N.C. Shouldn’t Repeat Tax Hike Mistake

Albert Einstein once famously defined insanity as “doing the same thing over and over again and expecting different results.”

In that context, what results are North Carolina’s General Assembly expecting with their $1 billion tax increase?

Lessons From the Past
During the 2001 recession, North Carolina and the nation faced a similar economic situation, albeit not quite as severe. Also similar to today, state lawmakers could not resist the urge to impose substantial tax increases on its citizens in order to avoid meaningful reform to state government expenditures.

Indeed, according to Governing magazine, North Carolina was one of only four states to raise total taxes by more than 1 percent in 2001.

If North Carolinians want to know what to expect over the next several years, we should follow Einstein’s advice and examine past results. Following the 2001 tax hikes, North Carolina’s economic well-being trailed regional and national trends in a number of indicators.

State budget makers need to acknowledge that past results suggest their tax increase will lead to sluggish job and income growth, higher poverty, a higher rate of the uninsured and greater government dependency.

Unemployment Consistently Above National Average

• North Carolina’s annual unemployment rate overtook the national average in 2001, and has remained there ever since. By contrast, for the 25 years prior to 2001, North Carolina’s annual unemployment rate was higher than the national average only once.

Sluggish Income Growth Put North Carolina Further Behind National Averages

• Per Capita income growth from 2001 to 2007 in North Carolina was 22.4 percent, less than the national average growth rate of 26.3 percent and second lowest among Southeastern states.
  • As a result, North Carolina’s per capita income dropped from 31st highest to 36th highest in the U.S.
• Average annual per capita income growth from 2001 to 2007 in North Carolina was 3.4 percent, tied for 4th lowest in the nation.

  Rapid Rise of Poverty – Overtaking Several Other States

• Overall poverty rates in North Carolina rose from 12.5 percent in 2001 to 15.5 percent in 2007. For sake of comparison, North Carolina’s 2001 overall poverty rate was less than 1 percentage point above the national average, by 2007 that discrepancy had more than tripled to 3 percentage points.
• The share of North Carolina families classified as living in poverty also climbed. In 2001, the rate of families in poverty was 9.5 percent, tied for the 18th highest rate in the nation. By 2007, North Carolina’s rate of families living in poverty jumped to 5th highest in the nation at 12.6 percent.
• In 2001, the child poverty rate in North Carolina was 16.4 percent, placing it tied for 17th highest in the U.S. By 2007, that rate had shot past 11 other states to place North Carolina’s child poverty rate tied for 7th highest in the nation at 21 percent.
  

 More North Carolinians Without Health Insurance Coverage

• In 2001, North Carolina’s uninsured rate was 14.4 percent, just below the national average. North Carolina’s uninsured rate rose to 16.4 percent by 2007 – surpassing the national average by more than a full percentage point.
• Children’s insurance rates followed a similar pattern. In 2001, North Carolina’s rate of uninsured children was 11.2 percent, below the national average. By 2007, it had climbed to 12.1 percent, surpassing the national average by 1 percentage point. Furthermore, the national rate for uninsured children actually declined slightly during this time as North Carolina’s rate grew.

 Dramatic Increase in Food Stamp Recipients in North Carolina

• North Carolina saw an alarming increase in the number of monthly average persons participating in the government food stamps program. North Carolina’s sharp rise was highest in the southeast and much higher than the national average.
  • Increase from 2002 to 2007

NC	54%
SC	44%
VA	46%
FLA	25%
GA	47%
TN	45%
US average	39%

 

 

Conclusion
As UNC-Chapel Hill economist James Smith declared in September of 2001, “It’s one of the all-time stupidest things done by a legislature anywhere. You don’t raise taxes in a recession, or even in a dismal economic environment.”

Smith was right. And to expect the results to be any different this time around is insane.

 

Brian Balfour is the budget & tax policy analyst with the Civitas Institute. Contact him at brian.balfour@nccivitas.org