Commentary

Six years of conservative rule in NC: Reviewing the destructive impact

Last fall, the staff at NC Policy Watch produced a powerful report on some of the key impacts of conservative rule in North Carolina at the five-year mark called Altered State. Today, as this morning’s edition of the Weekly Briefing reminds us, the damage continues to mount:

“A year after the release of Altered State, the policy environment in North Carolina has only grown more toxic. Rather than being chastened by countless critical editorials, plunging public opinion polls and an economy that continues to lag well below where it ought to be, given the state’s numerous built-in advantages, elected officials have used 2016 to double down on their commitment to the brand of divisive and regressive policies they pursued from 2011 to 2015.”

The column goes on to highlight several issues — HB2, the state budget, education privatization, environmental protection — in which conservatives have “doubled down” on the the disastrous policies of years one through five.

That said, it’s worth remembering just how destructive the policies of 2011-2015 were and continue to be. For that reason, we’ll be highlighting several articles from the original report over the coming days . We hope you’ll find them a useful refresher and a spur to action in the weeks and months ahead. Here’s article #1 by the Budget and Tax Center’s Alexandra Sirota:

Public investment falls, tax responsibility shifts: Low and middle income taxpayers bear more of the load

Public investments are essential building blocks of long-term economic growth and shared prosperity. Decades ago, North Carolina diverged from its Southern neighbors by investing in good roads, quality public schools and universities and early childhood programs.

Since the official recovery began in 2009 — when rebuilding from the Great Recession would have been possible — state lawmakers have turned away from that tradition, choosing to sharply limit public spending in favor of tax cuts. Overall, state support for services in the 2016 fiscal year will be nearly a full percentage point below historic investment levels as a share of the economy.

"State spending as part of the economy — measured by state personal income — has consistently fallen in the past few years."— "A Summary of the Fiscal Year 2015–2017 Budget," BTC Reports, October 2014 (Source: N.C. Budget & Tax Center)
“State spending as part of the economy — measured by state personal income — has consistently fallen in the past few years.”
— “A Summary of the Fiscal Year 2015–2017 Budget,” BTC Reports, October 2014 (Source: N.C. Budget & Tax Center)

In fact, state spending as a share of the economy — measured by state personal income — has fallen every year since 2009. The new budget continues this trend, and caps off the only period in more than four decades in which state spending declined as a part of the economy for more than five straight years.

The tax code has been radically transformed since 2010 in a way that makes adequate funding 0f core public services more difficult.

The most recent chapter in state fiscal history began in 2009 with the worst revenue shortfalls since the Great Depression. State policymakers responded with targeted spending cuts, deferred capital projects and measures to bolster state revenues. A temporary tax package passed in 2009 combined a sales tax increase with a surcharge on high-income taxpayers and profitable corporations to raise $1.3 billion. It expired in 2011.

The official recovery began in July 2009, but job losses in the state continued for 14 more months. Despite still-sluggish job creation and revenue projections, policymakers, having allowed the temporary tax package to expire, made $1.7 billion in additional budget cuts in 2011. At the same time, the legislature passed a tax exemption for business “pass-through” income at a cost of more than $300 million per year.

In 2012, the legislature increased taxes on many working families by reducing the value of the state Earned Income Tax Credit (EITC). At the same time, lawmakers constrained the ability of the Department of Revenue to prevent multi-state corporations from shifting profits to other states to avoid paying taxes on profits earned in North Carolina.

Changes in personal income and sales tax since 2013 have reshaped the state’s tax code in a way that shifts the tax responsibility to low-income and middle-income taxpayers. Note: Chart illustrates the combined impact of 2013 and 2015 tax changes (personal income tax and sales tax changes, fully phased-in). Baseline for comparsion is pre-2013 tax code with state Earned Income Tax Credit (EITC) in baseline. (Sources: Data request to Institute on Taxation and Economic Policy (ITEP), October 2015; N.C. Budget & Tax Center)
Changes in personal income and sales tax since 2013 have reshaped the state’s tax code in a way that shifts the tax responsibility to low-income and middle-income taxpayers. Note: Chart illustrates the combined impact of 2013 and 2015 tax changes (personal income tax and sales tax changes, fully phased-in). Baseline for comparsion is pre-2013 tax code with state Earned Income Tax Credit (EITC) in baseline. (Sources: Data request to Institute on Taxation and Economic Policy (ITEP), October 2015; N.C. Budget & Tax Center)

In 2013, as the state’s economic recovery was finally taking hold, lawmakers enacted a major overhaul of the tax code that further reduced revenues. They scrapped North Carolina’s progressive income tax and replaced it with a flat rate, phased in tax cuts for profitable corporations, extended the sales tax to several services and eliminated many credits and deductions — including the state EITC — reducing available revenue by roughly $1 billion per year. In a separate bill they also eliminated the estate tax that would have been levied on the value of estates worth more than $5 million. The combined effect was to shift the tax load further onto working- and middle-class taxpayers while giving millionaires a significant tax cut. Reductions on the public investments side included: fewer slots in pre-K programs; elimination of funding for small business lending in underserved communities; decreases in Medicaid provider rates; and reduced staffing for monitoring and testing the state’s environmental quality.

Policymakers made fewer changes to state-level taxes in the 2014 legislative session, but they enacted restrictions on the ability of local governments to compensate for the loss of state funding support caused by previous tax cuts. Most significant was a new law barring local governments from collecting privilege license taxes from businesses.

In 2015, policymakers once again cut taxes on profitable multistate corporations, reduced the personal income tax rate and expanded the sales tax to more services. On top of increasing the share of total state taxes paid by low- and middle-income families, this package of changes will reduce available revenue by more than $1 billion annually within four years.

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