RALEIGH (March 21, 2013) — North Carolina policymakers are currently pursuing personal income tax cuts despite the unimpressive recent experiences of other states that have tried this approach and despite academic literature finding that state personal income tax levels do not affect economic growth.
States that made deep personal income tax cuts in the 1990s and 2000s did not perform particularly well in later years, according to a new report from the Center on Budget and Policy Priorities. The biggest tax-cutting states in the 1990s had slower income growth than other states on average, and states that enacted major personal income tax cuts in the 2000s prior to the recession were as likely to lose economic ground as to gain it.
“The evidence is clear: it would be a huge mistake for North Carolina to cut income taxes,” said Alexandra Forter Sirota, director of the Budget & Tax Center, a project of the North Carolina Justice Center. “It won’t help our economy one bit, and it will mean cutting funding for services that businesses and families rely on every day, like good public schools, universities, and roads.”
Of the states that cut personal income taxes in the 2000s, those that experienced strong economic growth were oil producing states whose success likely resulted not from the income tax cuts, but instead from a sharp rise in oil prices and other factors unrelated to the tax cuts. Non-oil-producing states that cut personal income taxes saw their economies decline compared to the rest of the country.
Similarly, the states that cut taxes the most in the 1990s performed worse than other states on average in later years. These results are consistent with most academic studies, which typically find that state personal income tax levels do not affect economic growth, as the report details. One reason for these findings is that states must balance their budgets, so tax cuts must be paid for by raising other taxes, cutting services, or some combination of the two. Doing these things hurts the economy and counteracts any benefit of the income tax cut.
“With their revenues still deeply damaged by the recession and their reserve funds depleted, states have little margin for error right now,” the report reads. “Gambling on a personal income tax cut would put fundamental public services, which in most states are heavily dependent on personal income tax revenue, at risk.”
State income tax cuts would hit at a time when North Carolina is already facing serious funding problems due to cuts from the federal government. Cuts in federal funding over the next several years under the 2011 Budget Control Act will hurt North Carolina’s ability to provide services important to the state, such as good public schools, clean water, and safe communities. Across the board spending cuts known as sequestration will cause additional damage. State income tax cuts would only compound this problem.
“Rather than taking an approach that has failed to produce results in other states, North Carolina should focus on investing in educating our children, building state of the art infrastructure, and protecting the safety and well-being communities to spur economic growth in the future,” Sirota said.
Read the full report at this link.