Is your state ready for a recession? Follow North Carolina’s example

As the nation braces for a recession, North Carolina will be in a better place than most states thanks to fiscally responsible budgeting and tax cuts that put money back in families’ pockets. The national economy is flashing warning signs, “but there is good news on fiscal policy. A wildfire of state income-tax cuts is sweeping the nation,” according to Chris Edwards of the CATO Institute.

Bold tax cuts are a hallmark of a good budget. That’s what North Carolina experienced after the state’s bipartisan budget became law in November 2021 — the first state budget in three years. As a result, taxpayers get to keep more of their hard-earned money.

The budget was the first Democratic Gov. Roy Cooper signed into law, after a series of vetoes. But thanks to conservatives in the state’s General Assembly, this was not the first tax reform enacted in the state.

After decades of tax increases under a Democratic-run legislature, in 2013 the new conservative leadership overhauled the state’s tax code. They simplified the progressive multi-bracket tax that topped out at 7.75 percent to a flat tax of 5.75 percent and dramatically increased the standard deduction.

Thanks to the state’s budget, North Carolinians of all income levels will benefit from lower tax bills.

Several of the most significant taxpayer benefits include:

• A reduction in the personal income tax to 3.99 percent after 2025, which will help support working families and small businesses. North Carolina will have the fourth lowest rate of any state that levies an income tax.
• A phasing out of the growth-stifling corporate income tax rate — an egregious tax that research indicates falls on workers more than businesses. This will make the Tar Heel state just one of three that taxes neither corporate income nor gross receipts (a similar tax on a company’s gross sales).
• Fewer families will have a state tax bill, as the standard deduction increased by $2,000 for singles and $4,000 for married couples filing jointly. 

With inflation ravaging wage gains, families keeping more of their income is good policy. And because of smart state budgeting, North Carolina is not starving for revenue. In fact, the state enjoys a large surplus.

But this was not always the case. Before the 2013 reforms, unsustainable spending growth led to massive budget deficits during the Great Recession. As a result, desperate lawmakers raised taxes. The picture was grim: in 2010, North Carolina’s income taxes were the highest in the Southeast and the state’s GDP growth lagged behind the national average.

Despite the dire outlook, conservative state legislators rolled up their sleeves in 2013 and reined in spending. Because of their restraint, the state budget escaped the vicious tax-and-spend roller coaster.

This incredible effort can hardly be overstated; the success of North Carolina’s tax reforms have far exceeded those of any other state in the country.

Recently, North Carolina was named the nation’s top state to do business. And since 2013, the state’s growth rates have surpassed the national average.

The state has seen growth in businesses, as employees flee high-tax states and relocate to prosperous havens like North Carolina. In fact, only Florida and Texas are more popular migration destinations.

Other states have taken notice and are copying North Carolina’s successful blueprint. In 2013, North Carolina was only the third state to enact a flat income tax rate, a list that’s now grown to 10 states. And in 2022 alone, 10 states reduced their income tax rate, while six cut their corporate tax rates. 

Even with these incredible gains, North Carolina isn’t done yet. Legislators in the Old North State, as well as others across the country, must set their sights on long-term gains, such as a taxpayer bill of rights (called TABOR for short), which should be enshrined in state constitutions. Budget volatility encourages irresponsible growth during times of plenty, only to prove unsustainable during a recession. TABOR would limit a state’s spending to a formula of population growth plus inflation, keeping an upper bound on spending and returning excess revenue to taxpayers. Without TABOR limits, additional tax cuts will not be possible.

North Carolina has set an example for the rest of the nation to follow. By keeping spending growth in check, the state has given the country a blueprint of how to put communities first and propose budgets that serve the people, not politicians. Lower tax burdens are better for families and individuals, and lower tax burdens come from limited government reforms. If other states want to recession-proof their economies, they should learn from North Carolina’s playbook.

Paige Terryberry is the senior analyst for fiscal policy with the John Locke Foundation, a conservative think tank based in North Carolina.