NC Budget and Tax Center

A half dozen economic challenges that tax cuts at the top don’t fix

North Carolina legislative leaders are once again debating the value to our economy and well-being of cutting taxes for the wealthy and big companies. The debate tends to remain constrained to the short-run evidence from 2013 to the present on various traditional economic indicators at the state level. My colleague Patrick McHugh has pointed out that a review of that data should lead us all to conclude that the tax cuts since 2013 have delivered no special boost to the state’s economy.

And yet, we should also be considering the opportunity cost of North Carolina’s tax cut experiment.

It has kept our state from addressing genuine economic challenges that public policy and public investment could make progress on in favor of a flawed economic theory that at worst exacerbates the challenges and undermines a pathway to better economic outcomes for all.

Here are just SIX of the economic challenges that North Carolina faces that are not addressed by tax cuts at the top or for big companies:

  1. Job growth is concentrated in just a handful of counties, leaving the rest of the state struggling with too few jobs for those who want to work and the need for infrastructure to connect people to the areas where jobs do exist. Tax cuts that focus on reducing the rate on corporate profits don’t target the small businesses and homegrown companies that are the primary job creators statewide and integral to the smaller communities across the state. Instead, these tax cuts are primarily delivered to shareholders, many of whom do not even reside in North Carolina. At the same time, tax cuts drain the state of revenue that could provide dollars to local governments and regions to connect each community to where the jobs are.
  2. Income inequality continues to rise across the country and in North Carolina. Since the recovery began in 2009, until the last available data in 2015, the top 1 percent in North Carolina have captured more than all of the income growth. How is such a thing possible? The answer: When the income of the bottom 99 percent of North Carolinians actually declines over the same period. As has been well documented in the academic literature, there is no consensus that tax cuts for the highest income taxpayers will lead to new job creation.   Tax cuts at the top have made worse the concentration of income.
  3. The job growth that is happening isn’t paving the way to the middle class for majority of North Carolina workers and isn’t strong enough to accelerate wage growth for all. The quality of jobs that get created in an economy matter for the ability of those jobs to improve well-being. When jobs pay too little for people to make ends meet or make it difficult to move up the economic ladder, the ability to reach our economic stride is blocked. Read more
Education, Higher Ed, NC Budget and Tax Center

Reaching our state’s educational attainment goal

At this time of year, graduation stories are ever-present, yet their broader meaning to the strength of our economy is less discussed, as are the real barriers to completion that many young people face.

The research is clear that states with large numbers of bachelor’s degree holders have higher median wage levels than other states, according to the Economic Policy Institute. An advanced education also helps make workers more upwardly mobile in North Carolina. The Working Poor Families Project reports that the median earned income for someone with a bachelor’s degree is $18,000 higher than for someone with only a high school diploma.

Recognizing these real economic and community benefits, state leaders through the myFutureNC commission have set a post-secondary attainment goal that by 2030, two-thirds of North Carolinians aged 25 to 44  will hold a post-secondary degree, with a commitment to ensure that workers are acquiring skills and credentials that align with the goals of the state.

One overlooked source of people who can help North Carolina reach its goal are the Dreamers who have been educated here in North Carolina and are blocked from a pathway to post-secondary attainment due to their arrival to this country without documentation, as well as the lack of a tuition equity policy in our state.  Dreamers seeking to attend college in North Carolina are forced to pay out-of-state tuition – often 300 percent higher than the in-state tuition their peers pay – despite having spent their childhoods enrolled in North Carolina schools. In recognition of the inequity this creates, 21 states across the country have set up policies that recognize the investment that young people have in their educational futures and that communities have made in their education to date.

Estimates based on new data from the Migration Policy Institute suggest that, in North Carolina, an expanded tuition equity policy could benefit at least 1,470 graduates each year.

In a brief we released earlier today, Lissette Guerrero looks at the already significant economic contributions of all foreign-born workers and notes the critical role that post-secondary attainment and access to skills training for adult workers could provide in further boosting the economic and community contributions of these workers.

Indeed, as we have written about in the past on the topic of tuition equity, tuition equity can improve educational opportunities for young people in North Carolina and in turn boost employment outcomes and the productivity and growth of industries and the broader economy.

Tuition equity led to a 31 percent increase in college enrollment for undocumented students and a 33 percent increase in the proportion of Mexican young adults with a college degree in the states that adopted the policy. In addition, the average high school dropout rate decreased by 7 percentage points—from 42 percent to 35 percent—in states with tuition equity.

As yesterday’s Undocugraduation event demonstrated, the potential of young Dreamers is vast and important and to continue to block these youth from accessing post-secondary education would  put that potential to waste.

