- The Progressive Pulse - http://pulse.ncpolicywatch.org -

Telling the FULL story on tax proposals

Here’s the full story on the House tax plan: It will increase taxes for middle- and low-income households while giving a large tax cut to the wealthy. The bottom ninety-five percent [1] of taxpayers would see their taxes go up, on average, under the bill version that will be heard in House Appropriations today.

Those who focus only on the income tax changes and say this is a tax cut for everyone are ignoring how the sales tax changes – a major part of this tax plan – will hurt average families. Those who are using data from the Fiscal Research division to extrapolate that the majority will see a tax cut are also mistaken. These claims only obscure the harmful impact of this tax plan on the majority of North Carolinians.

The House tax plan does provide an income tax cut to taxpayers across the income spectrum, but that’s not the whole story and still 27% of all taxpayers would see an income tax increase. The greatest cut goes to the top: More than third of the income tax cut goes to the richest 1 percent. But as all North Carolinians know, we don’t just pay income taxes; we also pay sales tax [2]. That’s why we must look at income and sales tax changes in order to evaluate whether the House tax plans are good for our state.

The House tax plan expands the services that are subject to the sales tax. Because they spend a greater share of their income on taxable goods and services to meet their basic needs, middle- and low-income families will pay more of their income in sales taxes than the wealthy. In the House plan, the expansion of the sales tax is, on average, enough to cancel out the income tax cut, on average, for the bottom 95 percent of taxpayers.

Sample taxpayer analysis is a helpful way to understand some of the impacts of the tax plans, but we can’t assume the experience of all taxpayers in the same income group will be similar. The experience of a representative taxpayer should not be extrapolated to the entire population. As we are explaining in a blog series this week [3], there are many taxpayers who won’t experience a tax cut in the same way as the Fiscal Research division’s analysis shows.

The distributional analysis [4] of tax plans is a more accurate way to look at the real impact. This type of analysis is critical to having an informed debate about the impact of tax changes. It looks at final incidence – basically who actually ends up paying the tax, not just who is initially responsible, as well as whether any of the tax is exported.  A distributional analysis also examines the impact on a range of taxpayers and filing types so we better know the likely experience of taxpayers overall.

There is no getting around the fact that the House plan, as well as the Senate ones, are tax shifts that place a greater burden on middle- and low-income people, while the wealthy get a big tax break.