NC Budget and Tax Center

The Senate Tax Plan Fails to Fix the Problem

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

Statement on Senate proposal to further cut taxes

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

North Carolina is not the poster child for trickle-down economics

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.

NC Budget and Tax Center

California’s economic and fiscal recovery

This post is authored by Chris Hoene, Executive Director of the California Budget  & Policy Center. 

In November 2012, California voters approved Proposition 30, a constitutional amendment that increases personal income tax rates on very-high-income Californians through 2018 and raises the state’s sales tax rate by one-quarter cent through 2016. Governor Jerry Brown championed and campaigned for Proposition 30 after state policymakers’ made widespread and deep cuts to various state programs and services during and after the Great Recession. Confronted with ongoing state budget shortfalls, and the threat of additional cuts to education and other vital services, the Governor, other state leaders, and a broad coalition — encompassing educators, labor, health care providers, faith organizations, community groups, businesses, and others — backed Proposition 30’s temporary tax increases as a means to stabilizing the budget and ensuring adequate revenues to support public investments that would position the state for economic growth.

What has Proposition 30 meant for California? Since its passage, the state’s General Fund revenues have grown from $93 billion in 2012-13 to a projected $115 billion for 2015-16. This has been driven by a combination of economic growth and Proposition 30’s tax increases, but Proposition 30 alone raises approximately $8 billion for 2014-15 (the current fiscal year) and that figure is expected to be even higher in 2015-16. These new revenues have allowed the state to significantly reinvest in K-12 schools and community colleges. In 2011-12, the low point for state budget after the recession, the state’s commitment to schools and community colleges totaled $47.2 billion. For 2015-16, this commitment is projected to be $68.4 billion. Looking just at K-12 schools, the growth in state spending since 2011-12 amounts to an increase of more than $2,000 per student. California also has slowly begun to reinvest in its state university systems (the California State University and University of California), has created and invested in a new and stronger rainy day fund, and is paying down budgetary debts. Currently, the state is poised to enact its first-ever Earned Income Tax Credit (EITC) in 2015-16, a refundable tax credit targeted to the state’s lowest-income households. Read more

NC Budget and Tax Center

Predictions of Minnesota’s economic demise were greatly exaggerated

This guest post was contributed by Nan Madden, director of the Minnesota Budget Project in St. Paul, Minnesota.

Minnesota is basking in some attention in news outlets across the nation highlighting its strong economy, low unemployment numbers and a median wage sitting above the national average.

That’s not the scenario painted two years ago by opponents of Minnesota’s tax reform bill. At the time, opponents predicted economic catastrophe. Instead, Minnesota is thriving.

In the last two years, Minnesota has made smart changes to its tax system that positions the state well for long-term economic growth. The 2013 tax reform plan came after years of budget deficits and deep cuts to public services, and it allowed the state to make investments that lay a strong foundation for prosperity, including increased funding for early childhood education, schools and more affordable higher education. These investments will pay off in the long run by producing the highly-educated workforce that has been one of the keystones to Minnesota’s economic success.

These changes also modernized the state’s tax system so that it generates adequate revenue for a thriving state in a 21st century economy, and made the distribution of taxes across income groups more even.

A vital component of the 2013 tax reform was the creation of a new income tax rate on the 2 percent of Minnesotans with the highest incomes. The package also raised revenues by ending several corporate tax preferences and increasing tobacco taxes. The 2013 tax reforms – as well as actions in 2014 – took additional steps to make Minnesota’s tax system less regressive. Lawmakers expanded Minnesota’s state Earned Income Tax Credit and increased property tax refunds for renters and homeowners.

And a study released earlier this year from the Minnesota Department of Revenue shows those efforts have moved us in the right direction. Overall, the tax changes made the past two years raised taxes on the highest-income Minnesotans closer to the state average, and lowered taxes for all other income groups. While our tax system is still regressive, meaning the percentage of income paid in taxes goes down as incomes rise, it will be significantly less so in 2017 than 2012. The highest-income Minnesotans still pay the smallest share of their incomes in total state and local taxes, but the gap between them and other Minnesotans has closed considerably.

After more than a decade of frequent budget deficits, Minnesota now is fortunate to have a $1.9 billion surplus for the upcoming two-year budget cycle. The surplus doesn’t mean the state should reverse course. As Minnesota’s legislative session enters its final weeks, we’re urging policymakers to continue on the path of making our tax system more fair and not offer large, unsustainable tax cuts to a privileged few.

While Minnesota’s economic success is making headlines today, the tax reforms taken over the last two years have set the stage for economic progress for years to come.