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Final tax mod slides 12 09-12

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  • Despite the 52 percentincrease in the averagestate sales tax rate between 1970 and 2007,total state sales tax revenue as a share of totalhousehold consumption in the economy increasedonly 13 percent, from 2.2 percent of consumptionto 2.5 percent.16The traditional sales tax base, purchases of durable and non-durable goods with the exceptionof groceries (which the majority of states now exempt), fell from 39 percent of householdconsumption in 1970 to 32 percent in 2007. Over the same interval, consumption of services (excluding housing) rose from 31 percent to45 percent of total household purchases.18If more services had been included in the tax base, it is likely that sales tax revenue growth wouldhave more closely tracked economic growth. A 1993 study by economists Robert A. Bohm andEleanor D. Craig concluded that the extent to which services were included in state sales tax baseswas positively correlated over the 1968-83 period with the “elasticity” of the tax — that is, theextent to which growth in the sales tax kept pace with growth in state economies.19From the center on budget and policy priorities
  • 2001-02Sales tax increase extended twice (2003 & 2005)Upper income tax bracket of 8.25% for MFJ >$200k (extended twice)In 2005 raised tax on cigarettes from 5¢ to 30¢2008-09During my tenure here, the State has weathered several fiscal crisis, each seems worse than the last. State approach has been ad hoc ‘fixes’What is clear is that There are an infinite variety of impromptu fixes policymakers can improvise to keep a jerry-rigged tax system from teetering over completely.Hasn’t fixed the problem … Relied on temporary tax increases, counting on economic growth to see us through the future … But with good times came more ad hoc tax changes that further eroded the base….leading to greater revenue insufficiency in economic downturns
  • Transcript

    • 1. Tax ReformThe 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 StatisticDespite being one of the “Best BusinessClimates” in the U.S. during the last decadeaccording to Site Selection Magazine & otherpublications, 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 Average95 1997: 92.889391 1989: 89.088987 2009: 87.6285 2010: 87.5 1973: 83.148381 1982: 81.4479 1969: 79.147775 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 Carolinas 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 2000Source: 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 2010Manufacturing 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 Erosion11/27/2012 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 AverageThe effective tax rate (collections/income) has been relativelystable 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 2000sBut in order to keep up with a declining tax base, State tax rateswere increased from 3% to 5.75% since 1991, allowing theeffective tax rate to remain comparatively steady. 14
    • 16. State Tax StructureFY 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 volatilesources. 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 StableEconomic 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 & COMMENTSThanks to Brent Lane & Barry Boardman for providing graphs and statistics for this 28presentation