Reforms Pass in North Carolina … But Not Here



It’s a tale of two legislative sessions. In one state, lawmakers passed significant tax reform that lowers tax rates across the board, took a meaningful step towards school choice, and expanded Second Amendment rights. In another state, lawmakers talked a big game about government restructuring, reforming the state’s outdated ethics code, funding state roads properly, and healthcare reform – and in the end got virtually nothing done apart from across-the-board spending increases.

The first state is North Carolina. No prizes for guessing the second.

It’s not that South Carolina should imitate North Carolina in everything, or even most things. That’s not the point. But it’s demonstrably true that in 2013 North Carolina passed a series of modest but not insubstantial reforms, while South Carolina legislators accomplished little more than talk.

What’s the difference? Both states, after all, are “red.” Indeed, South Carolina’s conservative majority can’t take comfort in the fact that North Carolina is “redder” than its southern neighbor – because it isn’t. The difference has nothing to do with ideological descriptors or party majorities. It has everything to do with existing laws.

Tax Reform

North Carolina’s tax reform legislation included actual tax cuts in several areas – not just for certain businesses and industries.

Personal Income Tax Cut: The state’s three-tiered system of rates between 7.75 percent and 6 percent are reduced to a flat rate of 5.75 percent, and standard deductions increased to the first $15,000 of income for those married filing jointly and first $7,500 of income for single filers – meaning that the first portion of income is tax-free. This is done while some deductions are either reformed or removed. While having a 0 percent personal income tax would be ideal, this is still a legitimate 25 percent reduction in the tax rate.

South Carolina’s legislature, by contrast, made no real effort to reform its severely outdated six-tiered bracket system – the highest bracket being 7 percent, applying to South Carolina’s “upper income” earners, namely those making $14,000 of income per year. The fact that South Carolina has six different tax brackets ranging from $0 to roughly $14,000 is laughable, and just shows how out-dated our current tax structure really is. Also, unlike North Carolina, the only income that isn’t taxed is the filers’ first $2,800 – and that goes for both single and married filers.

Corporate Income Tax Cut: North Carolina’s 6.9 percent rate is cut to 5 percent by 2015, resulting in an overall 29 percent rate reduction. If North Carolina meets certain revenue targets, the rate will be cut to 3 percent by 2017. Also, several tax credits are eliminated and/or scheduled to sunset.

Lawmakers in South Carolina, on the other hand, did not move to make any changes to the state’s current corporate income tax structure. It still sits at 5 percent. Indeed, the legislature decided to maintain the status quo policy of maintaining a high corporate income tax rate for most businesses while giving special breaks and credits to a few well-connected firms.

Other Reforms: Among other changes, North Carolina also capped the state’s gas tax, eliminated its death tax, and eliminated or modified many sales tax exemptions – albeit without lowering the overall sales tax rate of 4.75 percent (though it should be pointed out that 4.75 percent is still lower than South Carolina’s 6 percent rate). South Carolina’s legislature, moreover, failed to remove any significant exemptions, ensuring the state will continue to exempt more in sales tax than it collects each year.

Budget Implications: North Carolina’s tax reform plan will also reduce government spending by over $500 million over the next two years, returning more money to North Carolinians. South Carolina, by contrast, has no plan to let taxpayers keep more of their money and lower government spending. Put simply, whatever money South Carolina state government collects through taxes, lawmakers find a way to spend it directly or put it in a “rainy day fund” and then raid the fund and spend it anyway. Either way, taxpayers will not get any of their money back once the state takes it, even when the state has more than enough to pay for essential state expenses. The only real way South Carolina will ever cut government spending is by following North Carolina’s lead and giving state government fewer tax dollars to spend.

What does this mean for South Carolina? It means we’re put at a worse competitive disadvantage than we are already. Before both legislative sessions started, North Carolina ranked 44th and South Carolina ranked 36th on the Tax Foundation’s State Business Tax Climate Index, which ranks states on their personal and corporate income taxes, along with sales, unemployment insurance, and property taxes. After North Carolina’s reforms and South Carolina’s lack thereof this past session, North Carolina jumps far ahead of the Palmetto state to 17th.

South Carolina’s current unsustainable “economic development” strategy of distorting the market through high taxes, taxpayer-funded hand-outs, and tax credits to select businesses and industries puts the state at a disadvantage, especially when surrounding states are lowering their personal and corporate tax rates across the board. Unless you’re a business with talented lobbyists and can spend the time and money to lobby state legislators for lower rates and taxpayer hand-outs, you’re going to be more apt to choose to move to the state with lower overall taxes.

Education Reform

North Carolina took a number of steps towards improving its education system with the passage of its FY2014 budget. North Carolina lawmakers made a two-year $230 million cut that would have gone to teacher assistants, an educational tool that has proven ineffective at raising student achievement. Lawmakers also mandated a new performance-based contract structure for educators and restricted tenure to the 25 percent of teachers who are ranked as the most effective under new performance criteria. Perhaps most significantly, North Carolina’s FY14 budget creates a $10 million voucher program that will award up to $ 4,200 a year to low-income students to allow them to attend the school of their choice. In addition to low income vouchers, legislators also turned a tax credit program intended to allow disabled students to attend non-public schools into a voucher/grant program worth up to $6,000 a year for each student.        

South Carolina education accomplishments this session were far more modest. South Carolina’s primary achievement was including a tax credit scholarship program limited to special needs students in the state budget, with the credits capped at $8 million a year. Scholarships are capped at $10,000 per student. This was about the only positive development. Other reforms, such as increasing school choice or incentivizing higher performance in public education, weren’t seriously considered. One of the few other significant developments in South Carolina education was a large increase in funding for 4k programs, despite the fact that such programs have shown little if any success in the past.

Second Amendment Protections

“Restaurant carry” passed both houses of the North Carolina Legislature, and is awaiting the governor’s signature. This means concealed weapons permit (CWP) holders in North Carolina will no longer be forced to disarm before entering bars and restaurants.

South Carolina, by contrast, failed to pass a similar bill, with the measure becoming bogged down in the Senate. The one firearms bill that was passed this year by South Carolina lawmakers would restrict firearm ownership to individuals whom the government deems “mental defectives.”

What’s the deal?

South Carolina is the reddest of red states. Outside Columbia’s world of politicos, high-tax, statist, or otherwise “government knows best” ideologies are as unpopular as the present administration in Washington. So why does a significantly less “red” state like North Carolina pass substantial low-tax, free-market reforms while South Carolina lawmakers pass nothing of the kind?

The answer has nothing to do with ideology. It’s about ethics – ethics in the broadest sense. In South Carolina, lawmakers are financially invested in the system in ways their counterparts in other states are not. An excessively long legislative session strengthens the connection between lobbyists and lawmakers, making broad-based tax reform impossible. Legislative self-policing means South Carolina lawmakers can be “persuaded” more easily to preserve special favors for the well-connected. The fact that South Carolina lawmakers don’t have to report any of their private income results in the same kind of legal corruptibility. That South Carolina lawmakers are exempt from the state’s Freedom of Information law means the cozy relationship between them and the representatives of favored companies and industries – lobbyists, corporate lawyers, consultants – can remain secret.

Until these things change, we’ll continue to get exactly the kind of tax and education reforms we got this year – and last year, and the year before that, and the year before that.

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