State Budgets

North Carolina Accelerates Broad-Based Tax Relief

Budget proposal continues North Carolina’s broad-based and pro-growth tax reforms.

North Carolina Senate Leader Phil Berger and House Speaker Tim Moore revealed details last Monday of a compromise consisting of a $23 billion budget and $530 million in tax relief package. Perhaps more exciting is the substantial pro-growth tax relief included in the plan. Although these reductions do not become effective until January 2019, the economic benefits would likely commence prior. The proposal reduces the individual income tax rate from 5.499 percent to 5.25 percent, delivering tax cuts to 99 percent of personal income tax filers. For married couples, the standard deduction increases, shielding their first $20,000 of personal income from taxation. In addition, the corporate income tax declines from 3 percent to 2.5 percent. With a corporate rate already the lowest in the country among states that levy such a tax, this move would only enhance the pro-growth momentum the state has experienced over the last four years.

On the downside, the budget deal continues some forms of tax preferences. Remaining taxpayers are forced to pay for these carveouts by paying higher tax rates on their own income and capital.

Included in the compromise are pay raises and bonuses for public school educators, $263 million for reserves, and $320 million and $125 million for infrastructure repairs respectively (including damage from Hurricane Matthew). The agreement also dramatically increases average teacher pay from last year’s budget by 3.3 percent starting next fall and 9.6 percent in total over the two-year period. Retirees would also get a 1 percent COLA (cost of living adjustment). The agreement also allocates more resources to performance-based incentive programs for the best teachers.

Overall, however, the budget proposal continues North Carolina’s broad-based and pro-growth tax reforms. As a result, the state has jumped from 26th in Economic Outlook in the 2011 edition of the Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index to 3rd in 2017 and has experienced near-record growth since the tax reforms of 2013. The phase-in of more tax relief has further enhanced the state’s economic competitiveness. Strong domestic in-migration and non-farm payroll job growth put North Carolina ahead of every regional competitor and in the top-ten nationwide.

Defying the ungrounded fears of tax cut critics, the state has maintained its AAA bond rating, met every revenue requirement, balanced its budget every year, and reported a $580.5 million budget surplus (as of May 2017). The proposed General Fund spending growth of 3.1 percent maintains fiscal prudence by coming in below the combined rate of inflation and population growth. Taxpayers may have to wait for the bulk of the tax relief; but by further lowering economically destructive taxes on productivity, North Carolina lawmakers are giving the state’s economy yet another long-term boost, further magnetizing its draw for individuals and businesses alike.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

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