Having failed to repeal or fix Obamacare, one of President Donald Trump’s signature campaign promises, the circular firing squad that is the Congressional Republican majority will now turn its attention toward the next major plank of the president’s platform – comprehensive tax reform.
Tax policy in the U.S. has not been reformed since President Ronald Reagan’s landmark legislation in 1986. Reagan signed into law the broadest revision of federal taxes in history, producing a simpler code with fewer tax breaks and significantly lower rates. The changes affected every family and business in the nation and sparked an economic boom.
In the years since, however, rates have gradually gone back up and Congress has passed nearly 15,000 changes to the tax code. Many of the loopholes and special interest tax breaks that disappeared three decades ago have crept back in.
But with control of Congress and the White House, the GOP has a real opportunity to achieve pro-growth policies that will unleash our economy from the “new normal” sub-2 percent growth we experienced over Obama’s eight years. “Fat cat” corporations won’t pay their “fair share”, critics will say, which is nonsense. U.S. corporations already pay the highest marginal rates in the world among developed countries. And even as rates around the World are falling, the U.S. has remained steady at about a 40 percent marginal rate, making us uncompetitive against global trading partners.
As for what other tax reform measures might work, there is a blueprint they can turn to: North Carolina. Six years ago North Carolina’s unemployment rate was above 10 percent and the state was still reeling from the Great Recession. But in 2013 a combination of the biggest tax-rate reductions in the state’s history, and a gutsy but controversial unemployment-insurance reform, supercharged N.C.’s economy and produced significant budget surpluses.
The tax cut slashed the state’s top personal income-tax rate to 5.75 percent, near the regional average, from 7.75 percent, which had been the highest in the South. The corporate tax rate was cut to 5 percent from 6.9 percent. The estate tax was eliminated.
But the story gets better. Because North Carolina lawmakers built in a trigger mechanism that applied excess revenues to additional rate cuts, the business tax has fallen to 2.5 percent – a 63 percent drop since 2013, which is the lowest corporate income tax rate among states that impose such a tax. And the state’s personal income tax rate will drop to 5.25 percent in January of 2019.
Shortly after the North Carolina reforms were passed, the unemployment rate started to decline rapidly and job growth climbed. Hundreds of thousands of jobs have been added to our economy and the unemployment rate has fallen to 4.2 percent. North Carolina now ranks 11th in the country for best business tax climate, according to the Tax Foundation, up from a dismal 44th in 2013.
But tax cuts, opponents always argue, mean less revenue, which means draconian cuts in education and other government spending. But in North Carolina, as in Reagan’s day, the tax cut’s impact on revenue was just the opposite. North Carolina’s projected revenue surplus grew to $580 million, according to projections released in May this year, because the state also cut discretionary spending at the same time they cut taxes.
What is North Carolina doing with all that extra money? First, the state is socking some of it away for a rainy day with 15 percent of all surplus revenue mandated to be set aside as a hedge against the next severe recession or natural disaster. A portion of it has gone toward increasing teacher pay in the state. In 2014, starting pay for new teachers was raised to $35,000. In addition, most teachers received increases of 7 percent in 2015, a 2.1 percent bump in 2016 and another 3.3 percent raise in 2017. Another chunk of the surplus went to paying back the feds for unemployment insurance subsidies extended during the recession, eliminating more than $2 billion in state debt.
Eliminating debt is important because money spent servicing debt can’t be spent on other productive needs-like teacher pay or better roads. At the federal level, President Obama doubled our national debt over his eight years in office to nearly $20 trillion dollars, creating a debt bomb which will blow up one day.
North Carolina has been the poster child for what successful pro-growth tax reform and conservative fiscal policy looks like. We should all thank the Republican General Assembly and former Governor Pat McCrory. If Washington would just get out of its Beltway bubble and pay attention, they might learn something.
Frank Dowd IV is Chairman of Charlotte Pipe and Foundry Company, a 116 year-old family-owned manufacturer with 7 plants scattered across the U.S.