Commentary, NC Budget and Tax Center

Coming Trump/Ryan tax proposals promise giveaways to the rich; hard times for North Carolina

Donald Trump speakingAs my colleagues have detailed over the past few weeks, President Trump’s budget blueprint proposes significant cuts to major programs and funding that support economic opportunity, health and well-being of North Carolinians. These cuts will allow the President to pursue increases in defense spending.

They are also required if the President and Speaker Ryan are to pursue the kind of overhaul of the federal tax code that would reduce revenue significantly over time. As has also been noted, much of the discussion of the federal tax changes has also been tied to the repeal of the Affordable Care Act where savings from reducing health care coverage are hoped to allow for the depth of tax cuts desired.

While we wait for the details on federal tax changes from President Trump and Congress, it is useful to review past proposals. These proposals have included reducing the corporate income tax rate and eliminating the alternative minimum tax for corporations, reductions in personal income tax rates and transfer tax as well as elimination or capping of itemized deductions and increases in the standard deduction among many other changes.

Here is what analysts have found in reviewing these proposals.

  1. The tax plan Trump put forward during his campaign would increase the federal debt by $20.9 trillion by 2036.
  2. The “Better Way” tax plan proposed by Speaker Paul Ryan would reduce the effective tax rates for the most well-off Americans by 8 percent, a change that is four times bigger than the change in effective tax rates for any other income group.
  3. Both tax plans represent a significant tax cut for the top 1 percent of taxpayers.
  4. The Border Adjustment Tax proposal for how the US would tax corporate profits would be regressive, fail to end offshore tax avoidance and violate trade agreements.

Because North Carolina’s tax code is tied to the federal code in various ways, the changes at the federal level will have an impact on states’ revenue collection and who pays. It is difficult to say exactly what the end result for North Carolina would be not least because the state has changed so much of its tax code in recent years. However, as ITEP writes, from eliminating the estate tax to treatment of capital gains and interest to “ending the deductibility of state and local taxes, creating a new deduction for child care expenses, changing the taxation of carried interest, altering expensing of business investments, and other corporate tax changes such as “border adjustment” could all have ripple effects on state revenue systems.”

Most notable in the overall assessment of the current federal tax code proposals is that it will become less progressive. And that means many North Carolina taxpayers will face an even heavier tax load given the already regressive nature of the state’s tax code today.

NC Budget and Tax Center

Why cutting taxes for business again makes no sense

When businesses pay their share of taxes, North Carolina is able to invest in the things that build thriving communities and a prosperous economy – things like good schools, roads, public health and a clean environment.

The Senate’s tax plan, Senate Bill 325, includes a tax cut for businesses that goes against this proven principle.  There are four reasons why this plan will move our state backwards.

  1. North Carolina’s corporate income tax rate is already the lowest in the country.

North Carolina’s corporate income tax rate, now 3 percent, is the lowest in the country among 32 states with a flat corporate income tax rate, and the states with graduated corporate income taxes all have top rates above 3 percent as well. (Four other states – Nevada, Ohio, Texas and Washington – do not have a corporate income tax; they impose a gross receipts tax – which is a tax on the total gross revenues of a company).

On January 1st of this year, North Carolina reduced the corporate income tax rate from 4 to 3 percent which will reduce revenue by $500 million when in effect for a full fiscal year.  This was an automatic reduction built into the 2013 tax changes that is happening even as enrollment costs associated with public schools and universities are increasing and health care costs for retirees are rising.  It happens as the state struggles to rebuild Eastern North Carolina communities post-Hurricane Matthew and cope with the implications of the increasing likelihood that Congress will shift more costs to states.

  1. Another corporate tax cut will not lead to meaningful economic growth, research indicates.

The proposed corporate tax cut will not provide the needed local boost to address North Carolina’s economic challenges or catalyze greater job growth where it is needed.  That is because, as research has found, the impact on corporate investment of a small cut in the corporate tax rate would not only be small but require years to fully take effect.  The consensus of that research is that even a very large, 10 percent reduction in total state and local taxes paid by businesses – much larger than the reduction in corporate income taxes alone in the Senate bill – is likely to increase economic output and jobs by only about 2 percent before accounting for any offsetting negative impact on the provision of public services that businesses rely on such as efficiently run courts and high quality public schools that help build an educated and trained workforce.

Additionally, there is no reason to believe that tax cuts going to big multistate corporations will benefit North Carolina’s economy: businesses may choose instead to use the money to finance out-of-state investments or distribute these additional dollars in the form of dividends to their shareholders who mostly live out of state. Estimates by the Institute on Taxation and Economic Policy suggest that just 18 percent of the corporate income tax rate cut would stay with residents of North Carolina.

  1. Cutting income taxes on small business won’t do much for North Carolina’s economy, either.

The Senate bill proposes an additional cut in the personal income tax rate, sometimes justified on the grounds that this will encourage job creation by small businesses that pay tax on their profits through the personal income tax rather than the corporate income tax.  But Kansas completely eliminated its personal income taxes on these businesses and the rate of small business startups actually declined in the following two years. Read more

NC Budget and Tax Center, Trump Administration

Coverage losses, cost shifts to North Carolina could result from US House vote today on health care coverage

The U.S. House of Representatives is set to vote on the American Health Care Act today which seeks to strip the health care coverage extended to millions of Americans in recent years, shift the cost of health care onto middle and low income consumers and give the wealthiest taxpayers a tax cut.

It has been called by many the greatest redistribution upward in memory.

