Have you ever experienced the thrill of paying off a credit card or car loan? If you have, you know the unbelievable effect that has on your finances. Suddenly, the $200 or $300 you were saying goodbye to every month stays in your pocket, meaning you can put it to other uses — shore up your rainy day fund, invest, donate to charity, or spend on a vacation.
The state of North Carolina experienced something similar recently. We paid back $2.5 billion, plus accrued interest, to the federal government, one year ahead of schedule. As a refresher, let’s go back to 2008 when the trouble started. As our country entered the national recession, North Carolina’s antiquated regulatory and tax policies caused our increase in unemployment rate to be among the highest in the nation. Since we had such a large number of people receiving unemployment benefits, the unemployment benefits extensions by the federal government — which ultimately became the longest benefit period in our country’s history — essentially bankrupted our state unemployment fund. We had to turn to the federal government to bail us out with this loan. Thirty-one states took such loans, although my back-of-the-envelope calculations show that we borrowed more per capita than any state. This was a dire situation. The leaders we elected in 2012 decided to put our state on a different path.
Despite some predictions to the contrary, these new policies put North Carolinians back to work. North Carolina has created the fifth-highest number of jobs in the nation during the past year, and all states ahead of us are more populous. We’ve catapulted from one of the worst performing states to one of the best.
Last month, the latest tax revenue projections came out. Our state’s fiscal year runs from July 1 to June 30, so the year is now nearly over. New tax policies were enacted that provided for tax cuts for nearly all North Carolinians. The corporate tax rate was reduced from 6.9 to 6 percent in 2014 and 5 percent in 2015. The top individual rate was cut from 7.75 percent to 5.75 percent. As the current fiscal year comes to a close, the individual income tax revenue is projected to be about the same as before, but the business income tax revenue will increase 15 to 20 percent, creating a projected $400 million surplus. Our state is merely the latest example of the mountains of economic research that shows that cutting tax rates when they are too high will increase tax revenue.
Kansas is experiencing similar good news, although the results have taken longer in its case. Kansas, however, offers a great laboratory for researchers. The Kansas City metropolitan area encompasses part of Kansas and Missouri. Consequently, when changes are made in one state, they can be compared with the other. Once tax cuts were implemented, Kansas went from 38th to 21st in the nation in job creation. Jobs have increased by 5.6 percent on the Kansas side of the metro area and 2.2 percent on the Missouri side. Hourly pay increased $1.22 in Kansas and 61 cents in Missouri.
Interestingly, some people have complained that their state tax refund was lower this year than in years past. Mine was too. This is actually great news for us. When we get a refund, it means that we allowed the state to hold onto our money during the entire year without paying us interest. It is much better to have access to the money during the year. This is essentially what happened because when the individual rate dropped from 7.75 percent to 5.75 percent, the withholding tables were changed so that fewer tax dollars were withheld. Our take-home pay would have been higher, unless other deductions, such as health care insurance, increased.
North Carolina still has a long way to go to fix our government and economy, but we’re already off to a great start. Paying off the loan and higher revenues mean we’ll have a tremendous amount of money to be used for reserves, education, building roads, and fulfilling the other needs of our state.