North Carolina's economy and tax revenues have been declining in recent decades. While the state was once a top performer in job and income growth, it now lags behind national averages. The tax base has narrowed as consumption patterns have changed, yet tax rates have increased to compensate. This unstable structure leaves the state vulnerable to budget shortfalls during recessions. To promote long-term economic growth and fiscal stability, tax reform is needed to develop a simpler, more competitive system that broadens the base and ensures a steady revenue stream.

1. Tax Reform
The Path to Economic
Growth and Fiscal
Stability
in North Carolina
0

2. NC’s Economy is Large
• Population of 9.55 million (10th)
• Workforce of 4,500,000
• GSP of $407 Billion (10th)
• Larger than GA, MI, MA since
2003
• NC = 24th largest national
economy
But large is hard to affect
Slide 1

3. A Surprising Statistic
Despite being one of the “Best Business
Climates” in the U.S. during the last decade
according to Site Selection Magazine & other
publications, in NC:
 Job creation is not keeping up with workforce
growth
 Job growth, unemployment, & poverty is
worse than the U.S. average
 From 1990 to 2000, we were 11th in U.S.
wage and income growth;
 In 2009, North Carolina was 45th
 In 2010, we were 48th
2

4. Economic Success---and Failure
NC Per Capita Income as % of US Average
95
1997: 92.88
93
91
1989: 89.08
89
87
2009: 87.62
85 2010: 87.5
1973: 83.14
83
81
1982: 81.44
79 1969: 79.14
77
75
1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
UNC Center for Competitive Economies
3

5. We are Losing Ground on Per Capita
Income In North Carolina
• We are falling further behind the U.S. average
in per capita income in North Carolina
• Our average per capita income as a percentage
of the U.S. average has decreased every year
from 1997 to 2010 to where we were in 1986
• If current trends continue, NC’s average per
capita income as a percentage of the U.S.
average is on track to drop to 1970 levels by
2020
4

6. Median Household Income
North Carolina
• North Carolina's median household income
has fallen from $51,125 in 2000 to $45,570 in
2010, a decline of 10.9 percent.
• Half of households in the state have incomes
above the median, and half below, according
to the U.S. Census Bureau.
All figures are in 2010 dollars

7. NORTH CAROLINA MEDIAN
HOUSEHOLD INCOME
10.9 % DECLINE FROM 2000
Source: U.S. Census Bureau

8. NC Economic Development Spending
(Cumulative)
$7,000,000,000 $6,725,966,540
$6,000,000,000
$5,402,783,885
$5,000,000,000
$4,180,679,410
$4,000,000,000
$3,000,000,000
$2,917,405,768
$2,000,000,000 $1,616,170,002
$1,000,000,000 $378,340,914
$203,437,950
$0
FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 FY 08-09 FY 09-10
Slide 7

9. NC Job Creation Performance 2000-2010
Slide 8

10. 1970 1980 1990 2000 2010
Manufacturing 35.2% 32.7% 25.5% 18.8% 10.8%
Government (incl. Military) 21.1% 19.6% 18.5% 18.1% 21.1%
Trade, Transportation and Utilities 18.5% 18.1% 19.6% 18.7% 17.8%
Services 14.9% 19.2% 25.2% 32.0% 39.1%
Financial Activities & Information 5.4% 5.5% 5.8% 6.5% 6.7%
Construction, Agriculture & Mining 5.0% 4.9% 5.4% 5.9% 4.5%

11. SALES TAX ISSUES
Shrinking Sales
Tax Base
Increasing Sales
Tax Rates in
North Carolina
10

12. The Sales Tax Base
• The tax base has narrowed
 The bar graphs below indicate how North Carolinians spend
$100 of their income as a % of items subject to sales tax
 We spend a smaller % of our income on items subject to
sales tax now than in the 1970’s & more on services not
subject to sales tax
11

