In the new state budget just passed last November, Republican lawmakers finally accomplished one of their long-sought goals: a plan to abolish the state’s corporate income tax by tax year 2030. In that tax year, corporations in North Carolina will no longer pay any tax on their income in the state. Proponents of the plan insist that it will accelerate job growth in the state. But just how likely is this claim to be true?
To answer this question, there are two things we need to know: the impact of tax-cutting policy in the recent past, and some basics of how economics works.
Tax Cuts: A Look At the Record
The abolition of the state corporate income tax (also known as the “corporate tax”) is part of a relentless anti-tax obsession at the core of Republican leaders’ priorities. Specifically, Republicans’ point to their 2013 tax law, which replaced North Carolina’s previously progressive personal tax schedule with a much lower flat tax, cut the corporate tax by more than half, and actually increased sales taxes, which are regressive, to offset the revenue hit. (Curiously, the same lawmakers never specify what state spending – for things like schools, highways or services – will be reduced when they advocate for more tax cuts.)
Republican lawmakers, and their boosters in right-wing media groups, brag frequently that this agenda has improved North Carolina’s economic and fiscal landscape over the last decade. But for the most part, their evidence is either simply missing or cherry-picked. We now have nearly a decade of data to analyze, and by even the most basic metrics, our state’s economic growth has been unremarkable:
Between 2001 and 2010, North Carolina’s state GDP grew 21.7%. Yet from 2011 to 2020, during Republicans’ tax cutting spree, it grew only 12.6%, trailing the national average.
Since slashing taxes in 2013, North Carolina’s economic growth has mostly been slower, and job growth more tepid, than our direct neighbors in Georgia and South Carolina.
Between 2010 and 2020, North Carolina’s real personal income growth per capita was in the bottom third in the nation.
In short, most North Carolinians are still waiting for the alleged benefits of tax cut politics to materialize.
Can taxes affect economic growth and job creation? Certainly. But the relationship is anything but simple. Like most things, the relationship between taxes and economic growth is equivocal and dependent on many confounding factors. Unfortunately, much of the debate on the subject devolves into ideological jousting instead of evidence-based pragmatism. Yet the numbers simply do not lie – tax cuts have not made North Carolina’s state economy any better for most people.
A Review of Economics 101
Many commentators on tax cut politics would be wise to set aside their ideological priors and first understand how firms set prices and why they hire to begin with.
The tax cutters’ argument is that by slashing taxes, corporations will face lower costs. As a result, they will not only pass along those savings to consumers in the form of lower prices, but they will also hire more employees with their new surplus income. There are a number of problems with this argument based on the evidence above, but the most fundamental issue is that it defies basic economic logic.
Take prices, for example. It’s an economic truism that in a free market, firms set prices on the basis of supply and demand – not a “cost-plus” or markup model. Apples cost $2.75/lb at Harris Teeter because that is what the market will bear, not because that was coincidentally the number some manager arrived at after calculating their costs plus a markup. A Tesla costs $60,000 while a Honda Accord costs $18,000 because the supply and demand profile of each car is very different, not because Tesla and Honda have such massively different cost structures.
When a firm’s taxes are cut, its EBITDA – earnings before taxes and depreciation – does not change. The difference accrues to the company’s bottom-line profit, not the price they charge consumers. If consumers are willing to pay $1 before the firm receives a tax cut, they will still be willing to pay the same afterward. (And this before one considers the effect of “sticky prices.”) There is no particular reason to “pass along” free surplus to consumers; firms would much rather pocket it, which, in fact, they do.
Or consider the jobs argument. Firms hire employees for one reason: to meet consumer demand, and thus produce a profit. This is true whether one is running a restaurant or manufacturing line. Absent increased demand, firms have no reason to hire more employees simply because they have surplus resources. Firms are more likely to use those surplus returns for shareholder dividends, stock buybacks and boosting executive compensation – and indeed, this is exactly what we saw happen with corporate tax cuts like President Trump’s “Tax Cuts and Jobs Act” in 2017.
No Shortcuts to Growth
There are no shortcuts in life, and the same is true of economic growth. In an economic landscape like North Carolina’s, it is just extremely difficult to make a pragmatic, instead of ideological, case for tax cuts.
There are also no shortcuts to long-term, sustainable and broadly shared economic growth, because the basic recipe is tried and true: a well-trained and educated workforce, quality infrastructure, and access to attractive markets. These are things that require steady, long-term investment – funded by taxes. Public policy like universal healthcare can be a major source of relief for entrepreneurs. Strong worker protections can not only make employees happier, but also build the robust middle-class markets any thriving economic ecosystem needs to succeed.
But these are not the policy interventions Republican tax cutters have in mind. Voters should ask themselves why.