The Daily Record
N.C. Economics Tax Dispute Has A Solution
RALEIGH — The federal government has just released another set of economic statistics — and they again show North Carolina has one of the fastest-growing economies in the United States.
According to the latest measurements of gross domestic product (GDP), North Carolina’s economy has grown at an annual average rate of 4.8 percent since Gov. Pat McCrory was inaugurated. If the dollar figures are adjusted for purchasing power, North Carolina’ GDP still rises by an annual average of 2.6 percent since the first quarter of 2013. That growth rate is ninth in the nation, and is exceeded in the Southeast only by Florida’s 2.8 percent rate.
It should be said, however, that the country as a whole shows signs of slowing growth in the latter months of 2015. This is important to keep in mind as leaders of the North Carolina House and Senate meet to work out their differences on a 2016-17 state budget.
While the two sides have already agreed on how much to spend, they disagree on how much to cut taxes, at least in the short run. The Senate favors increasing the standard deduction — the amount of income North Carolinians can automatically exclude from income tax — to $17,500 for married couples (up from the current $15,500) and to $8,750 for singles (up from the current $7,750) by the 2017 tax year. The House wants to expand these deductions by precisely the same amounts, but more slowly, by the 2020 tax year.
Fortunately, there is a handy tool for resolving the disagreement: a fiscal trigger. From the Gramm-Rudman budget deal of 1985 to state tax and expenditure limitations, conservatives have long argued that binding constraints on future fiscal decisions keep specialinterest lobbying or short-term political considerations from knocking government budgets out of alignment.
A previous North Carolina budget deal, in 2013, included a series of fiscal triggers. If General Fund revenue met its target by Jan. 1, 2016, the corporate tax rate would fall a point to 4 percent. If revenue met the next target, by the beginning of 2017, the rate would fall again, to 3 percent.
As we now know, North Carolina’s economy was poised for a strong recovery. Healthy revenue growth since 2013 has helped the state strengthen its balance sheet while triggering the 2016 rate cut. It’s also likely to trigger the 2017 cut, giving our state the lowest corporate rate of any state that levies such a tax.
Why not replicate the fiscal trigger solution today? The House could accept a more ambitious timetable for expanding the standard deduction, as the Senate has proposed, but make each installment of the tax cut conditional on hitting an agreed-upon General Fund revenue target.
North Carolina has been well served by a fiscally conservative approach that encompasses reducing and reforming taxes, restraining expenditures, and rebuilding the state’s reserves. While our strong economic performance since 2013 cannot be attributed entirely to these decisions, they certainly didn’t hurt and likely played a role. Some ingenuity and prudence at this point will help keep our momentum going.
John Locke Foundation chairman John Hood is the author of “Catalyst: Jim Martin and the Rise of North Carolina Republicans.”
JOHN HOOD
