Ten years ago, in the summer of 2013, the Republican-led North Carolina General Assembly enacted historic tax reforms.
Today, many states are enjoying tax cuts. They are slashing tax rates and moving to simpler structures. But in 2013, North Carolina was just the third state to move to a flat income tax rate structure. At the time of the reforms, North Carolina ranked as the seventh worst state to do business, according to an index released by the nonprofit Tax Foundation. Immediately following, we became the 17th best. Further reforms have won North Carolina the 10th-best ranking today.
This transformation began 10 years ago when the North Carolina legislature did the following:
Allowed workers to keep more of their paychecks. Legislators transformed the personal income tax, condensing the three rates (6.0%, 7.0%, and 7.75%) to a single, lower, flat rate of 5.75%. Every taxpayer received a tax rate cut and was able to keep more of their hard-earned dollars. Lawmakers more than doubled the standard deduction (from $3,000 to $7,500 for singles; $6,000 to $15,000 for married filing jointly) meaning that thousands more low-income households no longer owed any personal income tax.
Promoted bigger paychecks and more jobs by lowering the corporate income tax. Legislators set the corporate income tax on a downward trajectory, lowering it from 6.9% to 6.0% in 2014 and promising further reductions if revenue triggers were met. Those triggers were met, and North Carolina’s corporate tax fell to 3.0% by 2017 and has been at 2.5% since 2019. Now, with the last biennium budget, it is scheduled to phase out entirely by 2030.
Though many on the left decry this as a win for the wealthy, the corporate income tax is a tax on workers. Higher tax rates squeeze their bottom line, and in response corporations pass the tax down to their biggest expense: labor. Research shows that higher corporate tax rates are associated with lower worker wages, and vice versa.
Expanded the consumption-based sales tax base, while keeping the rate low. Sales taxes are among the most economically efficient taxes available to states. In 2013, North Carolina expanded its sales-tax base to include some previously exempted areas (aircraft, boats, and modular homes, among others). The rate, however, remained the same. The new Republican legislature had already in 2011 ended the costly “temporary” sales tax increase initiated in 2009, over the objections of then-Gov. Bev Perdue.
Today, there is a nationwide push to move to simple, flat taxes, increasing competition nationwide. North Carolina is the standard-bearer for tax reform. Eleven states now have flat income tax rates. Two more, Georgia and Iowa, will move to a flat income tax in future years.
North Carolina provides 10 years of proof that tax reform works. State leadership should be flattered that so many states are using our success as an example. Most recently, Kansas looks to model its tax reform legislation after North Carolina.
At the time, though, the reforms were harshly criticized. Some called it a “giant step backwards.” Certainly, the bold reforms were outside the comfort zone of many. But if anyone was skeptical before, they do not have reason to be now. In the face of North Carolina’s epic success, these arguments are tired — and still false. North Carolina tells a great success story.
If our state were still burdened with the tax policies of more than a decade ago, we would not have experienced the same Covid recovery, and we would not be as well positioned for a coming downturn brought on by reckless federal government policies during and after lockdowns as well as residual fallout from the shutdowns.
The evidence is clear. Since these reforms, government revenues have not been choked off, spending continues to increase in key areas like education, and budget surpluses are the new normal. Lawmakers have also been able to replenish the state’s Rainy Day Fund. Even so, our tax burdens are lower. People are moving to North Carolina in droves and fleeing states that look like North Carolina pre-reform. Ten years later, tax reform works.