The truth about taxes in North Carolina is quite simple: since the 1990s, Republicans reduced taxes on everyone, including lowering the sales tax rate, while Democrats repeatedly increased taxes on everyone, including increasing the sales tax rate.
A decade of tax cuts
Republican tax cuts began a decade ago, when the Republican-led legislature overrode Gov. Bev Perdue’s veto in order to end the Democrat-enacted “temporary” statewide sales tax hike that was costing taxpayers nearly $1 billion per year.
To extract more tax revenue from already-strapped North Carolina households during the Great Recession, in 2009 Perdue approved a 1-cent state sales tax increase sold as being temporary.
In the summer of 2011, Perdue’s budget proposal included an extension of ¾ of the penny sales tax hike, which would have cost North Carolinians an estimated $826 million annually. The new Republican majority in the legislature had other ideas, and approved a budget allowing the sales tax increase to fully sunset, as originally promised.
Perdue vetoed the legislative proposal, but the legislature overrode her veto and provided much-needed tax relief to North Carolina households.
In the subsequent nine years, consumers across the state have likely saved approximately $9 billion dollars.
Also included in the Republican-authored 2011-12 budget was tax relief for struggling small businesses. Specifically, the budget included a tax exemption of the first $50,000 in business income for start-up and small businesses having annual gross receipts of less than $825,000.
The exemption was projected to produce a tax savings of $131 million in its first fiscal year, and savings of $336 million the following year. It was, however, targeted to – and did – sunset at the end of the 2013 calendar year.
The year 2013 ushered in historic tax reforms, including arguably the biggest tax cuts in state history. The state income tax transitioned from a progressive structure topping out at 7.75% (highest in the southeast and 10th highest nationally) to a flat rate of 5.8%. A significant portion of the tax savings came from raising the standard deduction, exempting more income from state taxation; a move benefitting low-income taxpayers the most.
The corporate tax rate was lowered from 6.9% to 6%, with plans for it to fall to 5% by 2015, which it did. Subsequent measures lowered the rate to the current 2% level. The corporate tax has been shown to negatively impact worker wages more than anything else, so a corporate tax cut provides relief to a significant portion of the North Carolina workforce.
At the time, the legislature’s Fiscal Research Division estimated projected tax savings of the 2013 reforms in excess of $430 million for the first year, growing to above $600 million by the second year.
Contrary to the Left’s caricature of the decade of cuts as “tax cuts for the rich and big corporations,” these Republican tax reforms, beginning with eliminating Bev Perdue’s billion-dollar sales tax hike, benefitted virtually all North Carolinians.
Even the left-wing media had to dismiss the claims of groups saying the 2013 reforms would result in 80% of North Carolinians paying higher taxes as a result.
The claim “80 percent will pay higher taxes” was soundly debunked by multiple sources. Washington Post fact-checkers called the claim “absurd,” factcheck.org bluntly said the claim “is wrong,” while WRAL-TV in Raleigh declared the statement was “unsupported by facts,” and “is simply not right.”
Indeed, even the head of the organization that produced the report used as the basis for the 80 percent claim publicly acknowledged, “It’s just a very inaccurate use of the 80 percent number.”
Conversely, an analysis by the legislature’s nonpartisan fiscal research staff showed that taxpayers across all categories would see at least some slight reduction in tax burden under the reform.
Moreover, the reforms enabled North Carolina to leap from a dismal 7th worst business state tax climate in the nation in 2012 to 17th best the following year, according to the Tax Foundation’s state business tax climate index.
ADDITIONAL RESOURCES:
The real truth on tax hikes: Liberals imposed massive tax hikes for decades, conservatives are cutting taxes at historical rates:
https://www.nccivitas.org/2016/17738/
How could critics of NC tax cuts be so wrong?:
https://www.nccivitas.org/2020/critics-nc-tax-cuts-wrong/
Lowest income households pay smaller share of state income taxes after reforms:
NC job growth beating national average since 2013 tax reform:
https://www.nccivitas.org/2015/nc-job-growth-beating-national-average-since-2013-tax-reform/
The real victims of the corporate income tax? North Carolinians:
https://www.nccivitas.org/civitas-review/real-victims-corporate-income-tax-north-carolinians/
Fact check: Conservative tax reforms did not have ‘harsh consequences’ on state revenue:
Tax Foundation report: Labor bears the majority of the burden of the corporate tax:
https://taxfoundation.org/labor-bears-corporate-tax/
Cooper would be wrong to reverse corporate tax cuts:
https://www.nccivitas.org/2019/cooper-wrong-reverse-corporate-tax-cuts/
Civitas Institute’s Public Policy Series; Unlocking the State Budget: 1985 – 2016:
Civitas Institute, North Carolina Budget & Tax Highlights:
Democrats repeatedly raised taxes on everyone
In sharp contrast to the Republican-led sweeping tax cuts of the last decade, previous Democrat legislatures repeatedly raised taxes on all North Carolinians, especially slamming the middle and working class.
