A Victory for Students in North Carolina

Earlier this year, Governor Roy Cooper of North Carolina declared a “state of emergency” as part of his fight against school choice.

What’s remarkable is that he engaged in that rhetorical excess even though he sent at least one of his kids to a private school.

But this column will not focus on his hypocrisy, even though his two-faced behavior is despicable (and common).

Instead, we are going to celebrate the fact that his state-of-emergency stunt was a total flop. The North Carolina legislature just approved universal school choice (details here) and Gov. Cooper meekly is allowing the law to go into effect.

The Wall Street Journal editorialized about this great development.

North Carolina on Friday became the tenth state to approve universal school choice. …North Carolina created the Opportunity Scholarship program in 2013, but this budget increases funding from $176.5 million to $520.5 million by the 2032-33 fiscal year. It also opens up eligibility to all North Carolinians, though the amount of the scholarship declines as income rises. …In May, when legislators signaled their intentions, Gov. Cooper released a video declaring a “state of emergency.” …he said, “that the Republican legislature is aiming to choke the life out of public education.” The emergency stunt did nothing but make the Governor look weak. It also highlighted his double standard. Mr. Cooper was happy to choose private school for one of his daughters. But when the legislators were ready to give North Carolinians the same choice, suddenly it was an attack on public schools. …Parents want better education choices for their children. …North Carolina’s vote is a big victory—for parents who want better schools for their children and the Republicans who fought to provide that choice.

Given the deterioration of government schools, this is great news.

And it’s part of a great trend. Since the beginning of 2021, a growing number of states have adopted universal or near-universal school choice programs.

• West Virginia
• Arizona
• Iowa
• Utah
• Arkansas
• Florida
• Indiana
• Oklahoma

P.S. North Carolina also deserves credit for making big progress on tax and spending issues in recent years.

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The Most Reprehensible School Choice Hypocrite of 2023

The case for school choice is simple and straightforward. Government schools receive record amounts of taxpayer money and do a relatively poor job of educating children.

There are many reasons for the failure of government schools, including natural government inefficiency, but the main reason is probably that the system is controlled by teacher unions.

Indeed, it’s no exaggeration to assert that the system is run for the benefit of the unions rather than the students.

But there’s one group that I dislike more than union bosses.

The most reprehensible group of people in this field are the politicians who send their own kids to private schools while fighting to deny other families the same ability.

I have previously written about some of these hypocrites, including Barack Obama (and his Secretary of Education) as well as Elizabeth Warren. Now it is time to highlight North Carolina’s despicable governor.

Here are some excerpts from a column by Kyle Morris for Fox News.

Democrat North Carolina Gov. Roy Cooper declared a “state of emergency” this week in an attempt to prevent a school choice bill from passing the state legislature, despite sending his own daughter to a private school in Raleigh. …Cooper, highlighting efforts from Republicans in the state as a “private school voucher scheme”… The comments from Cooper come after he sent at least one of his three daughters to Saint Mary’s School, an expensive private school in Raleigh… Jason Williams, executive director of the NC Faith and Freedom Coalition, was quick to call out Cooper’s remarks in a tweet. “Why doesn’t Roy Cooper want your child to have the same quality, private education his kid had?” Williams wrote. “If he believed so much in public education, why did he spend thousands for his own kid to avoid it?” …”What a hypocrite. Public schools aren’t good enough for his kids, but they are for yours,” Independent Women’s Forum senior policy analyst Kelsey Bolar blasted.

Cooper’s supposed “state of emergency” is particularly nauseating.

He was perfectly content with a system filled with schools that failed students. But the moment teacher unions felt threatened, he sprung into action with hyperbolic rhetoric.

By the way, there’s another story that reveals additional school choice hypocrites such as Joe Biden, Kamala Harris, Nancy Pelosi, Gavin Newsom, and J.B. Pritzker.

To appease teacher unions, all of those people are willing to sacrifice other people’s kids. But not their own.

Utterly despicable.

P.S. The “Tweet of the Year” for 2021 involved school choice.

P.P.S. There’s strong evidence for school choice from nations such as Canada, Sweden, Chile, and the Netherlands.

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Assessing North Carolina’s Fiscal Policy

When I first started citing the Tax Foundation’s State Business Tax Climate Index back in 2013, North Carolina was one of the 10 worst states.

In a remarkable turnaround, North Carolina is now one of the 10 best states.

