Supply-side policies boost North Carolina

After North Carolina conservatives won control of the General Assembly in 2010, they began a systematic application of supply-side principles to state policy. It’s been a phenomenal success — although I admit others might disagree if their definition of “supply side” differs from mine.

The difference isn’t necessarily partisan. I know both Republicans and Democrats who believe “supply-side economics” is synonymous with a single proposition: cutting tax rates can result in more revenue collected.

That’s not quite right. “Supply-side fiscalists,” as the dissident economists and journalists were first called in the 1970s, challenged the Keynesian orthodoxy of the day. Faced with stagflation — rampant price increases combined with stagnant job creation and income growth — demand-side policymakers thought it wise to stimulate investment with loose monetary policy while keeping tax rates high to tamp down consumer demand and, if necessary, imposing wage and price controls to control inflation directly.

Supply-siders rejected this policy mix as foolish. They proposed its opposite: encourage more work and investment by slashing tax rates and regulations while tightening monetary policy to combat inflation, which they (correctly) defined as too much money chasing too few goods and services.

It worked. President Jimmy Carter actually touched off the supply-side revolution by appointing tight-money advocate Paul Volker to chair the Federal Reserve Board. Carter also deregulated transportation and energy markets and even signed a capital-gains tax cut. Then Ronald Reagan kicked it up several notches, slashing the top income-tax rate from 70% to 28% and implementing other deregulatory initiatives while backing Volker as higher interest rates did their work on the monetary side.

Yes, Art Laffer was one of those supply-siders. Yes, he did famously illustrate on a cocktail napkin the commonsensical notion that neither a 0% nor a 100% income tax rate collects any revenue, so there must be a revenue-maximizing rate somewhere in-between.

But no serious person argues that tax cuts always or usually “pay for themselves.” This can happen under certain conditions, such as very high tax rates (50%+) or taxes on capital-gains realizations over which investors have lots of control. In most situations, however, self-financing tax cuts aren’t mathematically possible in the short to intermediate term.

That’s not necessarily a persuasive argument against tax cuts. I support them — because I’m a supply-sider! I recognize that government services are valuable, and can themselves boost the supply of valuable physical and human capital. But I believe that most governments in most places are too large and cost too much. They ought to deliver their core services more efficiently, and their peripheral services rarely or never.

That’s the strategy North Carolina actually pursued over the past dozen years. State lawmakers have passed a series of regulatory reforms while reducing taxes on personal and corporate income. This policy mix made North Carolina a more attractive place to live, work, invest, and create jobs. Our economy — and, thus, our tax base — grew faster as a result.

But not enough to offset the income-tax revenue North Carolina would have collected at higher rates. Lawmakers balanced their budgets with a combination of other tax changes (eliminating loopholes and somewhat expanding the sales-tax base) and capping the growth of spending at no more than inflation plus population growth.

In FY 2014, the state collected $19.1 billion in General Fund taxes, including $10.3 billion on personal income, $1.4 billion on corporate income, and $5.6 billion on retail sales. In FY 2024, those figures were $32 billion (total), $16.6 billion (personal), $1.5 billion (corporate), and $10.9 billion (sales).

Adjust for inflation and population, however, and you see that General Fund tax collections declined from $3,039 per person to $2,893. Income taxes per capita declined 8%. Corporate taxes fell 35%. Sales tax rose 11%.

In 2014, state General Fund spending made up 4.2% of the state’s GDP. Last year, it was 3.5%. As a supply-side conservative, I support this outcome. As a fiscal conservative, I trust lawmakers understand these facts and will continue to make prudent decisions.

John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy and American history.