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North Carolina’s Tax Reform Experience Isn’t Comparable to Kansas

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Below is a letter to the editor by Joseph Henchman published today by The News & Observer of Raleigh, N.C.:

There is a lot that state lawmakers can learn from Kansas’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. -related fiscal struggles, but claiming that North Carolina is headed in the same direction—as this paper does in a June 10 editorial—is misleading. Kansas created a large tax planning opportunity with its now infamous pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. . Since then, Kansas has continually struggled to balance its budget and faced numerous credit downgrades. North Carolina, on the other hand, lowered tax rates and expanded the income and sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. bases, both tenets of good tax policy. Unlike Kansas, North Carolina has experienced three consecutive years of budget surpluses and implemented its tax cuts in a responsible manner. Debates over preferred North Carolina spending levels are fine, but the comparison with Kansas isn’t supported by data.

Unfortunately, the storytelling on Kansas sometimes quickly turns into a partisan brawl, with folks on the left claiming that Kansas is proof that tax reform has no impact on growth, and folks on the right claiming that Kansas is doing fine and needs to cut more spending. As we explained in an op-ed for Politico Magazine and in numerous media interviews after Kansas repealed the pass-through exemption last week, tax reform requires tradeoffs to ensure both fiscal sustainability and economic growth. North Carolina struck that balance in 2013 and should be given credit for doing so.