Tax Reform

The Path to Economic Growth

and Fiscal Stability in North Carolina

1

NC’s Economy is Large• Population of 9.55 million (10th)• Workforce of 4,500,000 • GSP of $407 Billion (10th) • Larger than GA, MI, MA since

2003• NC = 24th largest national

economy

But large is hard to affect

Slide 2

Despite being one of the “Best Business Climates” in the U.S. during the last decade according to Site Selection Magazine & other publications, in NC: Job creation is not keeping up with workforce growth Job growth, unemployment, & poverty is worse than

the U.S. average From 1990 to 2000, we were 11th in U.S.

wage and income growth; In 2009, North Carolina was 45th

In 2010, we were 48th

3

A Surprising Statistic

Economic Success---and Failure

75

77

79

81

83

85

87

89

91

93

95

1969: 79.14

1973: 83.14

1982: 81.44

1989: 89.08

1997: 92.88

2009: 87.62

NC Per Capita Income as % of US Average

4

2010: 87.5

UNC Center for Competitive Economies

We are Losing Ground on Per Capita Income In North Carolina

• We are falling further behind the U.S. average in per capita income in North Carolina

• Our average per capita income as a percentage of the U.S. average has decreased every year from 1997 to 2010 to where we were in 1986

• If current trends continue, NC’s average per capita income as a percentage of the U.S. average is on track to drop to 1970 levels by 2020

5

Median Household Income North Carolina

• North Carolina's median household income has fallen from $51,125 in 2000 to $45,570 in 2010, a decline of 10.9 percent.

• Half of households in the state have incomes above the median, and half below, according to the U.S. Census Bureau.

All figures are in 2010 dollars

NORTH CAROLINA MEDIAN HOUSEHOLD INCOME

Source: U.S. Census Bureau

10.9 % DECLINE FROM 2000

FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 FY 08-09 FY 09-10$0

$1,000,000,000

$2,000,000,000

$3,000,000,000

$4,000,000,000

$5,000,000,000

$6,000,000,000

$7,000,000,000

$203,437,950 $378,340,914

$1,616,170,002

$2,917,405,768

$4,180,679,410

$5,402,783,885

$6,725,966,540

NC Economic Development Spending (Cumulative)

Slide 8

Slide 9

NC Job Creation Performance 2000-2010

1970 1980 1990 2000 2010

Manufacturing 35.2% 32.7% 25.5% 18.8% 10.8%

Government (incl. Military) 21.1% 19.6% 18.5% 18.1% 21.1%

Trade, Transportation and Utilities 18.5% 18.1% 19.6% 18.7% 17.8%

Services 14.9% 19.2% 25.2% 32.0% 39.1%

Financial Activities & Information 5.4% 5.5% 5.8% 6.5% 6.7%

Construction, Agriculture & Mining 5.0% 4.9% 5.4% 5.9% 4.5%

SALES TAX ISSUES

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Shrinking Sales Tax Base

Increasing Sales Tax Rates in North Carolina

The Sales Tax Base• The tax base has narrowed

The bar graphs below indicate how North Carolinians spend $100 of their income as a % of items subject to sales tax

We spend a smaller % of our income on items subject to sales tax now than in the 1970’s & more on services not subject to sales tax

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Sales Tax Base Erosion

11/27/2012 13

The Sales Tax Base

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1970-71 1974-75 1978-79 1982-83 1986-87 1990-91 1994-95 1998-99 2002-03 2006-07

Effective Tax Rate Average

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The effective tax rate (collections/income) has been relatively stable despite a declining tax base. But how was this achieved?

The Sales Tax Base

56.1%52.7%

46.2%

36.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0%

10%

20%

30%

40%

50%

60%

70%

1970s 1980s 1990s 2000s

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But in order to keep up with a declining tax base, State tax rates were increased from 3% to 5.75% since 1991, allowing the effective tax rate to remain comparatively steady.

State Tax Structure

FY 1970-71 FY 2011-2012

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INCOME TAX ISSUES

Unstable Income Tax

Base

Increasing Tax Rates in

North Carolina

17

?Growth & Stability?

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20% of General Fund revenue comes from these two volatile sources.

• FY 1990-1991– 8.1% shortfall– $600 million expenditure

cuts– $600 million tax increase

• FY 2001-02, 2005-06– 10.8% shortfall– Temporary sales tax

increase– Temporary income tax

increase

• FY 2008-09– 15.2% shortfall– Increase ‘sin’ taxes– Temporary sales &

income tax increase

• Next Recession?– The tax structure has not

changed– History suggests another

Recession & shortfall– Could it be worse? 20% or

25%

NC Revenue Insufficiency

What Are Other States Doing?• States with current plans to eliminate or significantly

reduce their income taxes include: South Carolina, Oklahoma, Kansas, Indiana, Nebraska, Idaho, Maine, New Jersey, Ohio• “States like New York, California, Illinois and

Maryland that have high and rising tax rates also tend to be those that have growing welfare states, heavy regulation, dominant public unions, and budgets that are subject to boom and bust because they rely so heavily on a relatively few rich taxpayers.” From Wall Street Journal article “The Heartland Tax Rebellion”---2/7/12 20

From the Wall Street Journal--2/7/12

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How Do We Move North Carolina Forward?

Make North Carolina’s Economy more competitive

Promote income growth & wealth generation

Grow the State GDP

Ensure revenue stability

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Cornerstones for Developing Stable Economic Growth in North Carolina

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Education

Transportation

EnergyRegulatory Reform

Tax Reform

NC. CompetitiveEconomy

Tax Policy Long-Term Goal

• A competitive NC Economy that will:–Promote Economic Growth–Create Jobs

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Tax Policy Objectives

• Develop a transparent and simple tax code• Ensure a less volatile revenue stream to plan &

operate government efficiently at a revenue neutral level

• Improve a declining Sales & Use tax base• Generate income, wealth & GDP growth• Reward entrepreneurship and innovation• Promote a competitive small business

environment 25

NC’s Current Business Taxes

• Corporate income and franchise tax• Personal income tax • Sales or privilege tax on business purchases• Local privilege and gross receipts taxes• Gross premiums tax (insurance companies)• Excise tax on real estate transfers• Local property taxes• Estate tax

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How Do We Fix the NC Tax Code?

• Think about your own business and how NC’s tax code impacts your decisions

• If you were writing a new tax code for a new state, what would it look like?

• What if current tax code were replaced with fewer & simpler tax types?

• A tax code that is less complex, more equitable, generates wealth and income growth, and grows the State GDP

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Tax Reform Considerations

• Tax Reform requires a long-term, structural solution

• The Status Quo is no longer an option—our current tax code is outdated

• Using the same antiquated tax policy while expecting different results is the definition of Tax Insanity

28

DISCUSSION &

COMMENTS

29Thanks to Brent Lane & Barry Boardman for providing graphs and statistics for this presentation