The big improvement is partly because the state joined the flat tax club.

But there were other tax cuts as well, along with some much-needed spending restraint.

Sounds like great news, but you won’t be surprised to learn that not everyone is happy about what’s happened in the Tarheel State.

In a column for the Raleigh News & Observer, Ned Barnett opined yesterday against tax cuts – both the ones that already have occurred and the new ones that the state legislature is considering.

Republican state lawmakers think cutting taxes makes North Carolina more attractive to new businesses, but cutting taxes too much has the opposite effect. …Now, with the General Assembly back in session, they’re looking to cut some more. It’s a reckless path… Since Republicans began aggressively cutting taxes in 2013, the state has lost billions of dollars in revenue. …North Carolina has excess revenue because the state has reduced what it has historically spent as a share of the state economy – a drop from 5.8 percent to 4 percent… The state corporate tax has fallen from 6.9 percent to 2.5 percent and will be phased out by 2030. The personal income tax has been stepped down from a two-tier progressive tax with a top rate of 7.75 percent to a flat tax of 4.75 percent today. Now state Senate leader Phil Berger says the legislature should consider cutting the personal income tax to 2.5 percent.

The most important data cited above is that the burden of state government spending has dropped from 5.8 percent to 4 percent of the state economy.

This upsets Mr. Barnett, but the rest of us should view this as a major triumph for genuine fiscal responsibility.

And by imposing genuine spending restraint, North Carolina lawmakers created the “fiscal space” for meaningful tax cuts.

So why is Mr. Barnett upset? In the column, he complains that some parts of the budget are not increasing as fast as he would like. But he never offers any evidence that the state is suffering economic harm.

I suspect he offered no evidence because he has no evidence.

Or perhaps he offered no evidence because the data shows that he’s wrong.

And that’s exactly what I discovered when I checked the St. Louis Federal Reserve Bank’s per-capita income data. Lo and behold, incomes in North Carolina are growing faster than the national average and faster than the regional average.

The differences are not huge, but it’s nonetheless better to have faster income growth rather than slower income growth.

Some of my more sophisticated friends on the left doubtlessly will point out that states in other regions still have higher overall levels of average income, which is a fair point, but it’s also fair for me to respond by noting that the cost-of-living is generally much lower in North Carolina.

The bottom line is that North Carolina’s better tax policy has the state moving in the right direction while high-tax states are moving in the wrong direction.

P.S. North Carolina also is close to being among the 10 best states for educational freedom.

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Spending Restraint Is a Necessary Ingredient for Good Tax Policy

In my column yesterday about state tax systems, I specifically noted that North Carolina has been making big improvements.

Not only did the state shift to a flat tax a few years ago, it recently voted to lower the rate from 5.25 percent to 3.99 percent.

Why did this happen?

The easy answer is that Republicans gained control of the state legislature. But that’s – at best – only a partial answer. After all, there are plenty of places where Republicans gain power and don’t enact good fiscal policy.

So maybe a better answer is that Reagan-style Republicans took control.

I suspect that’s a far more accurate answer, but I want to dig deeper and look at a policy reform that made the tax cuts possible.

Simply stated, North Carolina politicians embraced the Golden Rule of spending restraint.

And by controlling the growth of spending, they created fiscal maneuvering room for lower tax rates.

In a column for a North Carolina newspaper, John Hood, a board member of the John Locke Foundation (the state’s pro-market think tank) explains what happened.

…in North Carolina, conservative governance has actually reduced the size of state government and significantly improved its fiscal condition. …As a share of the economy, state spending has averaged about 5.8% over the past 45 years. It was well over 6% as recently as 2009. Since fiscally conservative Republicans won control of the General Assembly in 2010, however, budgets have gone up every year in dollar terms but have gone down almost every year when expressed as a share of GDP. That’s because legislative leaders have stuck to their commitment to keep annual spending growth at or below the combined rates of inflation and population growth. …That has, in turn, allowed legislators to rebuild the state’s savings reserves, pay off state debt, and finance several rounds of growth-enhancing tax cuts.

I fully agree that the goal should be to reduce state spending as a share of GDP, so kudos to North Carolina lawmakers.

By limiting annual spending increases, they have strengthened the private sector.

Here’s a chart, based on data from the National Association of State Budget Officers, showing what has happened to state spending since 2010. For background, a simple rule of thumb is that the “general fund” is money a state raises and spends while “total spending” includes that spending plus money that comes from Washington.

