Starting in 2011, North Carolina lawmakers have implemented transformational changes resulting in a strong and growing economy. More people are working, more opportunities are available, and a streamlined, more efficient state government is treating residents more fairly and equitably.
We’ve come a long way. Don’t mess it up.
Faced with a $2.6 billion shortfall in 2011, legislative leadership had to make big changes quickly. They reduced the size of government, reined in spending, offered temporary tax cuts to small businesses to jump start the economy, and restructured and consolidated the Department of Public Safety, saving millions. They further reduced spending in 2012.
In 2013, with Republicans controlling both the General Assembly and the governor’s office, lawmakers enacted House Bill 998, the Tax Simplification and Reduction Act. The estate tax was repealed, and personal income, corporate income, and the franchise taxes were all reduced. Sales tax exemptions were repealed for certain products, two silly sales tax holidays were eliminated, some tax refunds were capped, the estate tax — and various other taxes and charges — were repealed.
The standard deduction increased from $3,000 for individuals to $7,000, and from $6,000 to those married and filing jointly to $15,000. Numerous tax earmarks were eliminated, and the sales tax base was widened; the corporate income tax base was broadened by eliminating almost all credits. Bringing North Carolina’s unemployment benefits more in line with neighboring states enabled us to begin paying off a $2.6 billion debt owed to the federal government.
Since then, rates have been lowered even further, standard deduction increased even more, and carve-outs and exemptions were rolled back. North Carolina’s tax system is simpler, fairer, and more transparent than it was eight years ago.
Even so, there’s still more work to do. Eliminating savings from the tax base, repealing or reforming capital gains tax, eliminating economic development programs that subsidize targeted businesses, and allowing immediate expensing of capital equipment and land would further improve our state’s tax system.
Despite the direction toward more fairness and economic freedom, we saw moves in the short session that were red flags of going in the wrong direction. Senate Bill 153 offers a warning sign. Introduced and passed in the Senate in 2017, it offered income tax breaks for military retirees. The House beefed it up with additional tax breaks and special treatments during the short session. Proposed tax breaks include a special separation allowance for state and local firefighters and rescue squad workers, property tax homestead exclusion for disabled veterans and surviving spouses of emergency personnel officers, property tax exemptions for cemeteries, and a sales tax exemption for the sale of cranes used for metal work. The total estimated cost to state and local government of these breaks that only some folks get is about $250 million over five years.
The bill didn’t pass, but it offers a warning sign. When special groups get special treatment, it makes the system more complicated and less fair. In addition to the provisions we saw in Senate Bill 153, we saw a continuation of special treatment for the film and solar industries, a big tax break to the Carolina Panthers on land they lease from the city of Charlotte (Senate Bill 561), and 30 years of property tax abatement offered to Apple. A new, pumped up program to entice big fish like Amazon HQ2 includes 100 percent break on withholding taxes plus up to $50 million for infrastructure such as water, sewer and rail access — and up to $5,000 per year, per job, for up to five years — make for a huge tax break for one at the expense of the rest of us. Fair?
If property taxes are too high for the Panthers or Apple, we should lower them for everyone. If income taxes are too high for military retirees, what about the rest of us? If crane equipment warrants a sales tax break, shouldn’t there be lower sales taxes for all? When one is allowed a break, someone else will pay more. That’s neither fair nor smart.
Cleaning up the tax code has paid real benefits for North Carolina’s economy. Rolling back regulations and keeping spending in check has helped, too. Unemployment is at its lowest point in years, incomes are rising, and 65,000 net new jobs have been created since May 2017. We have a $356 million revenue surplus and $2 billion in the rainy-day reserves.
Three lessons from the 2018 short session:
- Keep the tax code clean, simple, fair and equitable.
- Stop with the carve-outs and special breaks.
- Don’t mess this up.
Becki Gray is senior vice president of the John Locke Foundation.