Conservative icons such as Ronald Reagan, Barry Goldwater, and Milton Friedman would have appreciated some of the North Carolina General Assembly’s key accomplishments in 2013. That’s the assessment of John Locke Foundation President John Hood, who discussed this with me in a recent edition of Carolina Journal Radio.
Martinez: Let’s talk a little bit more about the specific idea, then, of the tax reform that has occurred. How will North Carolinians benefit from what the legislature has done?
Hood: Previously, North Carolina had a progressive rate tax structure, rates of 6 percent, 7 percent, and 7.5 percent. There was actually even a fourth rate for a while, of 8.25 percent. And these are fairly high income tax rates by Southern standards. Most of our neighbors didn’t have as high rates, or even any income tax in a couple of cases.
And so the proposal from the legislature — and Gov. [Pat] McCrory supported and signed the legislation — was to create a single rate. It’ll be at 5.75 percent when fully implemented. That will be lower than all the previous rates, so everybody gets a rate reduction in North Carolina regardless of income. And that rate is lower now than most of our surrounding states.
The idea there is to make North Carolina more competitive, to create more growth and more job opportunities, and to let people keep more of what they earn. This is not just a tax reform; it is a tax reduction. And usually you have to do those two things together. Sometimes you hear, “Well, we should reform the tax code and generate more money,” meaning a higher tax burden out of it. Or that it ought to be revenue-neutral.
You can understand why some people think that, but you’ve got to remember that tax reform is inevitably a process of taking some special benefits away from some people. The reason the tax code is so goofed up is because there are very active lobbies pressing for special breaks, special advantages. And any sensible tax reform will take those away and treat everybody the same. If you’re going to do that, politically, you need a spoonful of sugar to help the medicine go down. So you’ve got to give people — almost everybody — a break, so that the people who lose something from tax reform will not prevail.
Martinez: John, when a company looks at locating in North Carolina, what do the executives look at when it comes to the tax code? Are they just looking at the corporate rate, or are they trying to figure out what it’s going to cost their employees to live in the state? What do they look at when they start comparing?
Hood: It depends upon the situation. Lots of smaller companies, people setting up new companies, they might not even organize themselves in ways that would subject their business earnings to corporate tax. So they might just be looking at the personal income tax rate. Pretty much all corporate managers, corporate executives, look at the personal income tax rate in addition to the corporate rate because they’re going to pay it, and they want to know about that. And they want to think about recruiting high-level talent and whether the tax burden will be a turnoff or a turnon in that process.
So when the giants of conservative tax philosophy were thinking about tax reform, they were thinking about this very issue: What is the most efficient way to collect the money the government needs in a way that does not discourage economic investment? And the flat tax is at the top of that list. North Carolina now has a flat tax. Most states don’t, so this is a competitive edge for us, and it’s something that I think Ronald Reagan and other conservative icons would be very proud of North Carolina for doing.