By the way, population has increased by about 1 percent annually in North Carolina, so per-capita state spending is only growing by about 1.5 percent per year.

All things considered, a very good job. Too bad Republicans in Washington don’t push for similar policies (to be fair, they did restrain spending during the Tea Party era).

I’ll close with a worrisome observation that North Carolina does not not have a TABOR-style constitutional spending limit.

So while it’s admirable that state lawmakers have restrained spending over the past decade, there are no guarantees that the Tarheel State will enjoy spending restraint in the future.

So North Carolina should copy Colorado and adopt something like TABOR. Or, they can demonstrate their worldliness by copying Switzerland’s “debt brake,” which is another constitutional provision to limit spending.

The goal – for the state and the nation – should be some sort of spending cap.

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Ranking State Income Taxes

Motivated in part by an excellent graphic that I shared in 2016, I put together a five-column ranking of state personal income tax systems in 2018.

Given some changes that have since occurred, it’s time for a new version. The first two columns are self explanatory and columns 3 and 5 are based on whether the top tax rate on households is less than 5 percent (“Low Rate”) or more than 8 percent (“Class Warfare”).

Column 4, needless to say, is for states where the top tax rate in between 5-8 percent.

The good news is that the above table is better than the one I created in 2018. Thanks to tax competition between states, there have been some improvements in tax policy.

I recently wrote about Louisiana’s shift in the right direction.

Now we have some good news from the Tarheel state. The Wall Street Journal opined today about a new tax reform in North Carolina.

The deal phases out the state’s 2.5% corporate income tax between 2025 and 2031. …The deal also cuts the state’s flat 5.25% personal income tax rate in stages to 3.99% by July 1, 2027. …North Carolina ranks tenth on the Tax Foundation’s 2021 state business tax climate index, and these reforms will make it even more competitive. …North Carolina has an unreserved cash balance of $8.55 billion, and legislators are wisely returning some of it to taxpayers.

What’s especially noteworthy is that North Carolina has been moving in the right direction for almost 10 years.

P.S. Arizona almost moved from column 3 to column 5, but that big decline was averted.

P.P.S. There are efforts in Mississippi and Nebraska to get rid of state income taxes.

P.P.P.S. Kansas tried for a big improvement a few years ago, but ultimately settled for a modest improvement.

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Politicians in Washington Should Learn from Successful Tax Reform in North Carolina

Earlier this year, I pointed out that Trump and Republicans could learn a valuable lesson from Maine Governor Paul LePage on how to win a government shutdown.

Today, let’s look at a lesson from North Carolina on how to design and implement pro-growth tax policy.

In today’s Wall Street Journal, Senator Thom Tillis from the Tarheel State explains what happened when he helped enact a flat tax as Speaker of the State House.

In 2013, when I was speaker of the state House, North Carolina passed a serious tax-reform package. It was based on three simple principles: simplify the tax code, lower rates, and broaden the base. We replaced the progressive rate schedule for the personal income tax with a flat rate of 5.499%. That was a tax-rate cut for everyone, since the lowest bracket previously was 6%. We also increased the standard deduction for all tax filers and repealed the death tax. We lowered the 6.9% corporate income tax to 6% in 2014 and 5% in 2015. …North Carolina’s corporate tax fell to 3% in 2017 and is on track for 2.5% in 2019. We paid for this tax relief by expanding the tax base, closing loopholes, paring down spending, reducing the cost of entitlement programs, and eliminating “refundable” earned-income tax credits for people who pay no taxes.

Wow, good tax policy enabled by spending restraint. Exactly what I’ve been recommending for Washington.

Have these reforms generated good results?  The Senator says yes.

More than 350,000 jobs have been created, and the unemployment rate has been cut nearly in half. The state’s economy has jumped from one of the slowest growing in the country to one of the fastest growing.

What about tax revenue? Has the state government been starved of revenue?

Nope.

…a well-mobilized opposition on the left stoked fears that tax reform would cause shrinking state revenues and require massive budget cuts. This argument has been proved wrong. State revenue has increased each year since tax reform was enacted, and budget surpluses of more than $400 million are the new norm. North Carolina lawmakers have wisely used these surpluses to cut tax rates even further for families and businesses.

