NC Budget and Tax Center

Failed tax-cut experiment hurts NC – don’t let it hurt the country

Senator Thom Tillis is trying to sell national leaders and elites on North Carolina’s failed tax cut experiments.  His commentary in the Wall Street Journal this week cherry picks data and ignores the growing evidence that many communities and taxpayers in our state have been hurt by the approach to tax cuts that have primarily benefited the wealthy.

Most egregiously, it shows that Senator Tillis has not taken the time to monitor the way in which the choices made in 2013 have played out in his home state over the past four years.

We have.  Here is what our analysis tells us.

The approach of simplification of the tax code, lower rates and broader bases sounds nice, but it isn’t exactly what happened.

Those without powerful wealthy voices on their side have lost many of the tax policies that existed to connect everyday North Carolinians to opportunity and provide a high quality of life including funding the foundations of a thriving community.

Companies have maintained benefits that they receive and even seen some expansion in loopholes.  Just one example: soon after the rate reductions for profitable corporations which now stand at the lowest in the nation, the state also adopted single sales factor, which is a policy that primarily benefits out-of-state corporations.

Moreover, because N.C. policymakers were also fine with cutting services and programs for people and communities, and simultaneously concerned enough about political blowback from expanding the sales tax to more services, the base is actually not as broad on the sales tax side as would be needed to hold the amount of revenue steady to support basic infrastructure needs of the state.  Just one example of how this base-broadening played out in NC:  the expansion of sales taxes to auto repairs actually exempted the repairs of vehicles under dealer warranties but extended to service on repairs at mom and pop shops.

The tax changes in 2013 weren’t paid for in 2013. They are being paid for every day by the children in our state who go to under-resourced schools, communities whose drinking water is polluted, and university students who have mounting debt due to tuition increases. All North Carolinians now and in the future are paying for these tax changes.

While Senator Tillis would like folks to believe the revenue neutral approach he initially favored won the day, it didn’t.  In the first year, the final tax plan reduced state revenue collections by millions of dollars. The cumulative cost of major tax changes since 2013 will be at least $3.5 billion annually.

Senator Tillis is right that he and his colleagues paid for this by enacting unpopular spending cuts to schools, infrastructure, and other programs that support thriving communities.  The legislature also reduced services to older North Carolinians and those seeking medical care, those out of work North Carolinians in rural areas who sought job training for new careers as well as mothers who wanted their children to be safe and cared for while they work.

And of course, Senator Tillis is proud of the elimination of the state’s Earned Income Tax Credit, which followed the Reagan–expanded federal credit now law in 29 states and the District of Columbia.  The result of that choice is that nearly 1 million working North Carolinians have seen their tax load increase.

All of these North Carolinians pay taxes—sales, property and excise taxes– of course and many of them pay income taxes too.  Importantly these working families lost a proven tool for improving their children’s developmental outcomes and assisting their move to the middle class.

North Carolina’s tax plan has delivered the greatest tax cut to the wealthiest few in our state.

Because of the changes to the tax code since 2013, the top 1 percent of taxpayers will get an annual tax cut of $22,000, while the bottom 20 percent of taxpayers will get an average cut of just $16 a year. Of those in the bottom 20 percent of taxpayers, only 39 percent will receive any income 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.

These tax changes have reduced the ability of the state to meet the needs of a growing population.  North Carolina also cannot respond adequately to Hurricane Matthew and the opioid crisis, unanticipated challenges for our communities and families that threaten the well-being of us all.

North Carolina’s state appropriations are still nearly 3 percent below where we were in 2007 despite the state’s population growth of nearly 13 percent.  Our state’s commitment to supporting a strong economy is at a historic 45-year low.

The state’s experience of revenue coming in above what was expected is the function of conservative estimates of how the tax code would perform, along with better than expected performance of the national economic expansion.  A look at the analysis of the state legislatures own Fiscal Research Division suggests that our overcollections are not a function of tax cuts generating more revenue nor is it putting us on a better path long term.  In fact the General Assembly’s Fiscal Research Division points to the inability of our state’s current tax code to maintain existing services over the next five years.

Over-collections have been used as justification to cut taxes again and again, even as needs go unmet and the state has failed to adequately invest in every child’s early education or in rebuilding our Eastern communities torn apart by Hurricane Matthew or providing health care services and economic development support in our rural communities.

North Carolina has less revenue than we would have under the old tax code.  $3.5 billion less.

North Carolina’s economy is not performing at the top.

Ironic that Senator Tillis released his celebration of the state’s economy on the heels of new data that our poverty rate has remained persistently higher than the national average and our employment growth is stalling.

In fact, North Carolina’s economic performance through the recovery has been on par with the national average, nothing that would suggest something different is happening in our state. The acceleration of economic and job growth claimed was just a blip in the data when observed over a longer period.  In the most recent period we are actually failing to keep up with our low-performing south eastern NC in employment growth in most industries.

And as our last year’s Labor Day report on the State of Working North Carolina reported, the vast majority of communities have failed to experience the national recovery, employment growth has been concentrated in just a few metro areas and job quality has fallen leaving wages low and unemployment persistently high for certain groups and communities.

North Carolina has long had a reputation as a good place to do business. 2013 tax changes didn’t create that reputation.

Our state has improved in rankings that mean little for the quality of life and quality of business environment but instead reflect the interest of the lobbyists at the Tax Foundation who sought the tax changes that Senator Tillis and his colleague enacted.

The reality is that the choices by Senator Tillis and other North Carolina lawmakers to cut taxes for the wealthy and powerful at the expense of our communities are harming not only our reputation, but our people as well.

We are hampered by the fact that we can’t guarantee a quality education to every children wherever their family may live or work.  We are hurt by the fact that our universities are cutting investments in research and having trouble retaining the greatest minds in a range of fields.  We are hurt today and for the long-term when we aren’t doing all we can to prevent child abuse and can’t ensure the air we breathe and the water we drink are safe.

This is the wrong path for North Carolina and for our country. Don’t let Senator Tillis try to tell you any different.


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