Perdue’s devastating billion-dollar sales tax hike during the Great Recession was just the tip of the Democrats’ tax and spend iceberg.
For instance, between 1991 and 2009, the state sales tax nearly doubled from 3 percent to a high of 5.75 percent. Adding on local sales taxes, most North Carolina families were paying a 7.75 percent sales tax on purchases by 2009.
Liberals condemn the sales tax as “regressive” and harmful to low-income households disproportionately, but Democratic legislators incredibly raised the sales tax in 1991, 2001, 2003, 2005, 2007 and 2009.
This article highlights 30 times when Democrats raised taxes on North Carolinians between 1985 and 2010. The tax hikes were especially targeted at working-class households, and in addition to the regressive statewide sales tax increases, included tax increases on everything from movie admissions, gasoline, and beer to satellite television, phone bills and insurance premiums.
ADDITIONAL RESOURCES:
Ten tax hikes that slammed middle class families courtesy of NC Democrats:
The real truth on tax hikes: Liberals imposed massive tax hikes for decades, conservatives are cutting taxes at historical rates:
https://www.nccivitas.org/2016/17738/
Then vs Now
The past decade provides North Carolinians with a clear, distinct contrast between North Carolina in 2010 and 2020.
The 2011 sales tax cut, historic tax reforms of 2013, along with subsequent improvements, have transformed North Carolina from one of the worst states to do business to one of the best. At the time of the 2013 reforms, the Tar Heel state had the 7th worst state business tax climate in the nation, according to the Tax Foundation. Immediately after the 2013 reforms, that ranking shot up to 17th best. Continued tax cuts have enabled our state to climb to 15th best state business climate in the nation in 2020.
Over the past decade the top personal income tax rate in North Carolina declined from 7.75 percent to 5.25 percent. Meanwhile, the standard deduction has increased significantly, exempting more low-income workers from having any state tax liability at all. “More than 1.5 million working families in North Carolina owe no income tax on their earnings now that the state’s standard deduction has tripled,” reported House Speaker Tim Moore’s office in April 2019.
Under Democratic leadership in 2010, when compared with its three neighboring states North Carolina had the highest rate in two of the three major state tax rates, and second highest in the third tax category. Our top personal income tax rate and the corporate tax rate were both higher in North Carolina than all of our neighbors. The combined state and local sales tax rate ranked second highest.
Today, North Carolina ranks no higher than third in the three major categories of taxes. North Carolina went from having the highest top personal income tax rate in 2010 to third out of four – higher only than Tennessee, which doesn’t tax earned income.
Our corporate tax rate similarly dropped from highest to lowest in the region, while our combined state and local sales tax rate fell from second highest to third highest.
Significant tax reforms over the past decade have dramatically reduced the tax burden on North Carolinians. The table below outlines the major changes in North Carolina between 2010 and 2020:
ADDITIONAL RESOURCES:
North Carolina’s transition to a low-tax state:
https://www.nccivitas.org/2020/north-carolinas-transition-low-tax-state/
Tax Day reminder: NC tax climate is vastly improved over the last decade:
Unemployment Insurance Reforms Paying Off During Pandemic
Lastly, there are the 2013 unemployment insurance (UI) reforms. Years of mismanagement and short sightedness under the Democrats left the state’s UI Trust Fund unprepared for the Great Recession of 2009. This unpreparedness forced North Carolina to borrow billions from the federal government to cover unemployment claims, running up a debt of close to $3 billion by 2012. The debt weighed heavily on the UI system, triggering higher UI taxes on North Carolina employers.
The 2013 reforms enabled North Carolina to pay back the sizeable debt far earlier than the original payback plan. The early repayment resulted in major tax relief for employers, and some estimates at the time said the relief generated a total of $2.5 billion in tax savings for job creators over four years, while enabling the UI Trust Fund to build up more than $2 billion in reserves prior to the Covid-19 government shutdown.
Thanks to the reserves, North Carolina can now afford to pay unemployment benefits without having to go back into debt, which would once again prompt higher taxes on job creators. More credit should be given to the 2013 UI reforms for positioning North Carolina’s unemployment insurance program to capably handle the rise in unemployment caused by the governor’s Covid-19 shutdown.
ADDITIONAL RESOURCES:
North Carolina’s unemployment insurance reforms paying off big in 2016:
https://www.nccivitas.org/2016/ncs-unemployment-insurance-reforms-paying-off-big-in-2016/
New study shows positive impacts of North Carolina’s unemployment insurance reforms:
https://www.nccivitas.org/civitas-review/new-study-shows-positive-impacts-ncs-unemployment-reforms/
Senate bill seeks to address unemployment insurance debt to feds:
$600 million tax cut coming to NC job providers in 2016:
https://www.nccivitas.org/civitas-review/600-million-tax-cut-coming-to-nc-job-providers-in-2016/
