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Statement on the Passage of the Income Tax Cap Proposal

The passage of Senate Bill 75, proposing a Constitutional amendment capping the income tax rate to lock in recent legislative decisions to reduce rates, is fiscally irresponsible and unnecessary.

In order to keep funding vital public services such as schools and public safety, lawmakers will likely have to raise the sales tax or fees, which will eat into middle class families’ paychecks and financially hurt those who are already struggling to get by.

Lawmakers are not trying to bring greater democracy to the budget process; they are trying to take choices away from future generations of North Carolinians.  Voters in November should reject this effort to limit the tools available to future policymakers and the will of future voters.

Constitutions should be flexible and enduring frameworks for governing, not the place to impose the arbitrary whims of the moment on future generations.

The vote shows just how arbitrary the rate is that legislators choose to enshrine in the state Constitution. The bottom line is that this is about further locking in low tax rates that primarily benefit the wealthy, cutting public investments that serve the common good, and shifting the costs for our state’s needs to local governments and the middle class.

In the end, the results of this unnecessary amendment will be costly for us all.

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.

NC Budget and Tax Center

Limits on income tax will put immediate pressure on policymakers to raise other taxes

The income tax cap being considered by the House this week would put public investments at risk and is likely to force policymakers to raise other taxes to meet growing needs in the near term.

Last summer, the Fiscal Research Division provided a 5-year forecast of the state’s fiscal position that took into account the state’s growing population and the cost of delivering just current service levels to more people over time.  Their findings were, that in Fiscal Year 2019-2020, North Carolina policymakers would not have the revenue to deliver the same diminished services to future populations. Even under revisions to revenue collections next year, this finding holds.

The state’s current tax code, resulting from the tax cuts since 2013, and  growth still slow relative to historic performance is primarily to blame.  An income tax cap now would lock in the $2.6 billion in annual revenue loss from these tax changes since 2013 and make it more difficult to make decisions that responsibly balance the state budget.

The near term prospect of state policymakers raising revenue is real.  It is not hypothetical.

Indeed, in the briefing of House Finance on the bill, the Senate sponsor made clear that many other taxes could be raised should the state need to meet growing needs—franchise taxes, sales taxes and more.  He also made clear that many deductions or credits could be gotten rid of, including reductions or elimination of the standard deduction.

The income tax cap is not about holding taxes low for everyone. It is about limiting the tools available to future policymakers and locking in the income tax cuts that have primarily benefited the state’s wealthiest taxpayers.

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.
NC Budget and Tax Center

Statement from Budget & Tax Center Director Alexandra Sirota on legislative budget proposal

For yet another year, legislative leaders won’t invest in our classrooms, our health, and our communities at the levels needed to provide for the wellbeing of every North Carolinian. They won’t do so because they continue to keep in place $900 million in tax cuts for January 2019, building on a failed tax-cut experiment that has already resulted in $2.6 billion in annual revenue loss.

Their commitment to tax cuts above communities will keep North Carolina on track to fall farther behind our neighbors. North Carolina now invests less per student than South Carolina.

Their commitment to tax cuts above people’s wellbeing will keep North Carolina on track to lose ground in connecting more people to opportunity as the state’s population grows. Our state’s tax code will fail to meet current service needs as early as next year, according to official estimates.

Getting back on track will require listening to North Carolinians and what they need to thrive. A behind-closed doors budget process without any opportunity for changes in the legislative debate blocks out the concerns of teachers, parents, students, and community leaders.

A budget should be about how to ensure every North Carolinian can connect to opportunity. It shouldn’t be used to boost the wealth of the few at the expense of us all.