Lawmakers in North Carolina are looking seriously at repealing the state’s personal and corporate income taxes, and replacing them primarily with a larger sales tax. As is often the case with plans to gut the income tax, the proposal is being sold as a way to “kick-start” the state’s economy. In an attempt to bolster that argument, a conservative group in North Carolina called Civitas recently hired supply-side economist Arthur Laffer to write a report claiming that 378,000 new jobs and $25 billion in new income could be created through income tax repeal. Our partner organization, the Institute on Taxation and Economic (ITEP) took a close look at the study and found that, as with Laffer’s previous work, the study is severely flawed to the point of making it entirely useless. Among the study’s many flaws:
- Fails to control for a large range of important non-tax factors that affect state economic growth.
- Confuses cause and effect by assuming that recent declines in personal income were due to taxes rather than the Great Recession.
- Does not explain, or completely ignores, the economic impact of various tax changes it proposes to pay for income tax repeal.
- Cherry-picks blunt, aggregate economic measures in comparing state economies, and simply asserts that tax policy is the driving force behind these measures.
- Ignores the important role that public investments have to play in any successful state economy.
ITEP concludes that “In proposing a policy course that no state has ever taken—repealing the personal and corporate income taxes without a wealth of oil reserves to fall back on—ALME and the Civitas Institute have laid out an untested plan without any evidence that it will benefit the state’s economy.”