Another Good Year for Freedom-Based Reforms | Eastern North Carolina Now

    Publisher's note: The author of this post is Becki Gray, who is Vice President for Outreach for the Carolina Journal, John Hood Publisher.

    RALEIGH - Building on transformational reforms begun in 2011, North Carolina's elected leaders continued changes in 2015 to curtail spending, instill fiscal responsibility, rein in regulations, improve education, make government open and accountable, and create the best possible conditions for economic growth. This year's work was all about making North Carolina economically stable, North Carolinians independent, and our state First in Freedom.

Taxes:

    Building on transformational tax reforms of 2011 and 2013, the 2015 reforms reduce the personal income tax rate from 5.75 percent to 5.499 percent beginning in 2017, and the corporate income tax rate falls to 4 percent (the lowest of any state that imposes a corporate tax). In addition, the standard deduction increases by $500.

    Deductions for medical expenses and charitable contributions are unlimited. Due to 2015 reforms, taxpayers will keep more than $2 billion of their own money over the next five years. Combined with 2013 reforms, North Carolinians will pay over $4 billion less in state taxes.

Spending:

    The $21.7 billion General Fund budget for 2015-16 increased spending by just 3.1 percent - less than the combined rate of inflation and population growth. Even with a $450 million surplus in revenue, legislators and the governor resisted powerful special interests urging them to spend more. Fiscal discipline and respect for taxpayers won the day.

    More than $600 million went into savings accounts, building toward reserves of $1.6 billion to deal with natural disasters, a downturn in the economy, or other unforeseen expenses. And those reserves create a safety net guarding against future tax increases.

    A $216 million diversion each year from the Highway Fund to the General Fund stops. Coupled with a long overdue revision to Division of Motor Vehicles fees, the state will now have a reliable, steady stream of funding to pave roads, shore up bridges, and relieve congestion based on data and need, not political favors. Finally, highway funds will build and maintain highways.

Accountability:

    A new Internet portal will function as a one-stop information disclosure site for state agencies, cities, counties, and local school districts - all online, easy to find, sort and decipher, featuring monthly updates on budgets and expenditures. North Carolina leads the way for government transparency.

Subsidies:

    Nearly four decades of taxpayer-subsidized special treatment for Big Solar ends Dec. 31, 2015. From 2010 to 2014, these credits amounted to a $224 million haul for the solar industry at the expense of everyone else. The 35 percent state tax credit will not be extended. Lower energy costs fuel a strong economy.

Education:

    School choice

    Through an opportunity scholarship voucher of up to $4,200 per year, income-qualified parents of kids whose education needs aren't being met by a traditional classroom can attend the private school of their choice. Funding is available for 4,400 low-income students next year. In addition, special-needs students are eligible for an $8,000 per year voucher to attend the best school to meet their needs. During the 2015-16 school year, nearly 1,600 low-income and 770 special-needs students received scholarships.

    Spending is up

    K-12 education spending is up almost $470 million for 2015-16, with $66 million in additional funding for digital learning, textbooks, and supplies. The General Fund expenditure per student is $7,920, above the national average of $5,806.

    North Carolina spends a greater percentage of tax revenues on higher education than any other state.

    Taking care of teachers

    To attract the best and brightest, new teachers will make at least $35,000 per year, a $2,000 increase in first-year pay. All other teachers received a "step" increase between $3,000 and $35,000 annually and a $750 bonus.

    The average salary and compensation package for a teacher on a 10-month contract is now $60,000, nearly $5,000 higher than the year before.

    Overall, teachers received a 24 percent increase in their compensation package during this period. The average teacher will receive over $15,600 in benefits during the current school year.

    From 2009-14, 8,500 teachers chose to come to North Carolina to teach. During that same time, 2,194 teachers resigned to teach in another state. Teachers are not leaving in droves. More teachers are choosing to come to North Carolina from other states.

