NC Budget and Tax Center

To a man with a hammer, everything looks like a nail: G.A. pushes another business tax cut

The latest tax cut proposal from the leaders of the General Assembly, Senate Bill 622, will be heard later today in Senate Finance. It is more of the same.

As Mark Twain famously quipped — “to a man with a hammer, everything looks like a nail” — and indeed the leaders of the General Assembly have once again looked at the problems with our tax code and suggested that more tax cuts are needed. This time the proposal calls for reductions to the franchise tax — a tax paid overwhelmingly by businesses with high net worth — while continuing to use the flawed approach of increases in the standard deduction to address the state’s upside-down tax code.  (A tax code that currently asks middle- and low-income taxpayers to pay more than wealthy taxpayers will continue to fall short of what the state needs to maintain current services for the growing population.)

Senate Bill 622 doesn’t really address our flawed tax code or the urgent reality  that our state has at least $3.6 billion less than it would have had under the 2013 tax code, as well as a backlog of community needs that threaten to block our well-being and success in North Carolina.

You can read more about our analysis of the franchise tax proposal here.

Today, I want share our latest analysis of the issue with continued increases in the standard deduction. There have been a few such increases since the tax changes began in 2013.

Because a large number of North Carolinians claim the standard deduction rather than itemize, this is a poorly targeted tool to addressing the upside-down nature of the tax code. Analysis shows that, of the total net tax cut from the increase in the standard deduction, 27 percent will actually go to the top 20 percent while just 7 percent will go to the bottom 20 percent, whose income leaves them in poverty each year.

There is a better tool to address our upside-down tax code.  North Carolina leaders could take the dollars that they would commit to an increased standard deduction — roughly $90 million — and enact a state Earned Income Tax Credit.  The Earned Income Tax Credit provides working families who earn low wages with a credit against their total taxes paid — which often means refunding dollars back into their pockets so that they can meet basic needs and build assets.  A state EITC would deliver 36 percent of the net tax cut to working taxpayers in the bottom 20 percent of the distribution and zero percent to the top 20 percent. It would also add to the many benefits documented from having a federal EITC, including improved maternal and child health outcomes, educational success, and labor force participation.

It is time for the General Assembly to recognize that there are proven tools out there that our state’s families are missing out on because they continue to reach for a hammer when they need a more varied toolbox.

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