NC Budget and Tax Center

Better tax policy tool available to address state’s upside-down tax system

State lawmakers are once again considering more tax changes that won’t address what’s wrong with our current tax code or what our economy needs. During the Revenue Laws Committee meeting on yesterday, the General Assembly’s Fiscal Research Division provided committee members information regarding how raising the state standard deduction would impact taxpayers and state revenue.  This tax change would reduce the income tax owed by a taxpayer but is an expensive one that fails to efficiently target the low- and middle-income taxpayers who carry a heavier tax load than wealthy taxpayers.  A refundable state Earned Income Tax Credit is the better tool for North Carolina policymakers concerned about tax equity.

Tax changes passed since 2013 that include large income tax cuts that largely benefit the already well-off and profitable corporations have made North Carolina’s upside-down tax system worst. State lawmakers expanded the sales tax to more goods and services to partially pay for these costly tax cuts. The regressive sales tax hits low-income North Carolinians particularly hard, as they spend a larger share of their income on goods and services subject to the sales tax. This deliberate move by lawmakers to a greater reliance on the sale tax and less reliance on the income tax has shifted the tax load to low- and middle-income taxpayers and away from the well-off and profitable corporations.

In a context in which many working families earn low-wages and struggle to meet basic needs, there is increased recognition at the national level that the Earned Income Tax Credit (EITC) is the best tool to ensure workers keep more of what they earn and in so doing move families out of poverty. Here’s why a refundable EITC makes the most sense for North Carolina: many low- and moderate- income North Carolinians are not subject to a state income tax because they don’t earn enough income. However, they pay a significant share of their income in other taxes—like sales and property taxes—and the EITC helps offset the higher tax responsibility they have overall relative to wealthier taxpayers. Moreover, increasing the standard deduction would reduce the income taxes paid for all tax filers who don’t itemize, not just those with low-incomes.

Increasing the standard deduction by $2,000 not only is poorly targeted but is also costly. Fiscal Research estimates that such a proposal would reduce state revenue by as much as $205 million for tax year 2017. The actual cost may be higher considering that a higher percentage of NC taxpayers (beyond the 70 estimate by Fiscal Research) are likely to take the standard deduction as a result of tax changes since 2013. Restoring a state EITC at 5 percent of the federal amount would be half the cost of increasing the standard deduction at that level and reach nearly one million working but low-income families and their children.

If policymakers are willing to spend $200 million to address inequities in our state’s tax code then restoring a state refundable EITC and doubling its value to 10 percent of the federal amount is the better policy choice.

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