N.C. has plenty of money. Now, how to spend it – on tax cuts or schools and services?
North Carolina has arrived at a moment of choice. The state’s coffers are bulging with federal pandemic aid and higher than expected tax revenue has generated a $6.5 billion budget surplus.
Now the choice: Spend more or tax less?
Republican lawmakers have made their decision clear in budget proposals from the Republican-controlled House and Senate. They want more income tax cuts for corporations and individual taxpayers. They’ll ignore calls to expand Medicaid and they won’t fully fund public schools as called by the ruling in the Leandro school equity case.
Democratic Gov. Roy Cooper’s budget proposal calls for Medicaid expansion, larger raises for teachers and state employees and higher spending on early education, infrastructure and clean energy.
“The most important (budget) recommendations today will invest in North Carolina’s people so they can learn, get healthier, and get the right kind of training for great jobs,” Cooper said.
Last week, Rep. John Szoka, a Cumberland County Republican and senior chair of the House Finance Committee, expressed a competing view. He said further cutting the corporate tax rate is part of a low-tax policy that is bringing new businesses to North Carolina. “One reason, I believe, they continue to come here is because we have an inviting corporate tax environment,” he said.
Which approach is the right one? I asked two North Carolina professors who study businesses and taxation. They gave an honest answer: No one knows for sure.
While liberals and conservatives are full of certainty about which course is right, the professors say that while public investment in education, transportation and health care makes a state appealing to businesses, low taxes are a lure, too.
Scott Dyreng, a professor at Duke’s Fuqua School of Business who studies taxes and business strategy, said of the debate, “Both sides have logical chains of reasoning that have been shown in different settings to have merit. The reality probably falls somewhere in between.”
Where the right balance lies is elusive. The legislature has been cutting taxes since 2013 and the state’s economy has prospered, but the state’s population and its needs have also increased. What would have happened had a Democratic-led legislature been in place during the past decade and, instead of tax cuts, increased spending on education and public services and expanded Medicaid, bringing in billions of dollars in federal support?
“It’s possible the state has grown because of lower taxes,” Dyreng said, but added, “We will never be able to observe what economic growth in North Carolina would have been if we hadn’t cut taxes.”
At UNC’s Kenan–Flagler Business School, Jeff Hoopes is equally circumspect about balancing tax cuts and state spending.
“There’s no way to know how much the economy will be helped by tax cuts because there are so many variables at play,” said Hoopes, who researches the effects of tax policy.
Hoopes said tax cuts send “a huge signal” to businesses that “we are super business friendly.” But he said businesses also “want to move to a place that has all the amenities that are provided by the government.”
One way to find the sweet spot between tax cuts and spending, he said, is to assess how the average person benefits. If tax policy is aimed only at drawing more people into the state, he said, “I don’t know why that is desirable for anyone beyond real estate developers.”
Advisers to Cooper say he is encouraged by the House budget proposal that offers more in teacher pay raises and less in tax cuts than the Senate version.
It looks like the governor and the legislature will be able to compromise and pass a budget after a two-year impasse. And that will mean not a choice between tax cuts and more spending, but, in some manner, choosing both.
