Republican state lawmakers think cutting taxes makes North Carolina more attractive to new businesses, but cutting taxes too much has the opposite effect.
The Republican-led legislature has already curtailed state services and set back public education with excessive tax cuts. Now, with the General Assembly back in session, they're looking to cut some more. It's a reckless path that could lead to serious revenue shortfalls and a more regressive tax code.
Since Republicans began aggressively cutting taxes in 2013, the state has lost billions of dollars in revenue. The effects are showing up in high vacancy rates in state agencies and the courts as state employees' pay has lost ground to inflation. It's also worsening a shortage of public school teachers and support staff as school funding has fallen far short of the need.
Ironically, the full extent of the damage being done by small-government-loving Republicans has been temporarily offset by big-government spending at the federal level. Legislation responding to the pandemic and in support of infrastructure work and clean energy transition have provided billions of dollars to the states. That revenue has temporarily masked how negligent the legislature has been in meeting the state's basic obligations, let alone providing for its future.
Indeed, the cascade of federal cash has allowed Republicans to temporarily claim that the long-disproved idea of trickle-down economics actually works. They cut taxes and, lo and behold, the state has a budget surplus of more than $6 billion.
But the surplus is not because lowering taxes somehow produced more revenue. (New Jersey, a high-tax state, has a $6.8 billion surplus.) North Carolina has excess revenue because the state has reduced what it has historically spent as a share of the state economy - a drop from 5.8 percent to 4 percent - and because of a strong national economy boosted by the generosity of Uncle Sam.
Now this illusion of prosperity brought on by cutting taxes may cause serious trouble. The surge in federal funding will not last, but more tax cuts are coming. The state corporate tax has fallen from 6.9 percent to 2.5 percent and will be phased out by 2030. The personal income tax has been stepped down from a two-tier progressive tax with a top rate of 7.75 percent to a flat tax of 4.75 percent today. Now state Senate leader Phil Berger says the legislature should consider cutting the personal income tax to 2.5 percent.
"I don't think there's any question that the voters of North Carolina have clearly said they want the type of pro-business, less-ax, less-regulation policy that we have pursued," Berger said.
But school teachers, state employees and people who value their services have many questions about the wisdom of reducing state revenues year after year.
The tax cuts cost the state billions of dollars in lost revenue annually. Additional tax cuts that will take effect this year will reduce state tax revenue by $1.7 billion more. Imagine what that amount could do to increase teacher pay or lower tuition at North Carolina's public universities or provide more support for mental health care.
Alexandra Sirota, executive director of the nonprofit NC Budget and Tax Center, said cutting corporate and personal income taxes will not only further impair state services, it will also make a regressive tax code more so by creating pressure to raise the state sales tax.
"There's this pursuit of zero income taxes without the acknowledgment that they will need to find dollars elsewhere and the place they will look to is the sales tax," she said.
Sirota added that more income tax cuts offer unequal relief as the savings will largely go to those who have already benefited from tax cuts.
What the state should do is halt the tax cuts that are scheduled, adjust state employee and teacher pay to at least catch up with inflation and get ready for a possible recession.
Instead, the tax cut bender will continue.
Associate opinion editor Ned Barnett can be reached at 919-829-4512, or nbarnett@ newsobserver.com