It is also a cost shift onto states.  North Carolina policymakers would have to find an estimated $6.6 billion over 10 years to maintain the Medicaid program alone.  To do so, state policymakers will have to raise taxes or cut services or cut off people from health care or cut payments to providers.  At a time when North Carolina’s leaders are contemplating their existing spending priorities with a tax code that continues to fall short of the needs, finding an additional $6.6 billion over ten years will be impossible without many of these steps.

The proposed restructuring of Medicaid represents unnecessary changes to a program that serves the state’s most vulnerable residents efficiently and with the goal of improving health outcomes of all North Carolinians.  This is a retreat by the federal government that will leave state policymakers responsible for the rationing of care and fallout from the health care industry.

Over time, as my colleague Luis Toledo detailed in recent analysis, these pressures on state government will grow.  The adjustment of the amount that the federal government will provide to North Carolina is not sufficient to keep up with the cost of services nor will it allow the state to contend with the next public health crisis or emerging treatments for existing diseases.

The loss of health care coverage through the dismantling of the Affordable Care Act and the restructuring of Medicaid will ripple through North Carolina, impacting families, health care providers and, yes, the economy.

NC Budget and Tax Center

Four big problems with the NC Senate’s latest tax cut proposal

Senate leaders announced last week that they will file a “Billion Dollar Middle Class Tax Cut Act,” which is misnamed. It will actually continue to deliver the greatest tax breaks to wealthy taxpayers and profitable corporations and drive North Carolina ever closer to a zero income tax. The result will likely be a combination of underfunding needed public services in communities across the state and shifting the tax load to low- and middle-income taxpayers through increased sales and property taxes down the line. Here are four huge problems with the proposal:

1. Another $1 billion less in revenue makes it impossible to budget responsibly

The Senate proposes another $1 billion in tax cuts that will be paid for in cuts to public services. Importantly, the legislature’s Fiscal Research Division has already identified $680 million in immediate budget pressures—growing student enrollment in public schools and universities, health care costs, etc—for the next fiscal year. This does not include the well-documented need for the state to support rebuilding efforts in eastern North Carolina in the aftermath of Hurricane Matthew, nor the stated bipartisan priorities to invest in various unmet needs in the courts, mental health and other public service areas.

2. Eighty percent of the net tax cut since 2013 will have gone to the top 20 percent of taxpayers.

The cumulative change in taxes for North Carolina taxpayers will mean that the majority of the net tax cut since 2013, a full 80 percent, goes to the top 20 percent of taxpayers. If this proposal moves forward, a millionaire in North Carolina will have received an average annual tax cut of $20,000, while only a third of taxpayers who earn less than $20,000 would get anything. Taking all tax changes since 2013 into account, people who earn less than $20,000 would receive an average tax cut of $15 under this proposal.

3. Two-thirds of taxpayers in the bottom 20 percent of taxpayers receive no tax cut.

Senate leaders released misleading figures that seem to imply that some of the state’s counties with the highest poverty rates would see the largest tax cuts, but that’s simply not true. The major tax policies proposed in the Senate plan do not target low-income households or communities. These policies seek to exempt more income from taxation, lower the rate on income that is taxed, and uncap itemized deductions claimed by a very few and wealthy taxpayers. Most importantly, these income tax policies do not address the reality that many low-income taxpayers contribute through sales tax and do not have sufficient income to benefit from increasing the standard deduction or a Child Tax Credit that is not refundable. Fully two-thirds of the taxpayers with income below $20,000 a year will receive no tax cut from the Senate’s proposal.

4. Rural communities will continue to be hurt by the Senate tax cut proposal.

Not only will rural communities continue to be among the hardest hit from the loss of state revenue (many infrastructure, economic development and educational investments made by the state are not possible under current austerity policymaking), most rural North Carolinians would see little to no change in their tax payments. Tax returns reporting adjusted gross income over $100,000 and who are likely therefore to be among those receiving the vast majority of the benefits from the tax changes since 2013 are more concentrated in urban areas according to Internal Revenue Service data. Nearly half of taxpayers in rural counties have income that is too low to see any benefit from the Senate tax plan.

Check back here later for our full analysis of the Senate tax proposal.

NC Budget and Tax Center

Senate proposal is another tax cut for the wealthy and profitable corporations

Senate leaders announced they will continue on the path to ruin for North Carolina by pushing forward another series of income tax rate cuts this year that will primarily benefit the wealthy and profitable corporations.

The proposal unveiled this morning will do nothing to boost the wages of working people nor will it help connect rural communities to opportunity, despite Senators’ claims.

Instead, by lowering the income tax rates on corporate profits and income, the proposal continues to lock in the already significant breaks to the wealthy and profitable corporations.  To date, North Carolina’s millionaires have received an average tax break of $15,000 since 2013 while the state’s poorest households are carrying a heavier tax load.

North Carolina’s profitable corporations contribute the lowest amount in the country to ensuring that the infrastructure, workforce development and education that they benefit from is effective and efficient.  Under this proposal, the state will continue to ask little of large multi-state corporations and underfund the foundations of a strong economy for our state.

The proposed changes to the standard deduction and child tax credit are ineffective to offset the already greater share of income paid in state and local taxes by the lowest income taxpayers in North Carolina. And the resulting pressure on local governments to raise property taxes and on future state lawmakers to raise sales tax to make up the losses from these tax breaks for the wealthy will make it difficult to invest in opportunity for all.

It is important for all North Carolinians to see the full plan of the North Carolina Senate. We must ask what will be eliminated from our communities to pay for these tax breaks.  We must ask who they will ask to pay more.

The proposal passed earlier this week to lock in a low and arbitrary income tax rate that primarily benefits the wealthy is part of the effort to eliminate the income tax entirely and push the tax load onto middle- and low-income taxpayers.  Not only is this not a pathway to prosperity, this is another step backward for North Carolina.