Forget Kansas. North Carolina has become the new model for conservative tax reform. | Opinion
If imitation is the greatest form of flattery, then state policymakers across the country have been raving about North Carolina in recent years. Though many media outlets portray Kansas as the model for conservative tax reform, governors and legislators across the U.S. have spent the past decade seeking to emulate North Carolina as the standard for pro-growth tax reform.
Take Arizona, where on Jan. 1 the income tax rate dropped from 4.5% to 2.5%. The multi-year effort to achieve that rate — the nation’s lowest flat tax — began with a meeting between Arizona and N.C. legislators whose experience they sought. Arizona legislators and Gov. Doug Ducey (R) followed North Carolina’s lead, using revenue triggers to facilitate significant rate reduction.
Many other states have followed North Carolina’s tax reform roadmap, first laid out in 2013. It involves rate-reducing and flattening tax reform. It’s not hard to see why others are copying it. Since N.C. legislators first implemented the tax code overhaul, the state has become a magnet for new residents, employers, jobs and investment.
Last year North Carolina experienced the nation’s ninth fastest population growth, due in part to people fleeing states with higher taxes, crime and cost of living. Last summer, CNBC named N.C. the Top State for Business. Personal income growth in N.C. was 10.4% for 2022, better than 45 other states. Only Florida, Texas, Nevada and Arkansas had higher income growth rates.
An April 5 Opinion column by Ned Barnett lamented what has transpired in North Carolina post-tax reform. He said lower and middle income families are worse off with a tax code whose top rate has dropped from 7.75% to 4.75%, with no coinciding sales tax rate increase. He pointed to the loss of sales tax exemptions for more services, like car and home repairs, but the cost of that base broadening is dwarfed by the income tax savings resulting from a much lower income tax rate.
The tax relief enacted since 2013 has reduced tax burdens on average for households from every income level. Barnett asserts the loss of child-care tax credits, increased housing costs, and higher property tax bills have left low and middle income households worse off. Yet, when it comes to cost-inflating policies that state officials can control, Republican legislators are taking action. For example, the recently introduced House Bill 488 would prevent the imposition of new building efficiency standards projected to inflate housing costs.
Barnett claims rising property tax bills offset income tax savings, but rising property taxes are the product of local spending, not something dictated by legislators. Barnett does, however, raise a good point about growing property tax burdens being a problem. The N.C. legislature would do well to consider a property tax limitation law, which many other states have in some form.
Though it’s not often a conservative holds up California as a model for anything, adopting a version of their property tax limitation law would do much to protect North Carolinians from rapidly rising property tax bills. California’s Proposition 13, enacted by voters 44 years ago, limits the annual rise in the taxable value of a property at 2% or the rate of inflation, whichever is lower. When ownership changes hands, the property tax cap is reassessed at 1% of sale price.
In addition to Arizona, Kentucky, Iowa, Arkansas, Mississippi, Montana, Idaho and the other states following North Carolina’s lead, even lawmakers in a no-income-tax state like Tennessee are talking about what they see happening in North Carolina. As Gov. Bill Lee (R) and Tenn. lawmakers advance legislation to provide tax relief to employers, Tenn. legislators often note that their neighbors to the east will soon be one of only three states with no corporate income tax.
Barnett’s column paints a picture of North Carolina as a place where tax reform has made it harder to get by. But his assertion is belied by reality. Most people would have a hard time looking at the migration numbers, income growth data, job creation figures, and the fact that many states are seeking to emulate North Carolina, and conclude that N.C. legislators have been taking the wrong approach.