off the charts
POLICY INSIGHT
BEYOND THE NUMBERS

North Carolina’s Tax Cuts Far From the Economic Boon That Some Claim

Consultant Stephen Moore recently credited North Carolina’s tax cut package with sparking the state’s revenue growth.  But his account is highly misleading, and policymakers would be wise to ignore his boosterism and take a more thoughtful look at the state’s needs.

First, a refresher on where the state’s been: Since the recession hit, North Carolina has cut its funding for K-12 schools more deeply than all but six other states, and has cut per-student funding for its colleges and universities by nearly a quarter.  The state has weakened its future by diminishing one of the key sources of its historic economic strength –- a strong education system.

Given the commitment of past generations of North Carolinians to education, one might think that once the economy began to improve, the state’s current leaders would be anxious to repair the damage and invest in early education and other areas that will keep the state competitive in the future.  They aren’t.  Instead, they cut taxes primarily for the wealthy and out-of-state corporations, enacting a package of cuts that will cost the state at least several hundred millions of dollars in annual revenue.

The tax cuts won’t produce an economic boom that will somehow offset that lost revenue.  No serious economist on either side of the political aisle thinks that’s possible.  (See, for example, the assessment of conservative commentator James Pethokoukis, who cautions “Don’t expect tax cuts to pay for themselves or even come close.”)

That hasn’t stopped Mr. Moore from claiming that the tax cuts already have “supercharged” North Carolina’s economy, citing the fact that state revenues grew this year. 

It’s true that revenues are up somewhat over last year but the tax cuts aren’t the explanation.  Many states, not just North Carolina, have seen revenues improve beyond expectations recently as the national economy has picked up.  With more people working, incomes rising, and consumers spending more, state revenues are gaining ground.  In North Carolina, that normal economic growth is offsetting the revenue loss from the tax cuts.  (Another reason for revenues rising faster than projected in North Carolina is that the state appears to have seriously underestimated how much it would gain by eliminating a misguided exemption for certain business income.) 

The revenue growth is good news, but North Carolina’s proud education system is still badly weakened, and other fundamental state services are hobbled by cuts too.  Other states are taking advantage of the stronger economy to reinvest in their schools and other building blocks of future prosperity. 

In North Carolina, the tax cuts are keeping policymakers from doing the same.  Some are even advocating for more tax cuts.  With state revenues already projected to grow more slowly over the next two-year budget cycle than likely will be required to maintain even the state’s diminished level of services, more tax cuts would just dig deeper into the hole in which the state already finds itself. 

Deep personal income tax cuts have failed to produce an economic miracle in state after state that has used them.  North Carolina is no different.