Fact check: Conservative tax reforms did not have 'harsh consequences' on state revenues

Published September 17, 2020

By Brian Balfour

The progressive left in North Carolina has for years attempted to paint a narrative that the conservative tax reforms over the last several years have starved state government of funding, and have left budgets “cut to the bone.”

Perhaps the latest such example was this NC Policy Watch article that proclaimed “there are harsh consequences to cutting taxes for the rich and big corporations.”

Such criticism ignores the benefits of tax cuts in the form of job and income growth, while ignoring the negative consequences of higher taxes; pretending instead that changes in tax rates have no impact on job creation and investment. Such analysis, however, is beyond the scope of this article.

The purpose of this post is to present tax revenue trends to evaluate the claims that tax reform has had “harsh consequences” on state tax revenue.

By far the most significant changes to the state tax code occurred in 2013. It makes sense, then, to compare tax revenue trends in the years preceding and following FY 2013-14.

As you can see in the chart below, North Carolina General Fund tax revenue grew at a faster pace following the tax reforms compared to before the reforms.

From FY 2009-10 to FY 2012-13, tax revenue grew by 9.3%, and from FY 2014-15 to FY 2017-18, revenue grew at a faster 10.8% pace.

 Because of the onset of the Great Recession, which caused tax revenue to dramatically fall by roughly 11% in FY 2008-09, we used FY 2009-10 as the baseline for the pre- tax reform period. The tax reforms were passed in 2013 and largely went into effect on Jan. 1, 2014, so the fiscal year 2013-14 was a transition year, with half of it before and half after the tax cuts. For this reason, we chose FY 2014-15, the first full year with the reforms in effect, as the baseline.

This is admittedly a fairly small sample size, however, it certainly is enough to call into question the narrative that the 2013 – and subsequent – tax reforms have had “harsh consequences” on state tax revenue.

Indeed, the review shows that after tax reform, revenue has increased at a faster pace than in the years prior to reform.

Moreover, for FY 2018-19, tax revenue increased another 5.3% over FY 2017-18, a healthy clip higher than all but one annual revenue increase in the six years prior to reform.

Did tax reforms over the past several years starve the state budget of revenue? A look at the data tells us no; in fact tax revenue grew at a faster pace than in the years immediately prior to reform.

General Fund revenue data sources: 

Figures up to FY 2017-18: Governor’s Recommended Budget for 2019-21; Appendix Table 1A; available online at: https://files.nc.gov/ncosbm/documents/files/REC2019-21_AppendixTables.pdf

For figures after FY 2017-18, North Carolina Office of the State Controller, General Fund Monthly Reports for June 2019 and June 2020. Available online at: https://www.osc.nc.gov/public-information/reports/general-fund-monthly-reports

General Fund tax revenue includes the three major sources, which are: personal income, state sales, and corporate income taxes. Other sources include franchise tax, insurance tax, tobacco tax, along with several other small sources of tax revenue.