Tax dispute does have a solution


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), which extend through the end of 2015, 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 1st quarter of 2013. That growth rate is 9th 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 an adjustment to the 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.

Back in 2013, Gov. McCrory and legislative leaders were faced with the task of resolving a far larger dispute about tax cuts. Senate leaders argued, correctly, that a large cut in North Carolina’s tax rate on corporate income would significantly reduce the double-taxation of investment, encourage business starts, and make our state a national leader in tax reform.

The governor and the House agreed with the Senate’s goal. Indeed, the 2013-15 budget plans from both chambers included the same cut in the corporate rate over those two fiscal years, down to 5 percent by 2014-15. But while the Senate wanted to schedule additional corporate-tax cuts for the years after 2015, the House and McCrory administration expressed concern that forecasting errors, national economic conditions, or other unforeseen events might crimp revenue growth in the out-years.

Fortunately, there was a handy tool for resolving the disagreement: a fiscal trigger. It’s been in our toolbox for decades. 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 special-interest lobbying or short-term political considerations from knocking government budgets out of alignment.

The 2013 budget deal included a series of fiscal triggers. If General Fund revenue met its target by January 1, 2016, the corporate tax rate would fall 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. If the target isn’t met, the next increase of the standard deduction would be deferred.

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.

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