DELUCA: Consumption-based tax reform boosts economy

State eyes pro-growth income tax alternative

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The debate about the “fiscal cliff” may be over for now, but the questions about taxes are as pressing as ever: Should we raise them, by how much, and on whom?

State governments across the country have been grappling with this same dilemma for years, attempting to raise additional revenue without crippling job creation and economic growth. Some have been less successful than others, including my home state of North Carolina. We’re currently saddled with the highest income tax rates in the region — and the fifth-highest unemployment rate in the country.

In 2013, however, North Carolina is ready to lead the way on taxes — and set an example for other states to follow — by eliminating the state’s income tax and replacing it with a pro-growth alternative.

North Carolina’s problems are the same as America’s: high unemployment, flat wage growth, state budget deficits and general economic malaise. Its expected budget shortfall for 2013 is more than $2 billion, or roughly 10 percent of its total budget. The state’s high tax burden has grown to become the 17th worst in the nation. After a two-decade period where personal income increased at the fourth-fastest rate in the country, it has fallen to the 26th-fastest growth rate over the last decade.

No matter what state you’re in, it’s impossible for businesses and families to thrive in an economic environment like this. A few members of North Carolina’s legislature have decided to do something about it. They want to nix the personal income tax, the corporate income tax and the franchise tax, all of which penalize businesses and hinder job creation. In their place, the reform plan calls for a consumption-based tax system, which would expand the sales tax base, close current tax loopholes and implement simpler, fairer license fees on businesses.

A new report from the John W. Pope Civitas Institute finds that the overall effect of this tax reform would be more economic growth and more jobs. A consumption-based tax reform could increase North Carolina’s average rate of personal income growth by 0.38 percent to 0.66 percent per year. These numbers aren’t surprising, given that states with no personal income tax have average annual growth rates 0.5 percent higher than other states, and states without corporate income taxes average a full percentage point higher each year.

Had North Carolina implemented this tax reform in 2000, the Tar Heel State would be in a very a different place. Total personal income would be $14.4 billion to $25 billion higher, a 4 percent to 7 percent increase over the state’s actual 2011 total personal income. This is an additional $1,500 to $2,600 in income per resident in North Carolina — an additional $6,000 to $10,000 for a family of four.

Before you can draw a bigger paycheck, however, you need to find a job. This tax reform is also a slam dunk on that issue: North Carolina would have gained an additional 217,000 to 378,000 jobs over the past decade under this proposal. That would put a tremendous dent in the state’s 9.3 percent unemployment rate.

This bold legislation sets an example for the rest of the country. With 21 states still struggling with unemployment rates above 8 percent, North Carolina’s legislators can take the initiative and prove that there is a better way to balance their books while benefiting their citizens.

The debate in statehouses across America should no longer be about tax increases versus spending cuts, but rather about stagnation versus growth. We need to stop fiddling and start reforming. Consumption-based tax reform that leads to growing paychecks, more jobs and economic prosperity is a good place to start.

Francis DeLuca is president of the John W. Pope Civitas Institute.

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