For families, paying the bills on time and putting away some money into savings isn’t very glamorous stuff. However, that’s how we strengthen our finances to allow for greater investment (i.e., job creation) and more charitable contributions. The same is true for a state government. What North Carolina has been able to do in the last 3 years or so in this regard has simply been amazing.
Let’s go back to what it was like here just a few short years ago. We ended 2012 in 47th place for unemployment at 9.3%. To pay unemployment benefits we borrowed from the federal government the 3rd highest amount per capita, a debt of $2.6 billion. At the beginning of the economic downturn our state had a projected $2.2 billion annual budget deficit. All states were in this shape because of the national recession. The difference, though, is what each state did about it. Instead of cutting our expenses to cover the deficit, we plundered all types of funds – the Lottery Fund, the Clean Water Management Trust Fund, the Public School Building Capital Fund, the Public School Textbook Fund, the Golden LEAF Fund, and others.
We were in bad shape, which is probably why the party in power lost.
A new administration tried a different plan and the results have been staggering, even though it generally takes a long time for major economic policies to have their full effects. Individual tax rates were reduced from a high of 7.75 percent over time to 5.75. The corporate tax rate was reduced over time from 6.9 percent to 4 percent. As I was researching for this article, I found many critical opinions of this policy with titles such as “Tax-Cut plan will harm North Carolina’s competitive position.”
Nothing was further from the truth.
One of the biggest changes is one that doesn’t make headlines. We were the first state to pay back our unemployment benefit loan even though our debt was one of the largest. Our unemployment trust fund now has over $1 billion and the unemployment tax savings in 2016 alone are forecast to be $240 million for employers. What employers do with this money is to create jobs and increase wages. It is a virtuous cycle.
The lowered tax rates have put money in our pockets. Over 70% of North Carolina taxpayers now pay less or nothing in state personal income taxes, with the highest percentage being those in the lowest income bracket.
Consequently, we have become one of the biggest job creating machines in the nation. Since January 2013, we have added more than 260,000 net new private sector jobs. Labor force growth for 2015 came in five times stronger than the national rate. As a state employee, I have bemoaned the small or nonexistent raises, but realize that this was necessary to help people without jobs. Incidentally, our state employee pension system is 96% funded, the third highest in the nation. It is likely that retirees of states such as Illinois and Connecticut will see cuts in their pension payouts because their governments have not funded their pensions adequately.
We started applying sales tax to some services, an important move to reflect a more service-based economy, There is no reason that the output of just manufacturing companies should be subject to sales tax. According to the legislature’s nonpartisan research staff, those making Less than $14,000 had a reduction of 12.1 percent of total income tax burden while those making more than $94,999 had a 4.7 percent total income tax burden reduction.
The tax cuts have become bigger each year, but the tax revenue keeps increasing, which is exactly what economists know will happen when you create a business-friendly environment that generates new jobs for those unemployed. Last year, revenues came in $400 million above projections, which allowed us to put that money into a rainy day fund. In the first half of the 2016 budget year revenues are running $588 million ahead of last year. Some commentators are surprised that $489 million of that amount has come from those in the highest income bracket.
The Kiplinger Report forecasts that we will be one of the top 5 states in employment gains this year. Of course, these policies have only started to work, so they need to stay in place before the greatest benefit can be received. North Carolina is back!
Eric Dent is a business professor at Fayetteville State University who lives in Lumberton.