NC Budget and Tax Center

This is a guest blog post from Luc Schuster, Deputy Director with the Massachusetts Budget and Policy Center. This blog post synthesizes and updates information in a longer MassBudget’s factsheet on Education Reform in Massachusetts, available online HERE.

Motivated by growing concerns that our schools were not serving all students well, especially those in high-poverty districts, Massachusetts passed the landmark Education Reform Act of 1993 (or Ed Reform), which included a bunch of changes to the way schools are financed. While pressing challenges remain, these changes helped position a much greater share of all Massachusetts children to learn and to thrive over the past couple of decades.

Ed Reform overhauled the state’s Chapter 70 education funding formula, making the distribution of state aid more adequate and more equitable by:

  • Creating a minimum required funding level for all districts. A district’s minimum requirement is driven by its “foundation budget,” calculated by considering the characteristics of its student population (e.g. the total number of kids in each grade and the number of low-income students).
  • Requiring communities to contribute revenue based on a uniform calculation of their local tax-raising capacity.
  • Providing state aid to fill the gap between a district’s foundation budget and its required local contribution.

As part of a grand bargain to couple new policy reforms with greater state investment, Ed Reform included an ambitious commitment to increase education aid to local districts. The timing of this commitment coincided nicely with strong state economic growth, and education aid roughly doubled over the 1990’s. But the state’s fiscal situation deteriorated by the early 2000’s, due in large part to the annual loss of about $3 billion in revenue resulting from state-level income tax cuts phased-in between 1998 and 2002. With less revenue to support state programs, funding progress of the 1990’s has been partially reversed since 2002.

Part of the original motivation behind Ed Reform was a sense that the nation was rapidly moving towards a knowledge-based economy with a growing premium placed on the skills of a state’s workforce. This movement has continued over the past twenty years, underscoring the importance of investing in the education over the long term (see A Well-Educated Workforce is Key to State Prosperity).

Back in the late 1970’s states with more highly-educated workforces tended to have somewhat higher wages, but the relationship was pretty weak, with many outliers. States like Michigan and Ohio, for instance, were among the highest-wage states, even though they had lower levels of education, largely because these states had healthy manufacturing sectors with jobs that paid relatively well for people with only a high school degree.

Largely by 1993, and even more so today, there was a much stronger relationship between median wages and the education of a state’s workforce, with many fewer outliers. State leaders were right to identify the changing dynamic of education as the pathway to greater economic well-being back in the early 1990’s, and it appears that education will continue to play a central role in our state’s ability to build a strong, high wage, economy.

MA Scatterplot

NC Budget and Tax Center

Both House and Senate budget writers did the right thing by putting the $400 million projected surplus this year towards reserves.  This is important because North Carolina’s revenue collection surprise in April was largely the result of national trends that saw strong performance in capital gains income, a likely one time event.

The challenge, of course, is that budget writers do reduce the corporate income tax rates in the context of this one-time event.  The House allows the automatic trigger to go into effect reducing the rate profitable corporations pay down to 4 percent because the one-time collection above expectations meets the revenue threshold established in statute.  The Senate makes permanent the tax cuts for corporations regardless of current or future revenue collections but does so, in part, using the latest revenue news as justification.  Importantly, while collections are above expectations, as my colleague identified in a previous post, they are not above pre-recession levels or stronger than historic performance. Thus the decision to further reduce the state’s revenue sources based on a one-time event is not fiscally prudent.

In this week’s Prosperity Watch we wrote about more of the research into the national trend that drove an increase in personal income tax collections at tax time.

38 of the 41 states that have a broad-based personal income tax saw an average year over year growth in personal income tax collections of 11.5 percent according to a new report by the Rockefeller Institute of Government. Overall, 36 of the 38 states saw growth in personal income tax collections, with only Kansas and Illinois seeing a decline. North Carolina joined 25 other states in reporting double-digit growth in year over year personal income tax collections. Notably, other states that experienced similarly strong growth in their personal income tax collections did not pursue tax cuts and some states, California and Connecticut for example, raised taxes.

Read more here.

 

NC Budget and Tax Center

When the Senate leadership provided an overview of their budget proposal, what you didn’t hear were all of the investments that are missing from their proposal due to the huge price tag of their tax plan – a tax plan that will do nothing to strengthen our economy. If it weren’t for this tax plan, North Carolina would have more to invest in our public schools, in the health of families, the efficient delivery of justice and in communities across the state. We wouldn’t see Teacher Assistants sacrificed for smaller class sizes or higher tuition rates at community colleges to finance pay raises for professors.

