For a peek into a world after a massive tax cut, visit North Carolina and ride along with factory owner Eric Henry.
Conservative groups have hailed North Carolina as a model of a tax overhaul since it began slashing state corporate and individual tax rates four years ago. And one of the effort’s main architects, Thom Tillis, is now in the U.S. Senate, where early Saturday he joined 50 other Republican senators in voting for a USD 1.5 trillion federal tax overhaul – a plan that employs many of the same tactics already in use here.
But as Henry drove through the conservative, rural county he’s called home all his life, he had trouble seeing many benefits of the tax cut. Business was good, but it wasn’t good enough that he could give his 20 workers significant raises.
And there were growing worries that the lost tax revenue – estimated at USD 3.5 billion this year alone – was beginning to significantly hurt core public services such as schools.
“I don’t know the people who this benefits,” Henry said of the North Carolina tax cut.
Changing the national tax code is much different from changing a state’s code. But what’s happening today in North Carolina offers potential clues about the grand experiment with tax cuts the entire nation is close to embarking on, with Republicans appearing confident they can send final legislation to President Trump by year’s end.
The tax changes in North Carolina haven’t produced the fiscal calamity that led Republican legislators in Kansas this year to reverse dramatic cuts they passed a few years earlier, but nor have they produced the kind of win-for-all economic prosperity national Republicans say their effort will spur.
Instead, North Carolina has enjoyed the same steady growth as much of the country, making it challenging to estimate the impact of the tax cut compared with the many other factors shaping the state’s economy.
“There’s nothing magical that has happened in North Carolina,” said John Quinterno, an economic analyst at the Chapel Hill-based research group South by North Strategies.
Henry, 60, runs a T-shirt manufacturer called TS Designs, which sources all its material locally. His company almost went belly up in the mid-1990s when free-trade pacts such as the North American Free Trade Agreement opened the borders to cheap foreign textiles. Henry knew he couldn’t compete on price. So he rebuilt his business around selling a higher-quality, locally made product instead.
He’s been doing well in recent years. This summer, the company notched its best production month ever, allowing Henry to pay a bonus to his workers. He says the nation’s overall strong economy is what benefits him.
Henry was driving one day late last week to give a talk at nearby Elon University. It was on campus that Henry ran into Jason Cox, 37, who owns several Jimmy John’s franchises and commercial real estate projects. Henry asked Cox whether he’d seen a benefit from the tax cuts.
“Not really,” Cox replied.
Cox said the cost of health insurance and regulations loom much larger for him than taxes. Taxes, he said, enjoy “an over-exaggerated role in our decision-making.”
State cuts — and a warning
Taxes have long been targeted by many conservatives as obstacles to economic growth.
In 2013, the Republican-controlled legislature in North Carolina started rolling back taxes. The then-governor labelled it the “Carolina Comeback” and sold the plan as a way to energize a state economy growing sluggishly after the Great Recession.The corporate rate dropped in steps from 6.9 % to just 3 % this year, the lowest in the nation among states that have such a tax. The rate is set to fall to 2.5 % in two years.
Personal income tax went from a progressive rate that topped out at 7.75 % to a flat 5.75 %. This year, it fell again to 5.49 %.
The state also abolished its estate tax and expanded the sales tax to include more services, such as ticket sales and auto repairs.
“I think North Carolina is an example of successful tax reform,” said Jared Walczak, a senior policy analyst at the right-leaning Tax Foundation.
He praised the state for not only lowering rates but eliminating preferential rates for certain industries, creating a more neutral tax code.
Supporters boast that just last month, North Carolina was named No. 1 on Forbes’s annual list of the most business-friendly states. That was a first, although it was just a moderate improvement from earlier years, when it has finished in the top five.
“Generally, it’s part of what’s helped our economy to bounce back,” Lew Ebert, president of the North Carolina Chamber of Commerce, said of the new tax structure.
North Carolina’s recent history as a tax-cutting state is much less known – and much less turbulent – than Kansas’.
A year before North Carolina launched its overhaul, Kansas’s Republican-dominated legislature cut rates, with Gov. Sam Brownback, R, predicting an “adrenaline shot” of economic growth. He openly described it as an experiment on the pro-growth strategies touted by conservative think tanks and politicians.
