Tax cuts would add 10,000 N.C. jobs by 2013, boost income by $1.6 billion

May 9, 2011

This press release has been revised based on updated data.

RALEIGH — Expiration of North Carolina’s temporary 1-cent sales tax and income tax surcharges, a cut in the corporate tax rate, and other tax changes linked to the N.C. House budget and anticipated tax-reform package would lead to a net gain of 8,000 jobs in 2012 and 10,000 jobs by 2013.

The John Locke Foundation’s top budget analyst reaches those conclusions after reviewing a new report from a Boston-based economic research team.

“This report shows that private-sector job growth linked to the House’s tax changes clearly would offset layoffs anticipated from state government,” said Joseph Coletti, JLF Director of Health and Fiscal Policy Studies.

“House Republicans predict their budget could lead to a maximum of 7,000 government layoffs, but the state’s lower tax burden would more than offset those losses,” Coletti added. “If Gov. Beverly Perdue and her Democratic allies are successful in blocking the expiration of the state sales tax, and the other changes House budget writers are pursuing, North Carolina would be giving up jobs.”

While House proposals would net 8,000 new jobs next year, Perdue’s budget would lead to fewer job gains, Coletti said. “The governor’s budget plan would lead to a projected 3,000 government layoffs,” he said. “Tax changes in her plan would generate roughly 4,400 new private-sector jobs. That means a net gain of about 1,400. In other words, the House Republican plan creates more jobs than the governor’s plan.”

The job creation estimates come from the Beacon Hill Institute at Suffolk University in Boston. The institute’s economists used their N.C. State Tax Analysis Modeling Program — NC-STAMP — to calculate the impact of allowing North Carolina’s temporary 1-cent state sales tax and income tax surcharges to expire, lowering the state’s corporate tax rate by 2 percentage points, and changing the way the state calculates individual income taxes.

“The tax changes would provide a powerful stimulus to the North Carolina economy,” according to the report. “Employment would increase by 14,922 in 2012, and when fully implemented in 2013 would create 17,016 jobs by leaving more money in the hands of the state’s households and businesses.”

“The combination of individual income tax and sales tax changes would increase real disposable income by $1.1 billion in 2012 and $1.6 billion in 2013,” the economists report. “The corporate income tax changes lead to a reduction in the tax burden on capital investments. As a result, both local and out-of-state businesses would find investment more attractive in North Carolina. We estimate that investment will increase by $651.2 million in 2012, increasing to $1.1 billion in 2013.”

During the ongoing debate over the next North Carolina state budget, some interest groups have lobbied lawmakers to maintain a 1-cent sales tax the previous General Assembly approved in 2009 as a temporary measure. That tax is scheduled to disappear July 1.

“Those supporting the extension of the sales tax increase detail the benefits that the revenue could bring to the state government,” according to the report. “While true, the higher sales tax rate would also prevent the North Carolina economy from realizing large positive economic effects. Our modeling shows that the expiration of the temporary increase would create 11,734 jobs in 2012 and 11,195 jobs in 2013.”

Allowing the 1-cent sales tax to expire and removing most tax preferences would increase real disposable income by $691 million next year and $739 million in 2013, according to the Beacon Hill Institute economists.

Dropping the state’s corporate income tax rate from 6.9 percent to 4.9 percent and eliminating a surcharge, while eliminating various tax credits, would bring more investment to North Carolina, according to the report.

“Investment in North Carolina would surge by $367.5 million in 2012 and $774.7 million in 2013 as firms approve investment projects that would become profitable on an after-tax basis under the tax cut,” the Beacon Hill Institute economists report. “The tax cut would increase real disposable income by $143.5 million in 2012 and $334.8 million in 2013 as business owners and the newly employed gain from the tax cut.”

For the individual income tax, the report examines the impact of eliminating the existing surcharge for top earners, starting tax calculations with federal adjusted gross income, eliminating all current tax credits except for the one linked to charitable contributions, then increasing North Carolina’s standard deductions and exemptions.

“Net employment would increase in North Carolina by 2,866 in 2012 and by 5,055 in 2013,” according to the Beacon Hill Institute team. “As more workers enter the state economy, investment will increase by $7.3 million in 2012 and $13.3 million in 2013. State real disposable income would increase by $538.8 million in the first full year of implementation.”

The tax changes would reduce the amount of money flowing from taxpayers to state government in the next two years. “State revenues would drop by $888.9 million in 2012, increasing to $1.2 billion in 2013,” according to the report. “However, as the state economy grows even faster in ensuing years, revenues would recover.”

The numbers lead the Boston-based economists to a clear conclusion. “Tax increases bring more revenue into government coffers, but that money comes out of the state’s households and businesses, reducing their buying power,” according to the report. “Conversely, a tax cut will necessitate losses in government jobs and services, while increasing the purchasing power of those same households and businesses. Here, the tax cuts produce larger benefits to the private sector than the cost to the public sector, while the tax hikes produce smaller benefits to the public sector than the costs to the private sector.”

The Beacon Hill Institute report, “An Economic Analysis of State Tax Changes in North Carolina,” is available at the JLF Web site. For more information, please contact Coletti at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].