Ten-year boom proves N.C. tax cuts 'really worked'

Former Sen. Bob Rucho talks to Longleaf Politics about the impact of the General Assembly's 2013 tax plan

By:  Andrew Dunn

Let’s take a second and remember what the state of North Carolina’s economy was like in 2013.

The Great Recession had found North Carolina woefully unprepared. Years of anemic growth and poor budgeting resulted in massive shortfalls when the economy turned sour. And by 2013, the state was still in a hole.

The jobless rate remained stubbornly over 8% early in the year, a percentage point higher than the U.S. as a whole, and the state owed more than $2.5 billion to the federal government for unemployment benefits.

North Carolina’s rainy day fund had reached the bottom of the barrel, even with temporary tax increases passed under the Perdue administration and income tax rates at the highest in the Southeast by far.

It wasn’t a pretty picture, but it wasn’t an aberration. The Civitas Institute called it the end of a “lost decade” in our state’s economic history.

Then came massive political change.

After claiming its first majority in decades in the 2010 elections, Republicans expanded their hold in the following cycle. In 2013, the GOP had just sworn in its first supermajority in the General Assembly, as well as its first governor in a generation — Gov. Pat McCrory.

That budget mess was one of the first things they tackled.

In the 2013 session, General Assembly leaders spearheaded the largest tax cut of any state over the previous decade, a dramatically different tax code and a massive restructuring of the state budget.

North Carolina took the three-tiered personal income tax rate and changed it to a flat tax of 5.8%, a figure that has steadily fallen since then. Today, it's at 4.75%. Corporate taxes were slashed, too, falling to 5% right away and drifting down from there. It's now at 2.5%. The estate tax (or "death tax") was scrapped, too, but new sales tax categories shored up the gap.

The results were pretty dramatic.

North Carolina catapulted up the ranks of the State Business Tax Climate Index, going from 44th to 16th virtually overnight and ultimately climbing higher. Within three years, North Carolina was running a budget surplus of nearly half a billion dollars — a figure that would only grow in the following years.

Despite cutting tax rates, total tax revenue has swelled: Today’s budget comes in at around $33 billion, more than a 50% increase over a decade ago. And the state has billions of dollars held in reserve to prevent dramatic cuts if tough times come again.

Those tax reforms turn 10 this year, so Longleaf Politics chatted with one of the chief architects of the tax plan — former Sen. Bob Rucho of Mecklenburg County — to talk about how those reforms came about, what the impact has been, and anything he wishes the General Assembly had differently.

"It’s nice to see people recognizing that hey, this really worked," Rucho said.

Responses have been edited for brevity and clarity.

Q: Why was tax reform so important? Why tackle it so early?

At that time, we were just in the tail end of the Great Recession. We were in some tough straits. Not only was it important to reverse from that, but it was also important to transform the North Carolina economy into a pro-growth economic model that would allow us to, in essence, support and grow our businesses and let them expand.

If you look back in history, every single recession was getting more painful — bigger budget deficits. Our responsibility was not only to recover but to put us on a path where we would not have that same result. We did very well during the COVID recession. The underpinning that we put into place allowed us to outperform the U.S. on that issue. 

We were in dire straits as far as the money was concerned. But if you look at today, thanks to what was instituted with the pro-growth model and the spending cuts, we’re in the best financial position the state’s been in, in history.

The numbers tell a compelling story. But qualitatively, what do you think the biggest impact has been on the state from North Carolina's tax reform and budget discipline?

Rich and poor, everybody did better because of what we did. Life improved for people. Businesses expanded, and when they expanded it created jobs. The poverty rate declined from 18% in 2012 to 13.4%. We’re getting closer to what the U.S. poverty rate is, and there was a huge gap at one point in time. 

We lowered their costs of doing business, and guess what, wages increased. It gave people more money to spend and more money to save.

There was clearly a lot of opposition at the time. Do you think the critics have been proven wrong? 

Absolutely. The numbers speak for themselves. The other thing you look at is, Republicans continue to get elected. We’re still seeing Republicans win elections in the state because of the fact that people feel there are better things being done. 

This was a myth that the Democrats put forward: If you cut taxes, you’re not going to have money to spend. But now we have the rainy day fund, tax cuts, and the ability to operate state government at a responsible level. 

We were criticized for not helping the poor, but in a sense, we probably took some 200,000 people off the [government assistance] rolls. Did the middle class and the lower-income people receive benefits from this? Absolutely. All of a sudden, jobs were created and people for the first time had a chance to climb the employment ladder.

The only way you can create wealth in America is having your own business. And that’s an opportunity that didn’t really exist before as it does now under the new effort.

Would you do anything differently if you could?

Well, yes. We could have done more on the personal income tax rate. The economists said the tax cuts for the corporations would be beneficial. But the small businesses, the middle to small businesses, needed the help more.

