North Carolina's economy and tax revenues have been declining in recent decades. While the state was once a top performer in job and income growth, it now lags behind national averages. The tax base has narrowed as consumption patterns have changed, yet tax rates have increased to compensate. This unstable structure leaves the state vulnerable to budget shortfalls during recessions. To promote long-term economic growth and fiscal stability, tax reform is needed to develop a simpler, more competitive system that broadens the base and ensures a steady revenue stream.
Changing the conversation around millennials AENC 2015 Annual Meeting, Jamie ...
Final tax mod slides 12 09-12
1. Tax Reform
The Path to Economic
Growth and Fiscal
Stability
in North Carolina
0
2. 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 1
3. A Surprising Statistic
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
2
4. Economic Success---and Failure
NC Per Capita Income as % of US Average
95
1997: 92.88
93
91
1989: 89.08
89
87
2009: 87.62
85 2010: 87.5
1973: 83.14
83
81
1982: 81.44
79 1969: 79.14
77
75
1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
UNC Center for Competitive Economies
3
5. 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
4
6. 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
7. NORTH CAROLINA MEDIAN
HOUSEHOLD INCOME
10.9 % DECLINE FROM 2000
Source: U.S. Census Bureau
11. SALES TAX ISSUES
Shrinking Sales
Tax Base
Increasing Sales
Tax Rates in
North Carolina
10
12. 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
11
14. The Sales Tax Base
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1970-71 1974-75 1978-79 1982-83 1986-87 1990-91 1994-95 1998-99 2002-03 2006-07
Effective Tax Rate Average
The effective tax rate (collections/income) has been relatively
stable despite a declining tax base.
But how was this achieved?
13
15. The Sales Tax Base
70% 5.0%
4.5%
60% 56.1%
52.7% 4.0%
50% 46.2% 3.5%
3.0%
40% 36.8%
2.5%
30%
2.0%
20% 1.5%
1.0%
10%
0.5%
0% 0.0%
1970s 1980s 1990s 2000s
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.
14
19. NC Revenue Insufficiency
• FY 1990-1991 • FY 2008-09
– 8.1% shortfall – 15.2% shortfall
– $600 million expenditure – Increase ‘sin’ taxes
cuts – Temporary sales &
– $600 million tax increase income tax increase
• FY 2001-02, 2005-06 • Next Recession?
– 10.8% shortfall – The tax structure has not
– Temporary sales tax changed
increase – History suggests another
– Temporary income tax Recession & shortfall
increase – Could it be worse? 20%
or 25%
20. 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 19
22. 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
21
23. Cornerstones for Developing Stable
Economic Growth in North Carolina
Education
Tax Reform Transportation
NC. Competitive
Economy
Regulatory Energy
Reform
22
24. Tax Policy Long-Term Goal
• A competitive NC Economy that will:
–Promote Economic Growth
–Create Jobs
23
25. 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 24
26. 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
25
27. 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 26
28. 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
27
29. DISCUSSION
&
COMMENTS
Thanks to Brent Lane & Barry Boardman for providing graphs and statistics for this
28
presentation
Hinweis der Redaktion
Despite the 52 percentincrease in the averagestate sales tax rate between 1970 and 2007,total state sales tax revenue as a share of totalhousehold consumption in the economy increasedonly 13 percent, from 2.2 percent of consumptionto 2.5 percent.16The traditional sales tax base, purchases of durable and non-durable goods with the exceptionof groceries (which the majority of states now exempt), fell from 39 percent of householdconsumption in 1970 to 32 percent in 2007. Over the same interval, consumption of services (excluding housing) rose from 31 percent to45 percent of total household purchases.18If more services had been included in the tax base, it is likely that sales tax revenue growth wouldhave more closely tracked economic growth. A 1993 study by economists Robert A. Bohm andEleanor D. Craig concluded that the extent to which services were included in state sales tax baseswas positively correlated over the 1968-83 period with the “elasticity” of the tax — that is, theextent to which growth in the sales tax kept pace with growth in state economies.19From the center on budget and policy priorities
2001-02Sales tax increase extended twice (2003 & 2005)Upper income tax bracket of 8.25% for MFJ >$200k (extended twice)In 2005 raised tax on cigarettes from 5¢ to 30¢2008-09During my tenure here, the State has weathered several fiscal crisis, each seems worse than the last. State approach has been ad hoc ‘fixes’What is clear is that There are an infinite variety of impromptu fixes policymakers can improvise to keep a jerry-rigged tax system from teetering over completely.Hasn’t fixed the problem … Relied on temporary tax increases, counting on economic growth to see us through the future … But with good times came more ad hoc tax changes that further eroded the base….leading to greater revenue insufficiency in economic downturns