NC Already Cut Corporate and Income Taxes. Here’s What Happened.

Dec 14, 2017

In this Dec. 4, 2017, photo, part of the Republican Senate bill "Tax Cuts and Jobs Act" is photographed in Washington. Republican tax legislation advancing toward final votes in Congress could undermine “Obamacare” health insurance markets, and add to the financial squeeze on Medicare over time. This week lawmakers will try to resolve differences between House and Senate versions in hopes of finishing around Christmas.
Credit Jon Elswick / AP

Republicans lawmakers in Congress frequently point to North Carolina as evidence their tax overhaul will be a boon for the economy. In 2013, the state passed a tax overhaul that includes a lot of the same elements as the federal proposal, including cutting corporate and income taxes.   

Before the tax overhaul, North Carolina was ranked one of the worst states to do business, according to the Tax Foundation’s State Business Tax Climate index. Now it’s the third fastest growing economy in America and the third most popular state for migrating talent.

In 2017, Forbes named it the best state in the nation to do business.

This turnaround is due in large part to tax cuts, according to North Carolina Chamber of Commerce President Lew Ebert. He said those tax cuts freed up money for companies to reinvest, which created 100,000 new jobs a year.

“The job creation numbers kind of speak to the fact that, big picture, when you give companies more assets and more resources they create more jobs,” Ebert said. “That’s certainly happened in North Carolina over the last four years.”

North Carolina lawmakers cut the corporate rate from 6.9 percent to its current rate of 3 percent - currently the lowest in the nation. It will end at 2.5 percent in 2019. That’s the same year the income tax will become a single, flat rate of 5.25 percent, dropping from a high of 7.75 percent.

But not all business owners are pleased with the tax cuts.

Equipment stored in one of the warehouses of Charlie Owens’ business, Fletcher Warehousing, in Fletcher, N.C. Owens stores equipment and supplies for companies.
Credit Courtesy of Charlie Owens

Charlie Owens owns Fletcher Warehousing, a shipping, logistics and storage company in Fletcher, North Carolina. He said the tax cut benefits haven’t trickled down to his 15 employees, even with a doubling of the standard deduction.  

“They did not notice much of a change in their tax bill,” Owens said. “Inflation, medical costs and other things like that cut into what little they got as a tax cut.”

He also worries the tax cuts are short-sighted. He wishes the estimated $3 billion a year the tax cuts cost the state could have been spent educating North Carolinians for the jobs of tomorrow.   

“Five years, ten years from now, what kind of education are they going to have?” he asked. “What kind of companies are we going to attract to western North Carolina? We’re not going to attract them without a highly-educated workforce.”

Much of the state’s recent job growth - like the nation - has been in sectors that require highly-skilled workers, like technology, finance and healthcare, according to North Carolina State University Economics Professor Michael Walden. The rest of the growth has been mostly in low-wage, low-skill service sector jobs.

“What we’ve not had in North Carolina, and again I’d argue this is in most states, is a lot of growth in so called middle income jobs,” Walden said. “A lot of that is due to the decline in manufacturing.”

North Carolina’s Democratic Governor Roy Cooper has been critical of the state’s tax cuts for not helping the middle class. He accurately points out that wage gains since the tax overhaul have disproportionately benefited people making more than $100,000 a year.

But tax cuts aren’t a zero-sum game with winners and losers, according to Walden. He said there’s a case to be made that middle- and low-income earners have benefited as well.

“If you argue, well, it’s created more jobs, therefore it has created better opportunities for people who didn’t have a job, I think that might be the big benefit,” Walden said.  

Theoretically, wages should start to rise as companies compete to attract workers. Walden said we could be approaching that point soon with steady job creation and low unemployment.

In the meantime, economic growth has only offset about a third of the cost of the tax cuts.

As of now, the state legislature’s Fiscal Research Division projects budget shortfalls of at least $1.2 billion starting in 2019. Since the state has a balanced budget requirement that hole would have to be filled by cutting spending or raising taxes.