While the pundits in Washington debate whether the Trump tax cuts will help the economy, they should look to North Carolina where the economy is booming in part due to smart tax reforms.
In 2013 lawmakers in Raleigh slashed the business tax rate by more than half (to 3% from 6.9%), while also lowering individual tax rates from a high of 7.75% to 5.5%. North Carolina also abolished its state death tax. The standard deduction was more than doubled from $3,000 to $7,500 for singles and from $6,000 to $15,000 for a couple to benefit lower income households.
These tax cuts were partially offset by limitations on popular tax write-offs and credits, such as caps on the mortgage deduction and a broadening of the state sales tax.
Does all this sound familiar? In many ways, Donald Trump's tax plan is a nationwide replica of what this state did four years ago.
Since the tax cut, North Carolina — which was especially clobbered by the recession with the unemployment rate above 9% in 2012 — has outpaced the nation in personal income and job growth every year. So far in 2017, Carolina ranks fourth fastest in the pace of employment and the unemployment rate has shrunk to 4.1%.
Earlier this year Site Selection Magazine, based on interviewed major CEOs of America's largest companies, ranked North Carolina the second-most desirable state to locate a business — behind only Georgia.
The Research Triangle around Raleigh-Durham continues to expand as a major tech sector — the Silicon Valley of the South — and financial services companies like Fidelity have been relocating thousands of jobs from the high tax northeast to Tobacco Row. Manufacturing, pharmaceutical and even high-end textile jobs have returned, as well. All of this despite the controversy and organized boycotts of the state due to the controversial bathroom bill.
"The biggest problem we hear from our businesses today is finding the workers to fill the job openings," Lew Ebert, the president of the North Carolina Chamber of Commerce tells me with a broad smile.
The prosperity is luring new residents into the state. From 2013 through 2016 the state experienced a net migration of just under 150,000 residents from other states and this steady inflow means the state is likely to pick up another congressional representative after 2020.
Perhaps most remarkable: The state is running budget surpluses, which reached $447 million in 2015, $430 million in 2016, and $581 million this year.
While the left warned of Kansas-style deficits, they never happened in Raleigh. Why? First the phased-in tax cuts were contingent each year on meeting established revenue targets. Second, the tax cuts were partially paid for by revenue-raising offsets, such as the tax base broadening measures. As Senator Phil Berger, the president pro tempore in the state senate, puts it: "North Carolina is a tax-cutting lesson for Washington: We cut rates, expanded the tax base, and grew our economy."
Because of the healthy budget reserve and rainy day fund, the legislature just approved another tax cut to bring the business tax rate down to 2.5% in 2019, which will be one of the lowest rates in the nation.
Because incomes are rising in North Carolina at such a healthy pace since 2013 — the number of tax returns reporting earnings of above $100,000 has climbed by 27% or about 83,000 people — the share of the total income tax burden has shifted to the upper classes. "The poor and middle class are now paying a slightly smaller share of the income tax, while the rich are paying more" a Civitas study based on state tax return data found.
All of this is a stark contrast to the nation's two fiscal basket cases: Connecticut and Illinois. While North Carolina was cutting tax rates, the politicians in Hartford and Springfield were spurred on by unions and leftist advocacy groups to raise income tax rates on their wealthiest residents.
But their budget deficit hole keeps getting deeper. Illinois had to again raise taxes by $5 billion this year and Connecticut — which in 1990 had no income tax at all, now is considering its third income-tax hike in five years, which would bring the rate to 7%.
Meanwhile, low-income tax states like North Carolina and its neighbors Florida and Tennessee are filling up their coffers with revenues that keep flowing in from wealthy former Connecticut Yankees and Chicagoans. One Carolinian I met grumbled to me: "There are too many damned Cubs fans moving here."
If the goal of the Trump tax cut is to make America look more like tax-cutting North Carolina and less like soak-the-rich Connecticut and Illinois, he's certainly on the right track.
This piece originally appeared in Investor's Business Daily