its neighbors’ (5.03 percent) and the national average (4.23 percent). Also since mid-2001, North Carolina has lost 119,000 jobs, or more than one-third of all the net job losses in the South. At the same time, North Carolina saw more growth in government employees than any of its neighbors did. The state’s private-sector workforce actually lost 150,000 jobs during the period from mid-2001 to early 2003 — dwarfing the losses of any comparable state.
“There are obviously a number of factors in play in North Carolina’s economy, including technological change, foreign competition, and the impact of national economic slowdown,” Hood said. “But these factors are also evident in many of our neighboring and competing states — yet their economic recovery has been broader and stronger than ours.”
He observed that even in Tennessee, where lawmakers enacted a tax increase in 2002 approaching $1 billion, the state’s tax burden remains significantly lower than North Carolina’s.
“Potential entrepreneurs and investors must pay one of the highest income tax rates in the United States if they choose North Carolina, while in Tennessee their income-tax rate is essentially zero,” Hood said.