Publisher's note: This post, by Francis De Luca, who is the President of the John W. Pope Civitas Institute in Raleigh, was originally published in the Budget & Taxes section of Civitas's online edition. A similar version of this article originally appeared in Forbes Magazine.
Louisiana Governor Bobby Jindal, Nebraska Governor Dave Heineman, and Kansas Governor Sam Brownback have all called for their states to eliminate their income tax and replace it with a sales tax over the past week. They were joined yesterday morning by North Carolina, where the Senate President Pro Tempore, Phil Berger, confirmed the legislature and the Governor, Pat McCrory, would pursue serious tax reform this session. Indeed, a senate proposal being crafted into legislation includes a repeal of North Carolina's personal and corporate income taxes along with an expanded sales tax.
If North Carolina, Louisiana, and Nebraska are successful in eliminating state income taxes, they could provide the momentum for a nationwide trend.
Fortunately, there's already a detailed description of how this move will benefit the Tar Heel State's citizens.
The big problem that any tax code needs to address is to not impede economic growth and the resulting employment a robust economy brings. For North Carolina, this isn't an academic question: Our unemployment rate is at a staggering 9.2 percent, the fifth-highest rate in the country.
A study published by the Raleigh-based John W. Pope Civitas Institute estimates that North Carolina would have gained an additional 217 thousand to 378 thousand jobs over the past decade under this proposal. That would put a tremendous dent in that 9.2 percent unemployment rate.
And if we eliminate the state's income taxes now, North Carolinians would immediately see larger paychecks. The median North Carolina household currently pays about $2,100 in state income taxes. Repealing the state income tax burden would empower Tar Heel State residents by allowing them to keep more of what they earn.
Currently, North Carolina's income tax rate tops out at 7.75 percent, by far the highest in the region. We also have the region's highest corporate tax rate. The overall effect of such high taxes has been to increase our tax burden to the 17th highest in the nation. After a two-decade period where our incomes increased at the 4th-fastest rate in the country, we've fallen dramatically to the 26th-fastest rate over the last decade.
We can do better. The Civitas report evaluates the economic benefits from eliminating the personal income tax, the corporate income tax, and the franchise tax, all of which penalize businesses and hinder job creation. In place of the old taxes, the reform calls for a new consumption-based tax system, largely via expanding and slightly increasing the state sales tax.
The findings of this study show the proposal is a recipe for economic growth and more jobs. The Civitas study shows that such consumption-based tax reform can increase North Carolina's average annual rate of personal income growth by 0.38 percent to 0.66 percent. It also shows that states without a personal income tax have average annual growth rates 0.5 percent higher than other states, while states without corporate income taxes average a full percentage point higher each year.
But what do those figures really mean? If a consumption-based tax reform like this had been passed in 2000, North Carolina would be an entirely different place. In dollar terms, total personal income would have been between $14.4 billion and $25.0 billion higher, a 4 to 7 percent increase over the state's actual 2011 total personal income. This is an additional $1,500 to $2,600 in income per worker.
A bold consumption-based tax reform would also make North Carolina an example for the rest of the country. In Washington and in some state capitols around the nation, the current debate is between harsh austerity, bigger deficits, higher taxes, or some awkward combination of all of these options.
But this doesn't have to be the debate any longer. North Carolina, Louisiana, and Nebraska should take the initiative and prove that there is a better way for both the state's budget and citizens' wallets. Eliminating the income tax is the best place to start.