NC Budget and Tax Center

Facts matter about the tax “reform” debate

When making important decisions, people have a right to the best possible information. Facts, not ideology, should drive our policy agendas. This is especially true on budget and tax issues, which affect everyone in North Carolina.

Unfortunately, John Hood’s recent column on the NC General Assembly’s tax changes is replete with bad information. Warning: some wonky details follow.

The Budget & Tax Center uses rigorous methods and accurate modeling strategies that are endorsed and used throughout the economic forecasting industry – including by conservative and centrist groups.

Here’s the thing about making tax changes: there will always be winners and losers.  That’s why it takes careful thought, engagement of a diverse set of stakeholders and consideration of a range of data points and methods. Efforts to establish a reasonable estimate of what will happen as a result of the plan will always be estimates, but policymakers should have the best information available to them as to the direction and magnitude of the impact of their decision.

In the current tax debate, policymakers had two separate types of analysis at their disposal.

  • The sample taxpayer scenarios developed by the state’s Fiscal Research Division. This gives examples of how particular taxpayers will fare under tax changes.  These can be fine tools, but are inherently limited. They pick out particular taxpayers and can’t show you that everyone – or even most people — will have the same experience. The results can’t be extended to everyone in particular filing types, and certainly not­­ to the population at large.

Using this tool alone, as tax plan backers did, is like trying to fix your car using only a screwdriver. Yet even using this limited tool shows that proponents’ claims that everyone will benefit from tax changes is flatly false. That’s right, according to non-partisan Fiscal Research, and even according to the conservative Tax Foundation, there will be taxpayers who pay more under the tax plan.

  • The other type of tool that policymakers could use was an economic incidence model, like the kind that the Joint Committee on Taxation uses, that has been developed by the Institute on Taxation and Economic Policy. The Budget & Tax Center used this model to provide population-level estimates of the impact of tax changes. This is a far better tool than the limited sample scenarios, since it provides an overall summary of the experience of all taxpayers.

Analysis showed that the bottom 80 percent of taxpayers would experience a tax increase on average.  The findings take into account the rough swap of electricity and natural gas from the gross receipts franchise tax to the sales tax, as well as the privilege tax changes for amusements. The findings take into account a household’s total income in order to reflect ability to pay the tax.  The findings also take into account the base broadening of the sales tax.

The model is consistent with real-world experience. First, consumers will pay more indirectly because of changes businesses make to their prices to accommodate for the sales tax changes. The Council on State Taxation — not a group one would call a bastion of progressive views — finds that 40 percent of total sales tax collections are paid by businesses. Second, multi-state, profitable businesses — the bulk of corporate income taxpayers — are going to pass their tax cut on to shareholders, not workers. Those shareholders are very unlikely to all be North Carolinians, meaning that money will flow out of our state.

Record corporate profits have not translated into higher wages for the past thirty years, so why would we assume that a corporate income tax cut is going to all of a sudden give corporations a change of heart and decide to boost their workers’ wages?

In desperation, proponents often turn to the argument that this is going to create jobs.  But not only is there no economic consensus that this is a good strategy for growth, states that have tried it have not seen the promised employment expansion – though they have seen high incidence of poverty. We can’t import the oil production capacity of Texas or the coal mines of Tennessee, so why should we import their model that drives poverty through the roof?

When we juxtapose these two decisions — huge tax cuts for the wealthy versus a “just wait, it’ll all work out” message for working families – we can see the human cost of a serious policy mistake. Pretending that economic evidence supports these choices just compounds that serious mistake.

 

 

8 Comments

  1. Doug

    July 20, 2013 at 2:33 pm

    Not withstanding the inherent bias it is laughable that you think the methods are “rigorous”. I guess when you start with an inherent bias this is the type of shoddy work you get. Here is the WSJ, you know some people who actually know about economics and how economics actually work….

    Subscription required, but here is commentary:

  2. Doug

    July 20, 2013 at 2:33 pm

  3. Doug

    July 20, 2013 at 2:33 pm

  4. Weldon L. Farmer

    July 20, 2013 at 9:53 pm

    PS The only thing potentially better then the Flat Tax would be a national sales tax. In this case there would be no tax on income. No need to prove income and it would be unnecessary to hide income from the government because EVERYONE pays tax when they buy something. This is only after we nullify the 16 amendment giving the government the right to tax our income. We could then totally eliminate the IRS. I wonder how much extra tax income we could generate.

  5. Jack

    July 21, 2013 at 4:59 pm

    Doug:

    OMG!!!

    You mean the people that didn’t see the collapse of the U.S. and world economy heading right at them. These are the people you believe know and understand how things work?

  6. Doug

    July 22, 2013 at 1:33 pm

    Jack,
    What the heck are you talking about? I had read/viewed many stories and articles on the impending housing crisis as early as 2005. Now that is I am interested in economics, I work in a financial institution (one that came out of the crisis pretty well in fact), and just have common sense…but the writing was on the wall for years that there was a government caused housing bubble about to burst.

    Oh, and here is your writing for the current government borrowing bubble…just look at Detroit (a liberal democrat run haven for decades) for what is in the cards for the US, and what the current NCGA is trying to keep from happening due to the mismanged NC system.

  7. RJ

    July 22, 2013 at 5:12 pm

    Doug: Please explain to me how the government forced brokers and lenders to originate and write the Alt-A loans, NINJA loans, unverified doc loans, negative amortization loans, etc. These were at the heart of the bubble and crash and had zilch to do with the CRA/subprime blahblahblah.

  8. RJ

    July 22, 2013 at 5:14 pm

    This is one of the “zombie lies” that just won’t die, the notion that CRA caused the bubble and crash, that banks would never have lent the money to “those people” like in Detroit if the big, bad guvmint didn’t make them do it.