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North Carolina: A Laboratory for Trickle-Down Economics

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During North Carolina's 2013 legislative session, a fierce debate took place over how to change the state tax code. Because Republicans had won a super majority in the General Assembly as well as the governor's race in 2012, the real tug-of-war centered around an aggressively conservative tax reform package championed by State Senator Bob Rucho, co-chair of the Senate Finance Committee. A less aggressive proposal was preferred by House Speaker Thom Tillis, who is likely to be the Republican nominee to challenge U.S. Senator Kay Hagan, a Democrat.

The differences were over to how to make up for the lost revenue caused by cuts in the income tax rate, corporate taxes and the estate tax. Should they expand sales taxes? Should they tax social security? Which tax exemptions should they eliminate?

Sen. Rucho told us during our interview with him that he was intent on eliminating state income taxes altogether, and installing a consumption-based tax system. Speaker Tillis went on record to say there was a "philosophical divide" between the House and Senate Republicans.

Gov. Pat McCrory (R-NC) sided with House Republicans, and Sen. Rucho resigned his chairmanship of the Senate Finance Committee (his resignation was not accepted; however, and he later returned to his post).

The tax plan the Governor signed into law eliminated a three-tiered tax system and replaced it with a flat income tax rate of 5.8 percent for 2014, and 5.75 percent for 2015. The corporate tax rate was reduced from 6.9 percent to 6 percent for 2014, 5 percent for 2015 and if revenue triggers are met, 3 percent for 2017. The loss in revenue estimated at $650 million annually would be offset by expanding the sales tax and eliminating various personal exemptions including the Earned Income Tax Credit.

Although this did not go as far as Senator Rucho had wanted, it does represent a radical change to North Carolina's tax system.

During the debate, Republican lawmakers had invited four economists to testify at the Senate Finance Committee. One of them was Dr. Michael Walden of NC State University who is often cited in the local press and is well-respected by Republican lawmakers. Dr. Walden is regularly invited to speak at Republicans gatherings and at Civitas (the conservative think tank funded by Art Pope, who is also a major donor to Republican campaigns, and, to the alarm of many, the state Budget Director appointed by governor his money helped elect.)

Republican lawmakers in the Senate Finance Committee didn't quite absorb Dr. Walden's analysis. His view is that, as a general rule, taxes should be low and simple, with a broad base, meaning a variety of economic activities should be taxed. He also thinks that a shift to a consumption-based tax plan should be offset with tax rebates and an Earned Income Tax Credit so that poor and working people are not hit with a dramatic tax increase.

During our interview, Dr. Walden told us that research on the impact of tax cuts on economic growth does not show a direct causal connection. Instead, he emphasized the importance of an educated labor force that attracts new businesses as a way to stimulate economic growth. This, he said, was where research was decisive.

In conversations with Republican lawmakers, we had been told that Dr. Walden saw Tennessee as a model for economic growth spurred by low taxes.

"No, I never said that," he told us. Tennessee's growth during the recent recession cannot be attributed to tax cuts. Instead, he pointed to the federal government's support for the auto industry, a major part of Tennessee's economy.

In North Carolina, Dr. Walden said that investment in education was a more reliable path to job creation and economic growth than tax cuts, according to empirical data.

But in order to know whether or not lower taxes in North Carolina end up creating jobs, we first have to establish that the new tax plan actually lowers taxes. According to AP's Factcheck:

Republican lawmakers allowed the expiration of the state's Earned Income Tax Credit, a measure that boosted the income of the state's poorest workers. The tax reform package also eliminates several exemptions and deductions that benefited working class taxpayers, including a popular program that allowed families a deduction on pre-tax income into a college savings account.

According to a recent analysis by the legislature's own Fiscal Research Division, a married couple with two children making $20,000 a year will go from receiving a $222 tax rebate in 2013 to owing $40 next year, a net swing of $262.

At the other end of the income scale, a married couple with two children making $250,000 will get a $2,318 tax cut in 2014, according to the analysis.

A report by the North Carolina Justice Center claims that taxes would go up for the bottom 80 percent of North Carolina residents. And, they would get less in return for their increased tax payments due to budget cuts in education, social services and unemployment benefits.

Critics of the changes say it is essentially a drastic tax cut for big businesses and the wealthy, and a tax increase on the poor and the middle class. They reject the theory that shifting the tax burden in this way, while implementing austerity measures, will lead to economic growth. On the contrary, they believe these changes will hurt economic growth.

Rev. Dr. William Barber II, the President of NC NAACP and leader of the Moral Monday movement, said these policies are "morally indefensible and economically insane." The Moral Monday criticism is not only a moral critique, it is an economic and empirical one, arguing that Republican lawmakers simply have the wrong economic theory.

Each side of the debate is making an empirical claim. And, economics is an empirically-based science, is it not? There are some who have thus far ignored Rev. Barber's moral argument against policies that hurt children and hurt the poor. But are they going to ignore the data if it shows that tax breaks for the wealthy and cuts to public services hampers the state economy rather than stimulating it?

These economic debates have been around for decades. At some point, the debate has moved from what is conservative and what is progressive to what works and what doesn't.

Because North Carolina made such a radical shift in their economic policies in 2013, it can be seen as a laboratory. It's possible that what happens in this state in the coming months and years will help to settle the economic debate about the validity of supply-side or trickle-down economics in the court of public opinion.

While lawmakers, policy analysts, academics and politicians watch what happens in this state, Moral Monday protesters are busy organizing. They are gathering on February 8 in Raleigh for what organizers say will be the largest civil rights gathering in the South since the '60s to protest "extremist policies" of the North Carolina General Assembly.

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Annabel Park and her partner, Eric Byler, are currently finishing a feature-length documentary, 'Story of America: Journey into the Divide' that shows the Moral Monday movement, NC lawmakers and the people of North Carolina struggling at ground zero of America's divide.