Senator Tillis didn’t have specific details on tax collections in his column. I got suspicious that he might be hiding some unflattering numbers, so I went to the Census Bureau’s database on state government finances. But it turns out the Senator is guilty of underselling his state’s reform. Tax revenue has actually grown faster in the Tarheel State, compared the average of all other states (many of which have imposed big tax hikes).

Another example of the Laffer Curve in action.

And here’s a chart from North Carolina’s Office of State Budget and Management. As you can see, revenues are rising rather than falling.

By the way, I’m guessing that the small drop in 2014 and the big increase in 2015 were caused by taxpayers delaying income to take advantage of the new, friendlier tax system. We saw the same thing in the early 1980s when some taxpayer deferred income because of the multi-year phase-in of the Reagan tax cuts.

But I’m digressing. Let’s get back to North Carolina.

Here’s what the Tax Foundation wrote earlier this year.

After the most dramatic improvement in the Index’s history—from 41st to 11th in one year—North Carolina has continued to improve its tax structure, and now imposes the lowest-rate corporate income tax in the country at 4 percent, down from 5 percent the previous year. This rate cut improves the state from 6th to 4th on the corporate income tax component, the second-best ranking (after Utah) for any state that imposes a major corporate tax. (Six states forego corporate income taxes, but four of them impose economically distortive gross receipts taxes in their stead.) An individual income tax reduction, from 5.75 to 5.499 percent, is scheduled for 2017. At 11th overall, North Carolina trails only Indiana and Utah among states which do not forego any of the major tax types.

And in a column for Forbes, Patrick Gleason was even more effusive.

…the Republican-controlled North Carolina legislature enacted a new budget today that cuts the state’s personal and corporate income tax rates. Under this new budget, the state’s flat personal income tax rate will drop from 5.499 to 5.25% in January of 2019, and the corporate tax rate will fall from 3% to 2.5%, which represents a 16% reduction in one of the most harmful forms of taxation. …This new budget, which received bipartisan support from a three-fifths super-majority of state lawmakers, builds upon the Tar Heel State’s impressive record of pro-growth, rate-reducing tax reform. …It’s remarkable how much progress North Carolina has made in improving its business tax climate in recent years, going from having one of the worst businesses tax climates in the country (ranked 44th), to one of the best today (now 11th best according to the non-partisan Tax Foundation).

Most importantly, state lawmakers put the brakes on spending, thus making the tax reforms more political and economically durable and successful.

Since they began cutting taxes in 2013, North Carolina legislators have kept annual increases in state spending below the rate of population growth and inflation. As a result, at the same time North Carolina taxpayers have been allowed to keep billions more of their hard-earned income, the state has experienced repeated budget surpluses. As they did in 2015, North Carolina legislators are once again returning surplus dollars back to taxpayers with the personal and corporate income tax rate cuts included in the state’s new budget.

Last but not least, I can’t resist sharing this 2016 editorial from the Charlotte Observer. If nothing else, the headline is an amusing reminder that journalists have a hard time understanding that higher tax rates don’t necessarily mean more revenue and that lower tax rates don’t automatically lead to less revenue.

A curious trend you might have noticed of late: North Carolina’s leaders keep cutting taxes, yet the state keeps taking in more money. We saw it happen last year, when the state found itself with a $400 million surplus, despite big cuts in personal and corporate tax rates. …Now comes word that in the first six months of the 2016 budget year (July to December), the state has taken in $588 million more than it did in the same period the previous year. …the overall surge in tax receipts certainly shouldn’t go unnoticed, especially since most of the increased collections for the 2016 cycle so far come from higher individual income tax receipts. They’re up $489 million, 10 percent above the same period of the prior year.

Though the opinion writers in Charlotte shouldn’t feel too bad. Their counterparts at the Washington Post and Wall Street Journal have made the same mistake. As did a Connecticut TV station.

P.S. My leftist friends doubtlessly will cite Kansas as a counter-example to North Carolina. According the narrative, tax cuts failed and were repealed by a Republican legislature. I did a thorough analysis of what happened in the Sunflower State earlier this year. I pointed out that tax cuts are hard to sustain without some degree of spending restraint, but also noted that the net effect of Brownback’s tenure is a permanent reduction in the tax burden. If that’s a win for the left, I hope for similar losses in Washington. It’s also worth comparing income growth in Kansas, California, and Texas if you want to figure out what tax policies are good for ordinary people.

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