What happened when N.C. cut taxes

State offers potential clues about what the U.S. faces with bill

N.C.» For a peek BURLINGTON, into a world after a massive tax cut, visit North Carolina and ride along with factory owner Eric Henry.

Conservative groups have hailed North Carolina as a model of a tax overhaul since it began slashing state corporate and individual tax rates four years ago. And one of the effort’s main architects, Thom Tillis, is now in the U.S. Senate, where early this month he joined 50 other Republican senators in voting for a $1.5 trillion federal tax overhaul — a plan that employs many of the same tactics already in use here.

But as Henry drove through the conservative, rural county he’s called home all his life, he had trouble seeing many benefits of the tax cut. Business was good, but it wasn’t good enough that he could give his 20 workers significant raises.

And there were growing worries that the lost tax revenue — estimated at $3.5 billion this year alone — was beginning to significantly hurt core public services such as schools.

“I don’t know the people who this benefits,” Henry said of the North Carolina tax cut.

Changing the national tax code is much different from changing a state’s code. But what’s happening today in North Carolina offers potential clues about the grand experiment with tax cuts the entire nation is close to embarking on, with Republicans appearing confident they can send final legislation to President Donald Trump by year’s end.

The tax changes in North Carolina haven’t produced the fiscal calamity that led Republican legislators in Kansas this year to reverse

dramatic cuts they passed a few years earlier, but nor have they produced the kind of win-forall economic prosperity national Republicans say their effort will spur.

Instead, North Carolina has enjoyed the same steady growth as much of the country, making it challenging to estimate the impact of the tax cut compared with the many other factors shaping the state’s economy.

“There’s nothing magical that has happened in North Carolina,” said John Quinterno, an economic analyst at the Chapel Hill-based research group South by North Strategies.

Henry, 60, runs a T-shirt manufacturer called TS Designs, which sources all of its material locally.

He’s been doing well in recent years. This summer, the company notched its best production month ever, allowing Henry to pay a bonus to his workers. He says the nation’s overall strong economy is what benefits him.

Henry was driving one day this month to give a talk at nearby Elon University. It was on campus that Henry ran into Jason Cox, 37, who owns several Jimmy John’s franchises and commercial real estate projects. Henry asked Cox whether he’d seen a benefit from the tax cuts.

“Not really,” Cox replied. Taxes have long been targeted by many conservatives as obstacles to economic growth.

In 2013, the Republican-controlled legislature in North Carolina started rolling back taxes. The then-governor labeled it the “Carolina Comeback” and sold the plan as a way to energize a state economy growing sluggishly after the Great Recession.

The corporate rate dropped in steps from 6.9 percent to just 3 percent this year, the lowest in the nation among states that have such a tax. The rate is set to fall to 2.5 percent in two years.

Personal income tax went from a progressive rate that topped out at 7.75 percent to a flat 5.75 percent. This year, it fell again to 5.49 percent.

The state also abolished its estate tax and expanded the sales tax to include more services, such as ticket sales and auto repairs.

“I think North Carolina is an example of successful tax reform,” said Jared Walczak, a senior policy analyst at the rightleaning Tax Foundation.

North Carolina’s recent history as a tax-cutting state is much less known — and much less turbulent — than Kansas’.

A year before North Carolina launched its overhaul, Kansas’s Republican-dominated legislature cut rates, with Republican Gov. Sam Brownback predicting an “adrenaline shot” of economic growth. He openly described it as an experiment on the pro-growth strategies touted by conservative think tanks and politicians.

“It didn’t work well for Kansas,” said Jason Debacker, an assistant professor of economics at the University of South Carolina who co-authored a study that used tax return data to find that Kansas’ strategy generated almost no new economic activity.

What researchers did find was that the state’s tax coffers were hit hard.

“The net effect is the state is reeling from a huge budget deficit,” said Wally Meyer, director of entrepreneurship programs at the University of Kansas’s business school.

In June, Republican lawmakers raised taxes — even overriding a governor’s veto — to close a $900 million hole in the state budget.

So far, North Carolina has fared better.

The state economy and the number of new jobs have grown slightly faster than in the nation at large since the tax cuts began, said Michael Walden, an economics professor at North Carolina State University.

“My own sense is that the corporate tax rate cuts did help, but both tax and nontax factors were important,” Walden said.

But even if the top-line numbers have improved, workers have not seen huge benefits. The median hourly wage in North Carolina grew roughly on par with the national rate, while the average hourly wage and annual wage grew notably slower, according the federal Bureau of Labor Statistics.

Henry said he supports policies that make running a business easier. He’s fiscally conservative, and he considered himself a Republican until he switched parties in recent years when the state GOP party increasingly took stances on social issues — pushing a samesex marriage ban and the socalled transgender bathroom bill — that he disagreed with.

As Henry drove, he called other people he knew. One of them, a local architect named John Plageman, said he’d seen a spike in new business this year.

“I’d assume it has something to do with the tax cuts,” Plageman said.

While North Carolina’s economy has chugged along, signs of strain on state spending have increased. The state budget has not kept pace with a growing population, said Alexandra Sirota, director of the North Carolina Budget and Tax Center, a left-leaning nonprofit.

“Pretty soon, we’re not going to have enough money,” Sirota said.

The state legislature’s Fiscal Research Division agrees. It projects budget shortfalls of at least $1.2 billion starting in 2019.

The squeeze already has hit public schools.

In North Carolina, the state government provides the bulk of public education funding. And while the overall contribution is up, per-pupil spending, adjusted for inflation, is down. Plus, there are about 10,000 fewer public school teachers in the state, despite growing enrollment, said Mark Jewell of the North Carolina Association of Educators.

The school system serving Burlington is struggling, said Alamance-burlington Schools superintendent Bill Harrison.

Anyone claiming schools are better off after the tax cuts is “using smoke and mirrors,” Harrison said.