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Press Release

    A Tax Hike is Bad Medicine for North Carolina's Economy

    08/17/2000

    The first rule of public policy is not unlike that of medicine – "do no harm." And politicians, like doctors, should never pick a cure that not only kills the disease, but also the patient.

    Lawmakers now thinking to cure North Carolina’s budget ailment with a tax increase should pause to consider the long-term effects on the state’s economic health. Sure, raising taxes might cure the short-term budget crisis, but it will do so at the expense of our ability to compete with our regional neighbors. With today’s increasingly mobile high-tech firms looking for every opportunity to become more efficient, jumping to a lower-tax state is an easy way to improve their bottom line.

    According to the nonpartisan Tax Foundation, North Carolina ranks behind Virginia, South Carolina, Tennessee, and Georgia in terms of its relative tax burden. For example, if we look at "Tax Freedom Day" – the day taxpayers quit working for federal, state, and local tax collectors – taxpayers in North Carolina must work until April 29 before they earn enough money to pay their total tax burden. By contrast, Tax Freedom Day falls on April 23rd, 25th, and 28th in Tennessee, South Carolina, and Virginia, respectively. Any increase in taxes will put North Carolina at a competitive disadvantage with neighboring states and simply chase businesses to our lower-tax neighbors.

    The right medicine for North Carolina’s budget crisis requires the right diagnosis of the problem. The important question is: Why is North Carolina scraping by from annual budget to annual budget in the middle of a booming economy?

    Some are quick to blame the two recent lawsuits lost by the state and the money used to help victims of Hurricane Floyd. First, the courts found certain taxes unconstitutional, forcing the state to refund over $1 billion to government retirees and owners of intangible assets. Second, in the wake of Hurricane Floyd, assistance for flood victims surpassed $800 million.

    Others lay the blame on the tax cuts enacted following the 1994 elections. Legislators that year repealed the state sales tax on food, a regressive tax that hits the poor and elderly the hardest. They eliminated the intangibles tax after the courts rejected it. The inheritance tax was finally put to death, giving family businesses and farms a better chance of staying in the family. Lawmakers also phased out the tax on soft drinks, granted tax incentives to companies investing in the state, repealed the wholesale license tax, and approved sales tax refunds to school systems.

    The bottom line: Since 1995, lower taxes have provided consumers with an additional $1.3 billion. With this extra money the people of North Carolina have created a growing, diverse economy. Even the state has benefited as income growth has created an increased revenue stream for the state government.

    To blame yesterday’s tax cuts for today’s budget crisis is to confuse cause and effect. Despite the tax reductions – indeed, many economists would say because of them – state tax revenues have continued to grow to the tune of nearly $1 billion a year. In fact, since 1993-94, North Carolina has had five years in which tax receipts have grown at a 9 percent to 10 percent rate, as much as 40 percent faster than their historical norm. One could certainly make a strong case that cutting taxes has actually been good for the state’s coffers.

    But this windfall of new tax revenue has also generated an explosion of new state spending. North Carolina’s budget has grown by an average of nearly 8.4 percent per year, with several years of double-digit growth, outpacing the growth rate of the population, inflation, and tax revenues.

    To be sure, the unforeseen expenses have placed a burden on North Carolina’s budget. Finding almost $2 billion over a few years is a difficult, but not impossible task. Had lawmakers been more restrained in spending the windfall of tax revenues, North Carolina would have had plenty of resources to cover these new expenses and still enjoyed a healthy rainy day fund.

    Now the state finds itself at a crossroads and some lawmakers are looking for an easy cure through a tax hike. But this is not a cure for the simple disease of overspending; it simply provides more funding so the spending can continue. What lawmakers in Raleigh need to do is hold the line on spending, keep taxes at their present levels, and let the people of North Carolina do what they do best.

    Our growing, robust economy is the result of efforts to reduce the tax burden. While still a bit high, our taxes are still comparable to those of our neighbors. If North Carolina is to continue to be a state that creates jobs instead of driving them out, we must avoid a tax hike cure that doesn’t fit the disease.