13. Sales Tax Base Erosion
11/27/2012 12

14. The Sales Tax Base
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1970-71 1974-75 1978-79 1982-83 1986-87 1990-91 1994-95 1998-99 2002-03 2006-07
Effective Tax Rate Average
The effective tax rate (collections/income) has been relatively
stable despite a declining tax base.
But how was this achieved?
13

15. The Sales Tax Base
70% 5.0%
4.5%
60% 56.1%
52.7% 4.0%
50% 46.2% 3.5%
3.0%
40% 36.8%
2.5%
30%
2.0%
20% 1.5%
1.0%
10%
0.5%
0% 0.0%
1970s 1980s 1990s 2000s
But in order to keep up with a declining tax base, State tax rates
were increased from 3% to 5.75% since 1991, allowing the
effective tax rate to remain comparatively steady.
14

16. State Tax Structure
FY 1970-71 FY 2011-2012
15

17. INCOME TAX ISSUES
Unstable
Income Tax
Base
Increasing
Tax Rates in
North
Carolina
16

18. ?Growth & Stability?
20% of General Fund revenue comes from these two volatile
sources. 17

19. NC Revenue Insufficiency
• FY 1990-1991 • FY 2008-09
– 8.1% shortfall – 15.2% shortfall
– $600 million expenditure – Increase ‘sin’ taxes
cuts – Temporary sales &
– $600 million tax increase income tax increase
• FY 2001-02, 2005-06 • Next Recession?
– 10.8% shortfall – The tax structure has not
– Temporary sales tax changed
increase – History suggests another
– Temporary income tax Recession & shortfall
increase – Could it be worse? 20%
or 25%

20. What Are Other States Doing?
• States with current plans to eliminate or
significantly reduce their income taxes include:
South Carolina, Oklahoma, Kansas, Indiana,
Nebraska, Idaho, Maine, New Jersey, Ohio
• “States like New York, California, Illinois and
Maryland that have high and rising tax rates also
tend to be those that have growing welfare
states, heavy regulation, dominant public unions,
and budgets that are subject to boom and bust
because they rely so heavily on a relatively few
rich taxpayers.” From Wall Street Journal article
“The Heartland Tax Rebellion”---2/7/12 19

21. From the Wall Street Journal--2/7/12
20

22. How Do We Move North Carolina
Forward?
Make North Carolina’s Economy more
competitive
Promote income growth & wealth
generation
Grow the State GDP
Ensure revenue stability
21

23. Cornerstones for Developing Stable
Economic Growth in North Carolina
Education
Tax Reform Transportation
NC. Competitive
Economy
Regulatory Energy
Reform
22

24. Tax Policy Long-Term Goal
• A competitive NC Economy that will:
–Promote Economic Growth
–Create Jobs
23

25. Tax Policy Objectives
• Develop a transparent and simple tax code
• Ensure a less volatile revenue stream to plan &
operate government efficiently at a revenue
neutral level
• Improve a declining Sales & Use tax base
• Generate income, wealth & GDP growth
• Reward entrepreneurship and innovation
• Promote a competitive small business
environment 24

26. NC’s Current Business Taxes
• Corporate income and franchise tax
• Personal income tax
• Sales or privilege tax on business purchases
• Local privilege and gross receipts taxes
• Gross premiums tax (insurance companies)
• Excise tax on real estate transfers
• Local property taxes
• Estate tax
25

27. How Do We Fix the NC Tax Code?
• Think about your own business and how
NC’s tax code impacts your decisions
• If you were writing a new tax code for a
new state, what would it look like?
• What if current tax code were replaced
with fewer & simpler tax types?
• A tax code that is less complex, more
equitable, generates wealth and income
growth, and grows the State GDP 26

28. Tax Reform Considerations
• Tax Reform requires a long-term,
structural solution
• The Status Quo is no longer an option—
our current tax code is outdated
• Using the same antiquated tax policy
while expecting different results is the
definition of Tax Insanity
27

29. DISCUSSION
&
COMMENTS
Thanks to Brent Lane & Barry Boardman for providing graphs and statistics for this
28
presentation