Tax cuts are looming large on the horizon in North Carolina. So large, in fact, that even some traditionally anti-tax voices are starting to get nervous.
The state’s personal income tax rate is scheduled to plummet by more than a third over the next few years, from 3.99 to 2.49 percent, because of tax cut “triggers” that have put future tax cuts on autopilot. Meanwhile the corporate income tax, which is paid mainly by large multinational companies selling into the state, is slated for complete elimination despite widespread public support for retaining it. These cuts are scheduled to come on the heels of a series of drastic tax cuts that have already taken effect, including nine cuts to North Carolina’s personal income tax rate and seven to its corporate tax rate since 2013.
Gov. Josh Stein and groups like the NC Budget & Tax Center have been sounding the alarm about the consequences of this heavy-handed, regressive approach to tax cutting. But some state lawmakers are looking to double down, with a House committee considering a range of proposals that would hamstring local officials’ ability to set property tax levels.
Done right, property tax reforms like a robust circuit breaker credit could significantly improve North Carolina’s tax system. But the more sweeping property tax limit under consideration by the committee is the wrong idea at the wrong time. Against a backdrop of reckless tax cutting at the state and federal levels, these kinds of local tax limits are especially dangerous. History shows that when state support for education declines, local property tax revenues are the last line of defense in mitigating the harm inflicted on students.
This is very clearly applicable to North Carolina’s current situation. The state already has some of the lowest levels of per-student education funding and worst-paid teachers in the nation. And budget projections from the NC Office of State Budget and Management (OSBM) make clear that these problems will only worsen if these tax cutting plans move ahead as scheduled.
OSBM predicts that North Carolina will soon be staring down recurring, $6 billion structural deficits each year even under an anemic “current services” budget projection that assumes continued underinvestment in education and other areas. If lawmakers were to take the commonsense step of boosting the state’s shamefully low teacher pay, then the gap between revenues and expenses would be even larger.
For perspective, $6 billion is roughly what the state spends on public universities and community colleges each year. It is a cost that simply cannot be absorbed by the state budget without dramatic and highly visible cuts to the public services that North Carolinians expect.
A State Debate with National Implications
Skepticism toward the state’s tax cutting plans is spreading to include some surprising voices. Jared Walczak, a senior fellow at the right-leaning Tax Foundation who has been a proponent of the state’s tax cuts, recently warned that the speed with which North Carolina’s next round of income tax cuts will take effect is not “meaningfully tied to the state’s ability to afford the reductions.” The analysis was published by the Carolina Leadership Coalition, a conservative group.
Walczak talks about the risk of “budget crises” in North Carolina, a concern that is well-founded. But the language he uses is telling, and a careful reading suggests worry that the state could be hurtling toward a humiliating fiscal mistake of historic proportions, with potential national implications. Consider the following excerpts from the piece:
- “If the triggers are perceived as failing… that failure could derail future reforms.”
- “Future planned cuts could be scrapped and the reputation and staying power of existing reforms could be threated.”
- “Proponents of future cuts should be wary of risking their many successes on ill-designed triggers.”
To understand the significance of these statements, it’s important to have some sense of the national landscape of state tax policy, especially as it has unfolded over the last 15 years.
Many right-leaning states, egged on by groups like the Tax Foundation and people like Arthur Laffer, have been busy cutting income taxes for their most affluent residents ever since the Tea Party wave election of 2010 tilted state legislatures and governorships in a more anti-tax direction.
One of the states to move earliest and fastest on state tax cuts was Kansas, which in 2012 implemented deep tax cuts that then-Gov. Sam Brownback enthusiastically described as “a real live experiment” that would inject a “shot of adrenaline into the heart of the Kansas economy.”
The experiment did not go well.
Damaging budget cuts, credit rating downgrades, and widespread voter discontent followed. Within a few years, Kansas lawmakers backtracked and repealed most of the tax cuts, over the governor’s veto, with sweeping bipartisan votes in both chambers of the state legislature.
That reversal was major national news and cast a pall over state tax-cutting efforts for years to come. But proponents of regressive tax cutting weren’t done yet, and they adapted their playbook in two important ways following the Kansas debacle.
The first change in strategy was a shift away from adrenaline shots and toward what could be described as a frog-in-boiling-water approach to state tax cutting. Rather than pursuing splashy, immediate tax cuts that rapidly brought on unpleasant consequences, the anti-tax movement started to favor slower measures like phase-in schedules and autopilot “tax trigger” mechanisms that cut taxes years later when certain revenue milestones are reached. These approaches have the political advantages of offloading the responsibility for service cuts onto future crops of state lawmakers, and of denying tax cut opponents a single dramatic moment conducive to making a stand.
The second shift in strategy was to cast Kansas as an outlier, and to embark on a search for a less obviously disastrous poster child for state tax-cutting efforts. North Carolina was an attractive choice because its slightly slower approach to tax cutting has so far helped it avoid a singular, Kansas-style crisis moment. Moreover, North Carolina was well positioned before its tax cuts with strong urban areas, a favorable industry mix, top-tier universities, a low cost of living, and a mild climate that, taken together, positioned it for strong economic growth that anti-tax advocates could conveniently misattribute to the state’s tax cuts. Eventually, North Carolina became the preferred national “success story,” elevated by tax-cutting ideologues at the national level and in other states. But the “reputation” of these tax cuts, as Walczak puts it, is now at risk.
For those of us who live in North Carolina, like I do, the national implications of another embarrassing round of runaway state tax cuts are not what we care about most. We care about what these tax cuts—and the service reductions they’ll necessitate—will mean for our kids, our neighbors, and the future of our state. Nevertheless, if you’re trying to understand why national voices are sounding the alarm about what’s on the horizon in North Carolina, it’s because we’ve all seen this unfold before, in Kansas, and it did not go well for anyone involved. The lesson from that experience is clear, and we need to learn it fast.
