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.

NC Budget and Tax Center

Another Policy Proposal Ignores Reality of Today’s Job Market

Leaders in the General Assembly appear poised to take health care away from parents with low income through a change to Medicaid,  and they plan to do it using a budget process where no amendments can be offered.

The change would likely take the form of what some other states have proposed, requiring a certain number of hours each month in order to maintain health care access.  This plan ignores the reality facing more and more working North Carolinians who don’t control their schedules and are often at the mercy of economic forces beyond their control.

For this reason, and given what we know about what has happened when implemented in other areas, rigid work requirements will not deliver on the intended goal of increasing employment.  Indeed, researchers have documented the ways in which this could actually reduce employment in the long-term and grow poverty.  It may also be too harsh to receive federal approval.

Here are key facts about today’s labor market that legislators should consider as they seek to take health care away from parents with low income:

  1. There are too few jobs for those who want to work. Despite the state’s employment growth since the national recovery began in 2009,  there are still 87 counties where there are more jobless workers than job openings. In many communities, finding work is still a challenge, regardless of whether elected leaders in Raleigh accept that fact or not.
  2. Work is increasingly unstable resulting in a lack of consistent work hours each month. Research by the Center on Budget & Policy Priorities finds that of low-income adults who have worked in the past year, at least 1 in 4 have less than 80 hours of work in at least month.  This threshold is the one used by Kansas to determine eligibility on a month by month basis and failure to meet it means the loss of health insurance for a period. The issue of unpredictable hours is prevalent in the labor market and has created increased income volatility and economic hardship.
  3. Temporary and contingent work means despite working in a year, many workers face unpredictable employment. Temporary work has grown by 52 percent in North Carolina compared to 32 percent growth in the national economy.  Temp workers in North Carolina earn well below the national average. Temporary workers have little control over how many hours they work in a given month, which could put their healthcare coverage at risk through no fault of their own.
  4. Work at minimum wage doesn’t pay enough to make ends meet. A minimum age worker in North Carolina with one child who works just below the 80 hour a month threshold or 20 hours a week would qualify for Medicaid.  The annual income limit for Medicaid is 43 percent of the Federal Poverty level for an adult.
  5. Our labor market depends on public policies that make sure people can get by in low-wage work. One in five North Carolinians can’t afford to make ends meet in North Carolina based on work alone.  Food assistance and housing support, health insurance and child care subsidies aim to ensure people meet their basic needs and stay connected to the workforce.  Restricting access to these supports hurts employment outcomes and the well-being of families.  It also creates the wrong incentives by creating “cliffs” for working people where adding hours and income push them out of eligibility without ensuring that they can secure the needed benefit through work.  This is clear in North Carolina where those receiving Medicaid who could be subject to a new requirement to work a certain number of hours in the month and can’t meet it would be pushed into the coverage gap.  As a non-expansion state, North Carolina would be driving people out of a pathway to self-sufficiency.

On the heels of hundreds of business leaders, workers and advocates gathered in Raleigh on Tuesday to ask legislators to raise the state’s minimum wage from the current federal level of $7.25, it is clear our legislative leaders continue to miss the opportunity to advance policies that address the most pressing issues in today’s labor market.

Now they could consider a policy proposal that would actually make things worse for North Carolinians.

Let’s hope they reject including work requirements in the budget bill and taking health care away from low-income parents.

NC Budget and Tax Center, Uncategorized

Governor Cooper recognizes North Carolina is in a hole, stops digging

Governor Cooper released a proposed budget for 2018-19 that takes an important, though modest, first step in reversing the state’s failed tax cut experiment. The Governor proposed freezing corporate income tax rates at 3 percent rather than allowing them to drop again in January 2019, while also stopping personal income tax rate cuts on higher incomes.

Combined, this fiscally responsible approach will ensure $110 million is available in 2018-19 for public investments in areas that have immediate needs. Over the full Fiscal Year, the result will be an estimated $223 million in revenue available. Even more work will be required to undo the years of cuts that have been the priority of North Carolina’s General Assembly.

The hole we are in is deep.

This prudent first step in this year’s budget process demonstrates, however, what is possible when leaders put public investments before tax cuts. The Governor’s budget invests in a number of priorities in communities across the state, including increasing the number of school nurses and psychologists, funding classrooms, ensuring the Department of Environmental Quality gets the funding it needs to monitor air and water quality, and funding the transition of young people to the juvenile justice system under the Raise the Age proposal, among others.

There is no doubt that the damage of cutting tax cuts to our public institutions and communities has been years in the making and a more thorough adjustment from the tax-cutting approach will be required.

That should not diminish the importance of Governor Cooper’s recognition  that the first step when realizing you are in a hole is to stop digging.  Let’s hope the General Assembly follows suit.

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