Gauging the Effects of North Carolina Tax Reform

Friday, May 25, 2018

On May 14, 2018, roughly 75 people gathered at the Rizzo Center in Chapel Hill for the 2018 North Carolina Tax Reform Summit. The event was hosted by the UNC Tax Center, an affiliated center of the Kenan Institute of Private Enterprise.

A highlight of the day-long conference was a luncheon keynote by U.S. Sen. Thom Tillis. Sen. Tillis noted that when he became speaker of the North Carolina House of Representatives in 2011, his objective was to make North Carolina’s tax code more competitive with those of neighboring states. At the time, he said, North Carolina had the worst tax burden in the Southeast.

Today, Forbes magazine ranks the state as the best for business and Site Selection awarded it the magazine’s 2017 Prosperity Cup.

Tillis also shared a few observations on the new federal tax code. He said that it provides greater opportunities for U.S. corporations to do business at home and that two-thirds of families will receive a tax cut.

Barry Boardman, the North Carolina General Assembly’s chief economist, gave an overview of significant changes to the state tax code. Boardman said his office estimates that 123 changes had measurable impacts. The state now has the lowest corporate tax rate in the South and among the lowest in the country.

Sen. Phil Berger, North Carolina Senate president pro tem, shared some results of the state’s tax reform. “Growth in employment and total wages was solid last fiscal year,” he said, “and we expect it to continue at a similar pace this year.”

Berger noted that from 2012 to 2015, North Carolina had the highest median household income growth in the country. In 2012, the state ranked 46th in median household income; in 2016, it ranked 37th. This constituted a net increase of $12,231 per household.

In his presentation, North Carolina Sen. Jay Chaudhuri offered some cautionary words about tax reform measures, saying that their effects on the budget must be taken into consideration. Cutting education and health care, said Chaudhuri, “will result in balancing the budget on the backs of the middle class and the working poor.”

North Carolina must invest in schools, he said, pointing out that the state is 37th in teacher pay and 39th in per-student spending. Chaudhuri further urged investment in job training skills and rural broadband access.

Two panel discussions offered additional perspectives on tax reform. Among the questions asked of panelists in corporate tax was whether tax reform had been needed in North Carolina. The consensus was that yes, it had been. Michael Boykin of Grant Thornton LLP offered that the state had relied excessively on both corporate and individual income taxes, and therefore reform was necessary.

A second panel offered a perspective from accounting and economics research. Among the questions posed was whether the outcomes of tax reform can be measured accurately. Juan Carlos Suárez Serrato, a professor of economics at Duke University, said that effects can take up to 10 years to play out fully. Professor Suárez Serrato also noted that while state tax rate reductions have been tied to many outcomes like economic growth, one recent finding ties them to increased income inequality. Jeff Hoopes, a professor of accounting at the Kenan-Flagler Business School at UNC-Chapel Hill, emphasized that discerning a causal relation between changes in tax policy and economic outcomes is difficult for a number of reasons, including the lack of a natural control group, the concurrent enactment of non-tax laws, and subsequent changes to the tax laws themselves.

The day wrapped up with a networking reception.