The North Carolina Senate is expected to give final approval this week to a historic tax reform package that would significantly reduce personal income tax rates and phase out the corporate tax by 2017. The Senate plan, which passed second reading last Thursday, would scrap the state’s progressive income tax code, with a current 7.75% top rate, and replace it with a flat rate of 5.4% that would go down to 5.25% in 2015.
Left-of-center political pressure groups are up in arms over the proposal, portraying it as some sop to the wealthy, but the fact is that everyone would get a tax cut under the Senate proposal, just as they would under the plan that passed the House earlier this month, which moves to a flat 5.9% personal income tax.
North Carolina Democrats and other flat tax opponents claim that those who have higher incomes should pay more in taxes. Well, they do under a flat tax. Under a 5.25% flat tax, an individual making $40,000 a year would owe the state $2,100, whereas someone making $100,000 in a year would pay $5,250 in state income tax.
Furthermore, both tax reform plans put forward by North Carolina Republicans are more charitable to the least among us than the status quo. Currently North Carolina taxes income starting at dollar one. The plan set to pass the Senate does not tax incomes below $15,000, while the House-passed plan exempts the first $12,000 earned.
The very blue state of Massachusetts, whose voters preferred Barack Obama by 61% over their own former governor last November, gets by just fine with a flat tax of 5.25%, well below NC’s top rate. Ballot measures to create a graduated income tax system have been put before voters in this bastion of liberalism five times and five times Massachusetts voters have decided to keep their flat tax in place. The Bay State’s ever-so-progressive voters, who have voted for the Democratic candidate in the last seven presidential elections, seem to like their flat tax just fine and don’t want to get rid of it. If flat tax opponents truly believe their own hyperbolic rhetoric, they must consider places like Boston and Cambridge to be some dystopian wasteland.
Tax Foundation economist Scott Drenkard, in testimony before the North Carolina Senate Finance Committee last week, described the large body of research showing that flatter taxes are more conducive to economic growth:
“The economic literature on progressive income taxes is especially unkind. For example, the OECD study finds that reductions in the top marginal rate of income taxes would be beneficial to long term growth. Examining the period 1969-1986, Mullen and Williams (1994) found that higher marginal tax rates reduce gross state product growth. This finding even adjusts for the overall tax burden of the state, lending credence to the principle of broad bases and low rates.”
Not only will a lower, flatter income tax boost the North Carolina economy, it will also provide a defense against trickle down taxation. Don’t tax you, don’t tax me, tax the man behind the tree who cleared $200K last year. That statement sums up the approach to taxation shared by the White House, Nancy Pelosi, Harry Reid, and also Democratic legislators in Raleigh. But experience has shown that it leads to higher levies on everyone in the long run. This is known as trickle down taxation and ATR president Grover Norquist explains that Massachusetts voters of all income levels were wise to reject proposals to impose higher rates of taxation on incomes beyond an arbitrarily-set level:
“Voters were quite sophisticated in their reasoning and understood that dividing Bay Staters into different groups would allow them to be mugged one at a time.”
After the Senate plan passes third reading, a conference committee will be appointed to work out the differences between the House and Senate plans by month’s end. There are seven states with a flat tax and they have an average unemployment rate well below North Carolina’s. If Speaker Thom Tillis and Senate President Phil Berger are successful, the Tar Heel State will soon join their ranks and be free of the dubious distinction of being home to the highest income taxes in the South.