In the same session that North Carolina senators approved a proposal to cut taxes for high net worth companies, lawmakers have also passed legislation increasing the standard deduction.
The stated reasons for doing so is that it will reduce taxes for everyday North Carolinians by increasing the threshold of income upon which the low flat income tax rate, 5.25 percent, is applied. It will also, as proponents claim, mean fewer people will file income taxes.
The policy reasons for reducing the income tax rolls are limited. In the end, fewer people filing income taxes means fewer people are able to receive credits and deductions that could help them with the higher tax load they carry due to sales and excise taxes — not to mention rising property taxes at the local level.
The biggest problem with continuing to raise the standard deduction threshold is that a large number of North Carolinians claim the standard deduction rather than itemize. By continually increasing the income threshold, we are delivering a costly tax break that is poorly targeted to families struggling to get by. It is a policy that does less work than is needed right now to address the upside-down nature of the tax code.
Analysis from the Institute on Taxation and Economic Policy shows that 27 percent of the total net tax cut from the increase in the standard deduction 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.
As the state’s Fiscal Research Division notes, the increase in the standard deduction now up for consideration in the N.C. House would provide just $79 to taxpayers filing jointly and $39 to single taxpayers. It would also mean a reduction in state revenue of $180 million each fiscal year going forward once fully implemented.
However, for the taxpayer in North Carolina, the full effect of the bill is likely to be much less, because at the same time as senators voted to raise the standard deduction, they increased online sales taxes. So a taxpayer with $80,000 average income (the average taxpayer in the middle of the income distribution) will receive about a $52 tax cut from the standard deduction each year, but will pay $35 more in sales tax each year.
The pressure the Senate feels to ensure that their tax cuts for businesses and sales tax increase are coupled with a tax cut for families across the state shouldn’t lead them to make poor policy choices. The better option for delivering a bottom-up tax cut is a state Earned Income Tax Credit (EITC), a working family credit that helps taxpayers struggling to get by.
Such a policy would deliver a greater share of the tax cut to those in the bottom 20 percent, and target tax cuts to those with incomes below $60,000.
Without a final budget, the ability to measure alternative spending priorities will be sacrificed. It is irresponsible to pass another round of tax cuts. It’s even more irresponsible to use policies that are poorly targeted and serve only as cover for another round of tax cuts for big business.
Alexandra Forter Sirota is the director of the N.C. Justice Center’s Budget & Tax Center.