I don’t think we spent enough energy going in that direction. We knew we had the money, but nobody expected the revenues to go up so much.

Do you think eliminating the personal income tax entirely is possible in North Carolina?

The only way that can be done is to move to a full consumption-based economy. You’re talking about taxes on goods and services.

Here’s what I’ve been thinking: 2.5% is not a bad personal income rate. I don’t know if there’s the courage in the legislature to increase the sales tax on services. People really feel that they’re paying more. You try to explain that you’re also getting a tax rate cut, but people don’t always understand that. 

Do you worry that the General Assembly is losing its focus on fiscal responsibility? 

That’s something I’m really worried about right now. I’m looking at the House — they’ve forgotten where they came from on controlling spending. [Their budget’s increase in spending] may be close to 7%. That’s what Democrats do. 

I fully respect the fact that the inflation rate has put a lot of pressure on wages and salaries. The feeling of legislators is that they need to compensate. But once you put it into the system, you can’t take it back out. 

That just opens the can of worms. Someone has to pay that bill somewhere down the road.

4 things of note

Cooper vetoes abortion bill, setting up override showdown

What's happening: On Mother’s Day weekend, Gov. Roy Cooper hosted a major rally in downtown Raleigh to publicize his veto of a bill that would protect the lives of unborn babies starting at 12 weeks of pregnancy. You can watch a short video of the veto itself here. While completely ignoring the reality of what abortion actually is, Cooper said the bill represented “dangerous interference” that would harm pregnant women and their families, standing in front of signs that read “Stop the Bans.”

Why this matters: Saturday’s rally is the latest example of just how extreme Cooper and the Democratic Party have become on the abortion issue, to the point of blatantly lying to score political points. Cooper’s stance today is a significant reversal from most of his political history. As a state legislator, Cooper supported legislation to prevent minors from getting an abortion without parental consent, as well as policies that prevented state funding for abortions, as former Rep. Paul Stam pointed out over the weekend. Both are positions Cooper would label as “extreme” today.

What comes next: Senate Bill 20 is now back in the General Assembly’s court, which is expected to pursue a veto override this week. We discussed the override’s prospects in-depth last week.

Former Congressman Mark Walker expected to announce run for governor

What's happening: Former U.S. Rep. Mark Walker, a Republican from Greensboro, is expected to enter the race for North Carolina governor at a rally planned for May 20. His team sent out a press release last week taking a thinly veiled shot at the frontrunner in the race, Lt. Gov. Mark Robinson.

“Because Democrats will be putting everything they have into the coming race, it's essential that Republicans nominate a candidate who can withstand the scrutiny of a gubernatorial election,” it read.

Why this matters: The NCGOP establishment has largely coalesced around Robinson, who formally entered the race at an event last month. However, Walker is a vigorous campaigner who takes a grassroots approach and has a long list of connections. Former NFL football coach Tony Dungy endorsed his campaign, for example. All this would force Robinson to respond.

What comes next: I'll use a future column to explore Walker's prospects in the governor's race. But more immediately, Walker's entry into the race forces State Treasurer Dale Folwell to re-evaluate his plans. Folwell announced in March that he'd seek the Republican nomination for governor, but has done little since then. I'd advise Folwell to drop out of the race and instead run for re-election for treasurer. He has a real chance to cement a legacy as the best state treasurer in North Carolina history.

Trump, DeSantis, Pence to headline NCGOP convention

What's happening: The state's Republican Party has booked a powerful lineup of speakers for its upcoming annual convention, to be held in early June in Greensboro. Former President Donald Trump speaks Saturday night, while Florida Gov. Ron DeSantis and former Vice President Mike Pence have other speaking spots. 

“There's no question about it: We expect this will be the biggest convention we've ever had in North Carolina history,” NCGOP Chairman Michael Whatley told WBT's Brett Winterble. 

Why this matters: This is scheduled to be the first time Trump, DeSantis and Pence are all in one place — though they will not share a stage together. Each man has a different speaking slot throughout the weekend. 

Former President Trump is also not afraid to make news. He also spoke at the 2021 NCGOP convention, using the platform to endorse Ted Budd for U.S. Senate. Budd went on to handily win the GOP nomination and ultimately the seat.

What comes next: Expect the NCGOP convention to become a national event.

Wake County’s lone Republican legislator considering run for Congress

What’s happening: State Rep. Erin Paré, a Republican representing southern Wake County, is considering a run for U.S. Congress in 2024, Axios Raleigh reports. She’s set up a committee that allows her to raise money for a future campaign.

Why this matters: This news represents some of the first political jockeying that will help determine how new legislative districts are drawn in the coming months.

What comes next: The General Assembly will almost certainly draw a new suburban/exurban Raleigh seat that encompasses some of the territory of the district currently held by U.S. Rep. Wiley Nickel.