News: CJ Exclusives

Reports Show Worrying Tax Trends

State's economy has lagged since 2001 tax hikes

Two reports released April 9 show how North Carolina’s tax burden is growing compared to other states and how this trend may be affecting North Carolina’s economic recovery.

The Washington-based Tax Foundation published its annual “Tax Freedom Day” rankings of all the 50 states and the District of Columbia. In its 2003 projections of state and local tax revenues as a percentage of personal income, the Tax Foundation ranked North Carolina 25th in the nation — representing a dramatic worsening of the state’s position compared to its 36th ranking as recently as 1998.

Simultaneously, the Raleigh-based John Locke Foundation published a Spotlight briefing paper that found that North Carolina’s private-sector economy grew by only 1.9 percent from the third quarter of 2001 — when the first round of state tax increases approved by Gov. Mike Easley and the General Assembly took effect — through the third quarter of 2002, compared to an average growth rate of 3 percent for the Southeast as a whole. Growth in North Carolina’s government sector (9 percent) outpaced the regional average growth (7.9 percent) during the same period.

“These two reports, when read together, show North Carolina to be growing increasingly uncompetitive because of excessive government,” said John Hood, president of the John Locke Foundation and author of the Spotlight paper. “With income tax rates among the highest in the United States, with a sales tax rate now higher than that of most of our neighbors, and an overall tax burden well above the Southeastern average, North Carolina is becoming unattractive to investors and entrepreneurs. This is not a recipe for recovery.”

The legislature is currently considering a proposal from Gov. Easley to re-impose tax increases originally enacted in 2001 as a “temporary” measure. While some are labeling the idea a “delay in tax cuts,” Hood contends that the only accurate way to describe the plan is as “another tax increase” — costing taxpayers nearly $500 million in FY 2003-04 and almost $600 million in FY 2004-05.

Based on John Locke Foundation surveys of both North Carolina business executives and state voters, tax increases are not viewed as wise during a time of lackluster economic performance. Asked which factors are hosting affecting the state’s competitive position, North Carolina business leaders picked state and local tax rates as number one, with other concerns — education, infrastructure, and incentives among them — considered not as pressing.

“Another round of higher taxes will only worsen North Carolina’s economy at just the time we need to be attracting new industries to replace some of our traditional and ailing sectors,” Hood said.

Last week, Hood and coauthors Don Carrington and Roy Cordato proposed a different approach in The Freedom Budget, which constructed a revised General Fund budget of $14 billion in FY 2003-04 and $14.2 billion for FY 2004-05 — compared with Easley’s proposed $15 billion and $15.6 billion, respectively.

The Freedom Budget proposes a net tax reduction of $581 million by the second year, including the adoption of a flat tax rate of 6 percent on individual and corporate income, family tax credits for preschool and health care expenses, and the repeal of 2001 tax increases on liquor and employers.

It identifies $1.3 billion in General Fund savings in FY 2003-04 and nearly $1.7 billion in FY 2004-05. After adjusting revenue availability to sunset the temporary tax hikes and funding some new spending, including larger pay raises for state employees and community college personnel than Easley proposed, the Freedom Budget eliminates $369 million in special tax biases and loopholes while phasing in $950 million in tax reductions.

“According to surveys of North Carolina voters and business leaders, there is a strong constituency for solving the state’s budget problems without recourse to additional taxes — and, indeed, while cutting tax rates to make North Carolina more competitive in a vibrant, global marketplace,” the report concluded. “By returning to the fundamental, constitutional principles of our state, we can maximize freedom and opportunity in North Carolina while getting our fiscal house in order.”

The Tax Foundation’s “Tax Freedom Day” release for 2003 can be read online here. The Spotlight briefing paper on the state’s worsening economic situation, entitled “Don’t Raise Taxes, Again: North Carolina Continues to Fall Behind Others,” can be read here. The Freedom Budget report can be read online here.