Budget and Tax Center Statement on Senate Tax Package
Raleigh, NC – The budget proposal passed by the Senate Appropriations Committee yesterday fails to take the balanced approach necessary to ensure adequate support for the public structures that will put North Carolina on a path to economic recovery and long-term shared prosperity.
Instead of raising the revenue necessary to protect vital public investments in education, health care, public safety, and clean air and water, the Senate budget further reduces already-depressed revenues by pursuing tax cuts that will not create the jobs the people of North Carolina need.
Contrary to the claims of Senate leadership, cutting taxes will not create jobs. That’s because any jobs created through tax cuts will be more than offset by the jobs lost by cutting back on vital public investments. As the Budget and Tax Center reported a few weeks ago, the one-sided analysis used to support the claim that tax cuts will create jobs completely ignored the economic and jobs impact of cutting public investments and greatly overstated the impact of tax cuts on jobs.
Not only will the Senate tax-cut plan fail to create the jobs North Carolina needs, it also fails to address the long-term shortcomings of the state’s revenue system. The proposal on the personal income tax is not a first step to modernization. Instead of closing or limiting ineffective tax loopholes, the Senate tax plan only changes the tax forms necessary to take advantage of them by converting the basis for calculating income taxes from federal taxable income to Adjusted Gross Income (AGI) while retaining all but a few loopholes.
Furthermore, two-thirds of the benefits of the proposal to cut the state’s personal income tax rates would benefit households in the top 20 percent of the income distribution. Furthermore, the resulting loss of more than $400 million in annual revenue forces even more drastic and unnecessary cuts in public investments without any promise of creating jobs.
Although the Senate plan does take an important first step towards addressing ineffective spending embedded in the tax code, it fails to set up a much-needed process to identify and evaluate tax-code spending to ensure that these provisions benefit the common good. The state currently spends nearly $1 billion on economic development indirectly through the tax code, and more thorough review of this tax-code spending could provide much-needed revenue while ensuring that the state is effectively investing taxpayer dollars in job creation. North Carolina cannot afford to stumble in its job creation efforts at a time when the state needs 460,000 jobs to meet the demand of the state’s growing workforce.
Finally, the tax provision exempting the first $50,000 in profits for small businesses would also fail to create the jobs this state needs. The non-partisan Congressional Budget Office analyzed proposals at the federal level and found that, “increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products.” The bottom line: businesses need customers much more than they need tax cuts, and cutting back on public investments will result in less demand for the products and services that businesses sell.
The tax-cut package put forth by the North Carolina Senate is inadequate to fund the vital public investments the state needs and does not address the upside-down and out-of-date nature of the state’s revenue system. The net cost of the tax cuts is estimated by the Fiscal Research Division to be $168 million in the first year of the biennium and $467 million in the second year. In the final budget, state policymakers should focus on taking a balanced approach that makes the investments in public structures like public schools, community colleges and universities, and health systems that will pave the way to a prosperous future for all North Carolinians.