Tax cut is holding the state back

The verdict is in on President Trump’s 2017 corporate tax cut: It didn’t work.

The tax cut’s backers said reducing the corporate tax rate from 35% to 21%would increase the average household income by $4,000, raise economic growth above 3% and even pay for itself by generating more tax revenue. As the Wall Street Journal’s Greg Ip noted in a recent column, “Nearly two years later, none of those things have happened, and there is scant sign that they will.”

This umpteenth example of the false promise of trickle-down economics raises anew questions about North Carolina’s aggressive cutting of corporate taxes. The Republican-led General Assembly started phasing in tax cuts in 2013 that now cost about $3.6 billion a year in lost revenue. The estate tax was eliminated and the progressive income tax was reduced to a flat tax, but the most dramatic cut was a reduction in the corporate tax rate. Since 2013 it has been reduced from a high of 6.9%t — then the highest in the Southeast — to 2.5% today. Among 44 states that have a corporate tax, North Carolina’s is the lowest.

What has been the effect? State employees, teachers and state services have certainly felt the reduction in state revenue. But the boom that was supposed to come with making the state more “business friendly” hasn’t happened. The economy has grown as the state’s population has increased and the national economic recovery has lifted all states, but North Carolina’s mix of tax cuts and spending austerity has produced more pain than gain.

Michael Mazerov, senior fellow with the Center on Budget and Policy Priorities, a nonpartisan research and policy institute based in Washington, D.C., analyzed data for North Carolina’s job growth and overall economic growth since passage of the tax cuts. His conclusion: “Looking back to when (the cuts) started at the end of 2013, the state has underperformed most of its neighbors in terms of overall economic growth as measured by GDP.”

In terms of gross domestic product (GDP) from the fourth quarter of 2013 through the second quarter of 2019, Mazerov said North Carolina lags behind three of its four neighboring states. North Carolina’s GDP growth was 27.2%, better than the U.S. (26.1), but less than Georgia (32.6), South Carolina (33.1) and Tennessee (29.2). North Carolina did outpace Virginia (20.9), but Virginia’s growth was skewed by changes in federal spending, particularly automatic cuts in defense spending required by sequestration.

In terms of private sector job growth since 2013, North Carolina showed a 13.9% increase, better than the U.S. average (11.9) but less than Georgia and South Carolina (both 15.3).

“The bottom line is that North Carolina, like Kansas before it, has shown that cutting taxes does not have much, if any, positive impact on job creation,” Mazerov said.

What drives state economies, he said, is state spending on education, transportation and amenities such as parks.

Mazerov said, “States are shooting themselves in the foot when they cut taxes and cut back on investments in these crucial building blocks of the state economy.”

A targeted tax cut can help a struggling economy when the tax savings go to consumers who will spend it. But North Carolina’s across-the-board giveaway to corporations during a period of economic growth is not that kind of tax cut. It’s a mistake that’s holding back North Carolina. Republican lawmakers won’t admit the mistake — that’s why they keep making it. But next November, voters should correct it.

— The Charlotte Observer