Fixing what's broken:

    Medicaid, the health insurance and health care provider for 1.9 million North Carolinians, has long been plagued by massive cost overruns and concerns about how to achieve better health outcomes. Reforms moving to a hybrid of provider-led and managed care systems will encourage better-quality care through a closer relationship between doctors and patients, more predictable costs, and less risk to taxpayers.

Regulations:

    A fairer and simpler tax code makes a big difference. But for many people, the biggest impediment to starting or expanding a business is an oppressive regulatory burden. Reform has been attempted many times, but this group of elected leaders is doing something about it. Their reforms:

  • forbid state environmental agencies (but not the legislature) from imposing rules that are more stringent than federal environmental regulations.
  • offer guiding principles for new state rules.
  • require cost estimates for many kinds of rules.
  • require that at least two alternatives be proposed alongside any proposed rule with "substantial economic impact" (i.e., a projected economic impact of greater than $500,000).
  • apply sunset provisions with periodic review to state regulations.

Economic growth:

    Since mid-2013, North Carolina employers have added 234,000 net new jobs, a 5.8 percent growth rate, higher than the 4.9 percent national average and 5.2 percent regional average.

    Per-capita income has grown 3.6 percent. Over the most recent 12-month period, North Carolina ranked ninth in the nation in the rate of employment growth and 10th in per-capital income growth.

    The state unemployment rate is now 5.7 percent, down from 9.7 percent in December 2011. Previously discouraged North Carolina workers have been returning to the labor market at far higher rates than the national average during the past few months.

    Because North Carolina has paid off its unemployment insurance debt to the federal government and built its trust fund back up to above $1 billion, employers of all sizes benefit. Payroll taxes will automatically drop by $300 million this year and $250 million next year.

    Reforms have catapulted North Carolina from No. 44 to No. 15 in the Tax Foundation's State Business Climate rankings.

    Employment is growing in every sector except government. The size of government is actually shrinking while construction, professional and business services, and all other sectors are growing at 2 percent or more.

    General Fund revenues faced a $650 million shortfall for the 2011 state budget cycle, with a $450 million shortfall in 2013. In 2015, there was a $446 million surplus. Combined with unspent funds reverting to the state treasury, the overall budget surplus topped $860 million. Through October 2015, General Fund revenues are running nearly $400 million above what they were at the same time last year and about 1 percentage point above the consensus revenue forecast for this year.

    We are clearly on the right path. This year's reforms have moved North Carolina closer to full employment, economic stability, and greater opportunity for all. North Carolina has become a regional and national model. But this is no time to rest on our laurels.

    To promote further economic growth, the next phase of tax reform should focus on eliminating business-to-business taxation and removing taxation of investments. The tax on capital gains should be repealed, phased out, or reduced. Business expenses should be fully deductable when incurred rather than on a depreciation schedule.

    Recognizing that children are a valuable investment, the per-child tax deduction should be increased, or - as an alternative - the standard deduction should be increased.

    To ensure health care costs are low and quality care is accessible, certificate-of-need laws must be repealed.

    North Carolina ranks No. 43 among the 50 states in the regulatory burden of occupational licensing. Reining in licensing requirements will ensure that people willing to work hard will have every opportunity to succeed and will be free to pursue their dreams.

    Subsidies, whether for targeted industries, favored companies, special carve-outs or government-funded bribes, have no place in a fair, market-driven economy. They should be shunned by the business community, not tolerated by taxpayers, and rejected by smart leaders.

    Building on previous reforms, 2015 saw great progress toward economic recovery and growth. 2016 holds great promise for even more improvement, moving North Carolina closer to being First in Freedom.    Publisher's note: This post was created by the staff for the Carolina Journal, John Hood Publisher.

JLF's Cordato highlights current state bias against some investments


    RALEIGH - North Carolina lawmakers should take aim at the state's current system of depreciation, as they look for more ways to improve the tax code. A new John Locke Foundation Spotlight report recommends replacing state depreciation schedules with single-year "expensing."

