NC Budget and Tax Center

What lawmakers did and didn’t mention today about their tax choices

Today, the House Finance committee approved a proposal to change the state Constitution to lock in the recent tax choices made by the General Assembly leadership.  The proposal would lock in the current income tax rate that has made it impossible for the state to keep up with the education, health and infrastructure needs of a growing state.

Legislative leaders’ tax choices have meant the state has at least $2.5 billion less in revenue each year than would have been available to invest before 2013 in textbooks and classroom supplies, serve the health and well-being of older North Carolinians and families, and support the communities across the state seeking to revitalize and connect to economic opportunity.

Amidst the debate, proponents sought to tell their history of the tax choices that have been made since 2010.  Here are some of the facts that they missed in that retelling:

  1. Future legislative leaders won’t be keeping taxes low for North Carolinians. As was stated in the committee, the bottom line with locking in the income tax rate is not to hold taxes down for everyday North Carolinians. Indeed, proponents of the legislation noted a laundry list of revenue options that they could pursue, including franchise tax increases, elimination of itemized deductions (things like the mortgage interest and property tax deduction, the charitable deduction), excise taxes, elimination of the standard deduction.  An income tax cap in the state Constitution will limit the ability of future legislators to raise taxes on the richest taxpayers, but will ensure that they raise taxes on nearly everyone and everything else. In states with tax and spending limits, researchers have found that local governments and state governments are often forced to raise taxes primarily on working people and cut services, and experience higher interest rates.
  2. Legislative leaders decided not to extend a temporary sales tax even though state revenues had not fully recovered from the historic Great Recession. Indeed, the decision to not extend that temporary tax coincided with a loss of federal funding meant to stabilize investments in education and meant that the state would not commit to keeping up with the cost of educating our children. North Carolina has yet to return to the same level of funding we were providing for each child’s education before the Recession started.
  3. By allowing a temporary sales tax to expire and subsequently enacting a tax code that won’t keep up with growing needs, legislative leaders have put North Carolina on a path that undermines our core public investments. Under the just passed state budget, the General Assembly leadership will have reduced state investments as a share of the economy for a decade.
  4. Income taxes are an important part of the state’s revenue system, representing more than half of the General Fund revenue. Income taxes, while subject to decline as all taxes are in a recession, are also best aligned with income growth. A graduated income tax rate that applies a rate on income over certain amounts is even better able to ensure that the tax code is aligned with where income is growing—primarily for the very richest taxpayers in the state. By locking in the current low rate, legislators will be limiting a key tool to align the tax code with future needs.
  5. North Carolina’s economy has not boomed as a result of state leaders’ tax decisions. On many key indicators, North Carolina continues to fall short of delivering economic opportunity to all—poverty remains elevated, wages for the median worker are lagging, and there are still too few jobs for those who want to work.  North Carolina has also not outperformed our regional neighbors on other traditional measures of economic growth.
  6. Current legislative leaders have a list of major infrastructure projects that they would like to prioritize, and many local governments are also using bonds to invest in their capital needs. Rating agencies have typically looked at permanent tax and spending limits as a risky prospect, as states will have limited tools to raise the revenue to repay their loans.

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