by Dr. Roy Cordato
Senior Economist, Emeritas
If you are a North Carolina taxpayer and you think something looks familiar about President Trump’s tax reform plan, you are right. In the three big areas of tax policy where the state and federal code overlap—the income tax, the estate or death tax, and the corporate tax—it is quite clear that North Carolina has become the model for smart tax reform. The same set of pro-growth and pro-individual freedom principles are the driving force behind both.
The tax reform proposal that President Trump released last week is, in several key respects, almost a mirror image of the tax reform plan passed by North Carolina Republicans in 2013 and further improved over the last four years. Let’s compare what Trump has proposed and what North Carolina has done.
Personal income tax rates and progressivity
President Trump has proposed to lower tax rates for all income groups and flatten the rates structure, reducing the number of brackets from seven to three. The plan is designed to reduce the penalty on income generating activities—work effort, saving, investment, and entrepreneurship. He also proposed to add additional progressivity to the system by dramatically increasing the standard deduction, also known as the zero tax bracket, from $12,600 for a married couple to $24,000, which helps low- and middle-income taxpayers.
In North Carolina, the Republican-led legislature and former Gov. Pat McCrory lowered the rates for all income groups and flattened the rate structure, collapsing three income brackets into one rate (that has dropped to 5.499 percent). The plan was designed to reduce the penalty on income generating activities—work effort, saving, investment, and entrepreneurship. They also added progressivity into the system by dramatically increasing the standard deduction from $6,000 for a married couple first to $15,500 and then, in 2016, to $17,500, which creates a progressive average rate structure that helps low- and middle-income taxpayers.
Death (estate) tax
President Trump put forward the idea to abolish the federal death tax.
The North Carolina legislature and former Gov. McCrory abolished the state death tax.
Corporate income tax
President Trump proposed to dramatically cut the corporate income tax rate. His plan includes reducing the current rate of 35 percent, which is the highest among developing countries, to 15 percent, which would make it among the lowest in the world. His plan recognizes that the lower rate will mean higher after-tax profits that lead to more investment, economic growth, and job creation. It will also incentivize businesses to reinvest their profits in the United States, rather than in overseas operations or expansions.
In 2013, the North Carolina legislature and Gov. McCrory dramatically cut the state corporate income tax rate. The rate at the time was 6.9 percent, which was the highest in the Southeast and one of the highest in the country. The rate was reduced to 6 percent in 2014 and eventually to 3 percent in 2017. This not only makes it the lowest of any state in the Southeast but the lowest of any state in the nation that has a corporate tax. Like Trump’s planned reductions, the North Carolina changes recognize that the lower rate will mean higher after-tax profits, which will translate into more investment, economic growth, and job creation. It also incentivizes businesses to reinvest their profits in North Carolina, rather than overseas or in other states.
A model for the nation
It has become common to hold up North Carolina’s 2013 tax reform as a model for both other states and the nation. There is good reason for this. It is an application of the kind of sound economic thinking that should undergird all pro-growth tax reform. It appears that President Trump has embraced these principles and in translating them into a plan for tax reform has, not surprisingly, arrived in the same place North Carolina did four years ago. One can only hope that Congress will similarly follow suit, benefitting the nation in the same way that the reforms passed by the N.C. General Assembly benefited the state.