NC Budget and Tax Center

An income tax rate cap is still bad policy

A modified Senate Bill 75 was approved by the House Finance committee this afternoon, raising the proposed income tax rate cap from 5.5 to 7 percent, to try to address concerns with the previous state Constitutional amendment proposal.

There is no fix that can make the income tax rate cap work for North Carolina.

If the goal is to keep taxes and spending low, income tax limits have been found in several academic analyses to be ineffective. These analyses find that pressing needs for public services and funding end up being supported through other fees and taxes going up. Shifts to greater local government responsibility for funding have also commonly been found to occur, which in North Carolina would primarily result in property tax increases.

The American Enterprise Institute, a strong supporter of austerity and small government, found tax limits to be largely ineffective and a poor “substitute for the hard work of long-term public education and persuasion about the central benefits of limited government.”

The reality is that North Carolina policymakers in the leadership have already pursued their goal of lower income taxes with 10 straight years of declining state investments as a share of the economy.  The result has been fewer dollars for each child’s education in the early years and through high school,  more expensive post-secondary education, crumbling infrastructure, and declining investment in the well-being of families—from water quality to public health—and communities.

An income tax cap won’t allow future policymakers to ensure that the tax code can meet these current and future needs. Already Fiscal Research projects that the current tax choices will put pressure on future policymakers to cut spending or raise other taxes in the near future.

Capping the income tax rate in the state Constitution to lock in recent tax decisions is ineffective, unnecessary and harmful to North Carolinians and our state, now and in the future.

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