NC Budget and Tax Center

Tax cap amendment would lock in tax cuts for wealthy and profitable corporations

Yesterday the Senate Finance committee voted to move forward a bill that would amend the state Constitution to cap the income tax rate at the low and arbitrary rate of 5.5 percent. The bill will ensure that the tax cuts for the wealthy and profitable corporations since 2013 will remain permanent. It will lock in the cuts to public schools, health and services that promote thriving communities.

It is fiscally irresponsible to limit the choices of future lawmakers as they seek to meet the needs of a growing state and changing economy.  The result over time is likely to be more cuts to core public services and increases in other taxes that ask more from middle- and low-income North Carolinians.

Here are a few key flaws with locking into the state constitution the income tax rate:

  1. The income tax is the state’s primary source of revenue, but because of the flat rate it isn’t as likely to grow at the same rate as the economy. This means over time there will be fewer dollars to invest in public services.
  2. The rate alone doesn’t determine who pays and how much. As we wrote about in a recent Policy Basic, the effective tax rate paid by North Carolinians is much lower than the statutory rate because of the deductions and credits that exist.  North Carolina policymakers continue to consider various ways to limit what the income tax rate is applied to, and that will affect what is ultimately paid.
  3. Locking in the tax cuts would continue the $15,000 a year tax cut for millionaires in North Carolina and likely lead to increases in the sales tax among other taxes that ask more from middle- and low-income taxpayers. During the debate, Senators noted that the sales tax can be raised a penny as it was during the Great Recession.  Doing so without—as was done in the Great Recession package—a high income surcharge or tax increase will only shift the tax load further onto those who are struggling to get by.

Beyond these facts about tax policy, locking in the decisions of today’s General Assembly in the state Constitution is not only an unnecessary step but is inherently undemocratic.  Policymakers must have all the tools available to make fiscally responsible decisions, not just the tools that leaders today  promote despite evidence that they don’t work.

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