The Fiscal and Economic Effects on North Carolina of the Taxpayer Protection Act (Senate Bill 607)

State tax expenditure limits (TELs) are intended to limit the size of government by restraining the growth of state revenues. According to the Leviathan hypothesis — a staple from the study of political economy — government has a natural tendency to grow; and as it expands, the economy less and less reflects the marketplace preferences of consumers. The rise of interstate competition for capital and labor forces states, among other considerations, to examine tax policies for their effects on economic growth. Tax and expenditure limitations (TELs) are one way to redirect resources to private sector activity and away from government spending. TELs also seek to introduce certainty in the budget process. The best known TEL can be found in Colorado, which enacted a relatively stringent Taxpayer Bill of Rights (TABOR) in 1992, only to suspend it in 2005 and restore it five years later.

A recent review of the literature suggests that TELs have had mixed success. North Carolina recently cut its income tax from the current rate of 5.75 percent to 5.499 percent beginning in 2017, while expanding the state sales tax (effective 2016). State Senate Bill 607, the Taxpayer Protection Act, is a proposed TEL that would limit tax revenues in an attempt to promote economic growth. S.B. 607 would cut the state individual income tax rate from 5.499 percent to 5 percent in 2019.

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