by Dr. Roy Cordato
Senior Economist, Emeritas
• In 2013, the state of North Carolina implemented fundamental tax reform, replacing a system that imposed burdensome taxation on the many with special exemptions for the privileged few.
• Changes were made to the personal and corporate income taxes by lowering the rates and broadening the bases.
• Changes to the sales tax were less significant, leaving current rates in place and expanding the base to include some services.
• From the perspective of economic growth, the two most important reforms are those made to the personal and corporate income taxes.
• The plan cuts taxes by about $4.75 billion over five years, assuming the state meets certain revenue triggers and implements the plan fully.
• With the personal income tax, economic distortions have emanated from both its rate structure and its base. With respect to the corporate tax, the problem has been that it has existed at all.
• An income tax is a penalty on productive activity of all kinds—the higher the rate the greater the penalty.
• By flattening the top rate and lowering it to 5.75 percent from 7.75 percent, the latest reforms significantly ameliorate these problems.
• Future reform efforts need to focus on eliminating savings from the tax base.
• Principles of government transparency and economic growth both suggest that the corporate tax should eventually be abolished.
• The good news is that, by lowering the rate, these negative impacts are reduced, and dramatically so if revenue triggers are met and the rate falls to 3 percent.
• The importance of reducing tax revenues is that it transfers resources from political to private sector control, enhancing the overall efficiency of how these resources are used.