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.

NC Budget and Tax Center

Last week, Stephen Moore, an associate of Arthur Laffer and national consultant, penned an opinion piece in the Wall Street Journal making a claim totally unsupported by facts – that tax cuts are improving North Carolina’s economy.

Tax cuts that primarily benefit the wealthiest people and large, profitable corporations, coupled with the drastic reduction in the effectiveness of unemployment insurance to help those struggling to get by have not ushered in a stronger economy. Instead, North Carolina continues to experience a slow, uneven economic recovery buoyed only by national trends as the state backs away from the kinds of investments that are crucial to growth.

There is no link between the tax cuts and the revenue increase the state is experiencing this year. Instead, pundits like Stephen Moore and others in North Carolina, take simultaneously occurring conditions and claim a connection that doesn’t exist.  This would be like someone looking at the relationship between per capita cheese consumption and civil engineer doctorate awards and declaring that everyone should eat more cheese so we can produce more civil engineers.

What’s really happening is that state revenue is coming in above expectations because of the realization of capital gains and business income growth. It’s the same thing being seen in states that haven’t cut taxes (and one—California—that has actually raised taxes).BTC Job Growth from Recession Watch

Higher job growth rates and productivity are welcome signs in North Carolina. But it’s important to keep in mind our state’s economic performance is still below historic levels.  Take the change in employment, North Carolina’s job growth since the start of the last recession is well below where it should be relative to other similar time periods and that means we continue to struggle to repair the damage of the Great Recession.

Rather than helping the state’s economy, it’s becoming even clearer that the tax cuts hamper our ability to address the real challenges in our economy. For one thing, all income growth since the start of the recovery has gone to the top 1 percent of North Carolinians – those making more than $1 million a year. Average North Carolinians have seen their wages fall despite the official recovery. The jobs being created since the recovery are overwhelmingly work that pays too little to support a family and build a future. And, two thirds of the state’s counties have fewer people employed than before the Recession started.

Contrary to Stephen Moore’s hopes, there is no payoff from tax cuts in North Carolina. Instead, the state will struggle to rebuild and too many North Carolinians will struggle to get by because policymakers failed to realize that tax cuts are not an economic development strategy worthy of our state’s people and history.