But even more troubling is the speed with which policymakers hope to move forward on a proposal that was not released in full until midnight and for which amendments to the tax plan were not allowed in committee.. A more transparent and inclusive process for developing this important document that sets the state’s priorities is needed to ensure that the choices are clear and considered.

NC Budget and Tax Center

Last week, we raised concerns with the Senate leadership’s new tax plan. Rather than reinvesting and regaining ground lost in recent years, the Senate is pursuing another round of costly income tax cuts. When fully implemented, the $1 billion price tag for the Senate tax plan will mean North Carolina must forgo investments in the foundations of a strong economy—educating our children, ensuring courts run efficiently, building healthy and safe communities.BTC Who Pays Senate Tax Plan

The Senate tax plan does nothing to fix the problem with the state’s upside-down tax code, according to analysis of the plan using an economic incidence model that provides population-level estimates of the average tax change for taxpayers by income group of all tax changes. In fact, the Senate tax plan makes such small changes regarding who pays taxes it suggests that the goal of the plan is not to fix the problems with the tax code but continue to make the tax system less adequate and thus underfund public services. The figure below demonstrates the total share of income paid in state and local taxes by income group identified by the average income in each quintile and for the top 5 percent and 1 percent respectively. The red bar reflects current law and shows that low and middle income taxpayers in North Carolina pay more than those at the top. The green bar shows law under the changes proposed in the Senate tax plan: not much different.

Here are a few more key findings from an analysis of the Senate tax plan:

  • The net tax changes result in modest, if any, changes to the tax contributions across the income distribution. The bottom 20 percent would receive a total tax cut of around $20 on average while the top 1 percent would receive on average a tax cut of slightly more than $300. That dollar amount for the top 1 percent represents 0.03 percent of their average annual income.
  • The biggest winners of the tax plan are the wealthiest North Carolinians because the status quo is maintained. The plan does nothing to fix the upside-down nature of North Carolina’s tax code which asks more from middle and low-income taxpayers and a lot less from the state’s wealthiest. The choices in this proposal build on the 2013 which made worse the inequities in the tax code. An estimated 90 percent of taxpayers in the top 20 percent receive an income tax cut under this plan. For the bottom 80 percent of taxpayers, just 72 percent would receive an income tax cut.
  • The sales tax base expansion will ask more of the state’s low- and middle-income taxpayers as a share of their income. Without a better-targeted tool, like a refundable state Earned Income Tax Credit, the increase in sales taxes is not effectively offset by the proposed higher standard deduction. For the bottom 20 percent of taxpayers, the income tax cut is reduced by 40 percent because of sales tax changes. The sales tax base expansion is also modest in its ability to generate revenue. The sales tax changes represent roughly $200 million in revenue, covering just a third of the revenue lost from personal income taxes in the second year according to the Fiscal Research Division.
  • The combined changes to personal income, corporate income and sales tax will reduce state revenue by $1 billion when fully implemented. Not only does the plan fail to address the upside-down nature of the tax code, it falls short of achieving another core principle of a tax system: adequately funding public services. One billion dollars less in state revenue will mean fewer textbooks in the classroom, no teacher pay raises, no funding for additional students, no dollars for modernization of the justice system and no support to provide for the health and well-being of seniors, children and our struggling communities.

The income tax rate cuts in the Senate tax plan have the effect of eroding the state’s ability to invest while making little to no impact on economic outcomes for individual taxpayers or the broader economy.

NC Budget and Tax Center

Despite the clear need to make investments that will put North Carolina on sounder economic footing, the Senate is proposing another round of tax cuts that will hinder the state’s progress, including more income tax cuts and tax breaks for certain businesses. This is a strategy that has failed in many other states.

Now is a critical moment in the economic recovery, and we must leverage this moment to reposition the state’s economy to work for everyone. But this requires that lawmakers raise enough revenues to ensure a quality education for every child, support an efficient and impartial judicial system and provide for the health and safety of all North Carolinians.

If the Senate continues to pursue tax cuts above reinvestment, it will compromise our quality of life and competitiveness now and in the future.