    "Using a system of depreciation for writing off asset costs distorts investment decisions," said report author Dr. Roy Cordato, John Locke Foundation Vice President for Research and Resident Scholar. "It creates a bias against making investments in 'longer-lived' capital and businesses that require such investment. It creates a bias in favor of 'shorter-lived' capital investments and industries that rely more heavily on these kinds of investments."

    In contrast, a system based on "expensing" allows businesses to deduct the full cost of a capital asset from business taxes in the year the purchase is made, Cordato said. "Expensing eliminates the bias tied to depreciation by treating all asset investments equally," he said. "It would ensure that the tax value of all such investments is equal to the full cost of making the investment."

    There's another benefit, Cordato adds. "Ultimately, it would put North Carolina in a good position for making and attracting new investments by lowering the cost for almost all capital investments."

    The switch from depreciation to expensing would fit well with the "positive" and "dramatic" restructuring of North Carolina's tax code under way since 2013, Cordato said. Lowering and flattening the personal and corporate income tax rates have "created a more efficient and fair tax code."

    Now lawmakers ought to focus on getting the income tax base right, Cordato said. "Going forward, the primary task of tax reform should be to eliminate the bias that exists against saving, investment, and entrepreneurship," he said. "The current tax code penalizes saving and investment by double taxing interest, dividends, and capital gains."

    Alongside this focus on the tax base, the state should re-examine the way it treats business investments in capital equipment and real property, Cordato said. "This is where the switch from depreciation to expensing comes into play."

    It's universally recognized that business expenses tied to producing goods and services for sale should be deductible from taxation, Cordato said. But the federal government and most states permit deductions linked to land, office equipment, machinery, buildings, and other assets only over a period of time and at specified rates.

    This approach, called depreciation or amortization, is based on the presumed durability of the investment. A "longer-lived" asset has a longer depreciation period, such as 27.5 years for investment in land for an apartment complex versus five years for an office computer.

    "While this approach might seem to make sense, it has several serious defects from an economic perspective," Cordato said. "First, a piece of equipment's useful life has more to do with market conditions and alternative technology than the equipment's physical characteristics."

    A "deeper and more systemic problem" is the distortion of investment decisions, Cordato adds. "The bias against 'longer-lived' capital and in favor of 'shorter-lived' capital creates problems even if the write-off period is consistent with the asset's true economic lifespan."

    Under a system of depreciation, the value of a tax deduction turns out to be less than the full cost of the capital asset, Cordato said. "This is because a dollar is worth more to someone now than at any time in the future," he said. "This is why lenders charge interest and borrowers agree to pay interest."

    Under immediate expensing, a construction company that buys a $100,000 bulldozer can write off the full $100,000 from this year's pretax income. "That means the full cost gets deducted," Cordato said. "On the other hand, a six-year depreciation period means the total value of the deduction will be less than the full cost of the investment. The longer the depreciation period, the less the deduction will be worth."

    "Depreciation creates an incentive for substituting, where possible, shorter-lived assets for longer-lived assets," he added. "This is true for decisions within individual companies. It's also true for those making decisions about the kind of businesses to invest in. There's a bias against investment in companies requiring use of more longer-lived assets."

    Scrapping depreciation for expensing would require North Carolina to break away, or "decouple," from the federal tax code. But that would not make tax filing at the state level any more complicated for N.C. businesses, Cordato said.

    "We're not talking about substituting a different set of depreciation schedules for the federal set," he said. "Businesses would simply deduct the full amount of their asset purchases during the year from their pretax income in one lump sum."

    Any tax reform should pursue a goal of not interfering with business decisions, Cordato said. "To the extent possible, such decisions should be made based on market conditions of supply and demand. They should not be guided in any direction by the tax code."

    "In examining future changes to North Carolina's tax code, the overall goal should be what economists call 'tax neutrality,' which implies treating all business and consumption activities equally."
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