“It didn’t work well for Kansas,” said Jason DeBacker, an assistant professor of economics at the University of South Carolina who co-authored a study that used tax return data to find that Kansas’ strategy generated almost no new economic activity.
“We struggled to find anything,” DeBacker said.
What researchers did find was that the state’s tax coffers were hit hard.
“The net effect is the state is reeling from a huge budget deficit,” said Wally Meyer, director of entrepreneurship programs at the University of Kansas’s business school.
In June, Republican lawmakers raised taxes – even overriding a governor’s veto – to close a USD 900 million hole in the state budget.
So far, North Carolina has fared better.
The state economy and the number of new jobs have grown slightly faster than in the nation at large since the tax cuts began, said Michael Walden, an economics professor at North Carolina State University.
“My own sense is that the corporate tax rate cuts did help, but both tax and nontax factors were important,” Walden said.
But even if the top-line numbers have improved, workers have not seen huge benefits. The median hourly wage in North Carolina grew roughly on par with the national rate, while the average hourly wage and annual wage grew notably slower, according the federal Bureau of Labour Statistics.
Henry said he supports policies that make running a business easier. He’s fiscally conservative, and he considered himself a Republican until he switched parties in recent years when the state GOP party increasingly took stances on social issues – pushing a same-sex marriage ban and the so-called transgender bathroom bill – that he disagreed with.
As Henry drove, he called other people he knew. One of them, a local architect named John Plageman, said he’d seen a spike in new business this year.
“I’d assume it has something to do with the tax cuts,” Plageman said.
And he was excited by the prospect of federal tax cuts.
Eating lunch at Reverence Farms Café in nearby Graham, Henry sat with Bruce Nelson, who runs the cafe and a local farm with his daughter and son-in-law. In a different life, Nelson was chief executive of Office Depot. He said he understood why Wall Street was so excited about tax reform.
“It’s all about earnings per share,” Nelson said. Lower taxes mean higher earnings.
But Nelson said he doubted the cuts would generate significant corporate investment. Companies already need to be ruthless about lowering costs. He couldn’t imagine a company waiting for a tax cut to become more efficient. And he didn’t expect the tax cuts to translate into pay raises.
“There’s no such thing as trickle-down,” Nelson said.
Cuts all around
While North Carolina’s economy has chugged along, signs of strain on state spending have increased. The state budget has not kept pace with a growing population, said Alexandra Sirota, director of the North Carolina Budget and Tax Center, a left-leaning non-profit.
“Pretty soon, we’re not going to have enough money,” Sirota said.
The state legislature’s Fiscal Research Division agrees. It projects budget shortfalls of at least USD 1.2 billion starting in 2019.
The squeeze has already hit public schools.
In North Carolina, the state government provides the bulk of public education funding. And while the overall contribution is up, per-pupil spending, adjusted for inflation, is down. Plus, there are about 10000 fewer public school teachers in the state, despite growing enrolment, said Mark Jewell of the North Carolina Association of Educators.
The school system serving Burlington is struggling, said Alamance-Burlington Schools superintendent Bill Harrison.
Anyone claiming schools are better off after the tax cuts is “using smoke and mirrors,” Harrison said.
Harrison rattled off a string of numbers to make his point. Funding for school supplies has dropped 20 %, he said. His schools get 33 % less money for textbooks now than a decade ago.
“I heard it every year: Why doesn’t my child have a textbook?” Harrison said.
Henry’s wife, Lisa, taught preschool for children with disabilities for almost three decades. She retired in 2015 after watching several years in which state lawmakers made cuts to public schools, including by underfunding teacher pay raises.
“It just felt like a huge slap in the face,” Lisa Henry said.
As the sun started to set, Henry drove back to his company. Just a few employees were still around. None of them said they’d noticed the state tax cuts.
“Other than the roads not getting taken care of,” said Eric Michel, 33, chief logistics officer.
And no one in the office has gotten a big pay raise since the tax cut, either.
Henry hoped that if the company kept growing, that the orders kept coming in, he could afford to pay his workers more.
“But the seeds for that were planted long ago,” he said.