2018 Fiscal Year State Budget, NC Budget and Tax Center

Failed tax-cut experiment will continue under final budget agreement, pushes fiscal reckoning down the line

The final budget agreement from leaders of the House and Senate puts North Carolina on precarious fiscal footing in the second-half of the second fiscal year of the two-year budget and beyond.  The tax changes that leaders agreed to—which were less a compromise and more of a decision to combine the tax cuts in both chambers’ proposals—make the cost of these tax cuts bigger than what either chamber proposed.

The cumulative cost of major tax changes since 2013 will be at least $3.5 billion annually.

Because of the way that the budget phases in the tax changes, budget writers only report on half of the fiscal year impact of the tax changes that include rate reductions for personal and corporate income, an increase in the standard deduction, conversion of the child tax credit to a deduction and sales tax changes.  The reality is the full cost of the tax changes proposed will mean the state has $1 billion less than they would have had under current tax law.

That means that in the creation of the next two-year budget, beginning in Fiscal Year 2019-20, legislators will have to cut current service levels that are already broadly recognized as falling far short of need, or raise revenue to meet the demands of a growing state population.  Given federal uncertainty, even the investments they suggest will be made will be put in jeopardy by their tax choices and decision to hide the full impact of the tax changes.

Compared to pre-2013 tax law, the new changes to the tax code, coupled with other changes since 2013, will deliver an annual average tax cut to the top 1 percent of taxpayers of $22,000 while the bottom 20 percent of taxpayers will receive an average annual tax cut of just $16 each year.  Of those in the bottom 20 percent of taxpayers, only 39 percent will receive a tax cut.

Approximately 80 percent of the net tax cut since 2013 will have gone to the top 20 percent.  More than half of the net tax cut will go to the top 1 percent.

The final tax plan continues to ask more of low- and middle-income taxpayers than wealthy taxpayers because of several policy changes since 2013. Most significantly, state policymakers eliminated the refundable state Earned Income Tax Credit for low-income working taxpayers. State policymakers eliminated the state’s graduated income tax rate structure and adopted a low, flat income tax rate that delivers the greatest tax cut to taxpayers with the highest income. Finally, the state broadened the base of the sales tax, which meant that low- and middle-income taxpayers who spend more of their income on goods and services by virtue of making ends meet saw their tax load increase.  The personal income tax rate cuts do not deliver a targeted tax cut to low- and middle-income taxpayers.

Of course, over time, leaders have tried to claim that they are addressing the tax shift by implementing other tax changes. Take, for instance, the increased standard deduction that will deliver some benefit to low-income taxpayers—but also will benefit all of the nearly 80 percent of taxpayers who claim the standard deduction, not all of whom are low- or even middle-income.

Most disturbingly is the way in which legislative leaders seem to also suggest that they are improving the tax code for taxpayers with children. Leaders took the Child Tax Credit and converted it to a deduction. But this does nothing to improve the tax code for taxpayers with children overall. In fact, it means that some taxpayers have a tax increase as a result of this change. For those with less than $20,000 in income (the bottom 20 percent of taxpayers), their average tax increase will be $248, which is equivalent to almost six months of diapers or 12 months of formula.  Moreover, the deduction is now available to a broader income-range of taxpayers and not targeted. If policymakers were truly looking to help with child expenses, they would have made the credit refundable, which is much more effective than cutting the rate or raising the standard deduction.

The reality is that House and Senate leaders are not seeking to deliver a tax cut to everyday North Carolinians. They are seeking to cut taxes for the wealthy and profitable corporations in order to once again to try to prove that the already failed experiment of tax cuts can work somewhere.  At some point, the adults in the negotiating room need to stand up and say enough is enough.  When will they?

Alexandra F. Sirota is the Director of the Budget & Tax Center, a project of the NC Justice Center.

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