NC Budget and Tax Center

April labor market data confirm NC job growth is still unexceptional

The data released last Friday by the Bureau of Labor Statistics affirms the message delivered on the Senate floor last week by some lawmakers. North Carolina has not experienced a surge in employment nor is the state’s level of employment in a better position compared to historic levels. The tax cut experiment since 2013 has failed and due to the loss in the ability to fund foundational investments to a strong economy—health and well-being of families, education of children and the workforce, infrastructure in communities and regional connections—it is likely to hold us back from reaching our full economic potential

As noted on the Budget & Tax Center’s labor market update for April 2019, year over year job growth was just 1.6 percent, below the national average of 1.8 percent. North Carolina’s employment growth remains in line with regional neighbors and has not achieved notable acceleration from tax cuts.

The state’s unemployment rate has remained steady over the past year, hovering around four percent. Unlike the recent trend nationally, North Carolina’s labor force continues to grow albeit slower than the working age population. This is likely due to the reality that there are still too few jobs for those who are looking for work.

North Carolina’s employment to population levels remain below historic levels and below the national average as does our labor force participation rate. North Carolina needs to create 16,000 jobs each month to get back to pre-Recession employment levels in three years.  While clearly getting back to that level sooner should be the goal, the month over month change in employed persons has not hit that 16,000 threshold since January 2018.

 

NC Budget and Tax Center

House budget proposal: Thank goodness for the Feds?

Despite the consensus among members of both sides of the aisle — CEOs and working families, rural and urban leaders alike — that early childhood investments are critical to the well-being and economic development of the state, another budget proposal in North Carolina falls short of funding investments in our youngest children in the specific areas and at the levels needed.

The House budget makes only modest year-over-year increases in core early childhood investments in Smart Start, child care subsidies, and pre-K programs.  Investments would increase by 1.7 percent for child care subsidies over last year, by 7.5 percent for Smart Start and by 6.5 percent in pre-K.

These increases fall short of reaching the infants, toddlers or pre-schoolers that are currently not served by quality early childhood programs.

These increases also don’t fully address the issue of an eroding infrastructure that is needed to support quality programming, the specific training and compensation needs to keep a competitive workforce of early childhood educators, and the building of classrooms across the state.

Moreover, these budget changes continue to increase reliance on federal block grants to support the funding of state priorities. House leaders approved swapping out state dollars in pre-K and child care subsidies for federal funds from Temporary Assistance for Needy Families and Child Care and Development block grant funds.

The result is that relative to FY2012-13 (the last year that state appropriations data was readily available), state funding for child care subsidy and NC Pre-K would be down more than 50 percent.

The result is also that the state is missing out on advancing major initiatives that would improve the quality and access to early childhood education.  For example, the House budget proposes setting aside the minimum amount of dollars for quality measures as required by federal law.

The bottom-line of this budget story is once again that, despite consensus and a broadly shared understanding of what is needed to support the well-being our state, the cost of tax cuts each year is making it impossible to align our budget to those priorities.

NC Budget and Tax Center

NC tax collections likely to exceed projections, but leaders should proceed with great caution

Yesterday’s announcement that revenues are likely to come in over projection after review of April tax filings should not lead policymakers to the wrong conclusion or harmful policy choices.

Instead, as the state’s Chief Economist at the Fiscal Research Division and the head of the Office of State Budget and Management note, more time is needed to assess whether the anticipated $700 million in collections over projection should be considered one-time dollars or should result in ongoing expectations that the state will bring in more revenue each year than what had previously been expected.

They anticipate completing that analysis before the Senate proposes its budget later this month.

Whatever their decision on what this going forward, we don’t have to wait to know where we continue to be today.  The state will still have $900 million less next fiscal year because of the full cost of rate reductions that began on January 1. In total, the state tax code is still bringing in at least $3.6 billion less than the pre-2013 tax code would have under current conditions.

It is important to recognize that states should see revenue raise each year because a sustainable, adequate system would have revenue collections rise as the economy does well and as the costs for delivering services rise as well. States across the country are reporting similar increases in revenue which most experts attribute to the economy and importantly stock market doing well.

There are some nuggets in the announcement that can tell us something about what is happening in our economy and what it means for our tax code.

  • The potential overcollections equal a roughly 3 percent revenue increase which highlight the continuation of “stable, modest growth in the state economy.” That is these growth while above what was projected are in line with what should be happening in the economy but are not exceptional results.
  • The majority of the over collection is from capital gains and dividend income and corporate profits being higher than anticipated. Again, this follows from a strong stock market but does not provide evidence of a broader benefit to workers. In fact, wage and salary income is performing at projections.

The bottom line is that we should expect our state tax structure to deliver more revenue year over year in a good economy.  Policymakers shouldn’t take this as evidence that tax cuts are resulting in more revenue but that the national economy is doing well for some.

The reality remains that all around us in communities is evidence that our public investments are struggling with the constraints imposed by years of tax cuts.  We still have $3.6 billion than we would have had under the old tax code, $3.6 billion that would go a long way to meeting our priorities in education, early childhood, environmental protection and health care.

Alexandra Sirota is the Director of the N.C. Budget and Tax Center.