NC Budget and Tax Center

The budget passed by state lawmakers last week expanded the sales tax base to include additional services that are not currently taxed. Accordingly, the repair or upkeep of a vehicle, the repair of a broken washer or dryer, or the maintenance of an air conditioning unit will now be subject to the sales tax.

It appears that the weekend gave policymakers time for some second thoughts about their plan, however. This week, state lawmakers are now aiming to pass a bill that will roll back one particular aspect of the sales tax base expansion included in the budget.

House Bill 117 (HB 117) includes a provision that would exempt repair, maintenance, and installation services on tangible property and motor vehicles covered under manufacturer or dealer warranties from the sales tax. Accordingly, under HB 117, if your vehicle or tangible property is covered under a warranty then you don’t pay a sales tax on repair and upkeep services. To the contrary, if your vehicle or other tangible property is not covered under a manufacturer or dealer warranty then you will pay more in sales taxes.

This tax change means that two people can own similar tangible property, but one could potentially end up paying more in sales taxes simply because they don’t have a manufacturer or dealer warranty. This is troubling because it is likely to particularly harm low-income taxpayers who already pay a larger share of their income in taxes compared to the well-off. Low-income taxpayers who have to take their non-warranted vehicle to an auto shop for an unexpected repair will pay more in sales taxes, for example. Meanwhile, those who are able to afford costly warranties will escape having to pay more in sales taxes.

The backtracking on services included in the sales tax base expansion contradicts state lawmakers’ supposed commitment to base broadening on principle. Broadening the sales tax base has been sold as a way to make the state’s tax code more effective and ensure that it reflects a more service-oriented economy. That appears to be the case only if powerful lobbyists don’t object. Read More

NC Budget and Tax Center

As part of ongoing negotiations to produce a state budget, state lawmakers would like to provide more tax cuts to North Carolina taxpayers. This tax proposal, while unclear in the details (is it another reduction to the already low 5.75 percent personal income tax rate?), would offset the increase in various DMV fees included in the budget passed by House members.

A refundable state Earned Income Tax Credit (EITC) is a great way for state lawmakers to fulfill their desired goal of ensuring working families aren’t paying more as a result of their budget choices. The EITC provides a modest boost to the wages of low- and moderate-income workers, which will help offset additional costs resulting from an increase in DMV fees. Prior to its elimination in 2014, more than 927,000 North Carolinians claimed the state EITC, with working families in each of the state’s 100 counties benefiting from the tax credit.

State lawmakers’ reported agreement to provide $110 million in tax cuts to offset the DMV fee hikes is close to the value of the state EITC. For FY 2013, prior to its elimination, the state EITC cost around $101 million, which is less than the tax cut target agreed to by state lawmakers. The EITC is the best targeted tool to address the upside-down nature of the state’s tax code. Better than an increased standard deduction, the tax credit is proven by years of experience and research to effectively target working families who earn low wages so that they can make ends meet, support their children’s healthy development and boost the economy.

If state lawmakers are serious about correcting the imbalance in the state’s tax code, a refundable state EITC is the most effective way to support children and working families and help spur economic activity in local communities across the state.

NC Budget and Tax Center

State lawmakers would like to amend North Carolina’s state constitution in ways that would undermine our ability to adequately meet the needs of a growing and changing state and impede our ability to build today for a strong economy for the future. These amendments would reduce annual state revenue by nearly $2 billion if implemented in 2015, meaning state funding cuts to important public investments that drive the state forward – our public schools, affordable higher education, safe and healthy communities, and modern infrastructure.

Colorado, which enacted TABOR in 1992, serves as a cautionary tale regarding the perils of taking such a path. The state suspended the law for five years in 2005 in response to a sharp decline in public services. As a result of TABOR, Colorado went from the middle of the pack to the bottom among states in regards to state support for public education and initiatives that serve children. Regarding Colorado, an updated 2015 report by the Center on Budget and Policy Priorities highlights:

  • Colorado fell from 35th to 49th in the nation in K-12 spending as a percentage of personal income.
  • College and university funding as a share of personal income declined from 35th in the nation to 48th.
  • Colorado fell to near the bottom of national rankings in providing children with full, on-time vaccinations.
  • The share of low-income children in the state who lacked health insurance doubled, making Colorado the worst in the nation by this measure

North Carolina has ALREADY experienced erosion in state support for public schools, higher education and early childhood programs in recent years and currently ranks near the bottom among states in many areas. The implementation of these constitutional amendments would all but guarantee a last place finish in every race, every year.

  • North Carolina already ranks 43rd in average pay for our teachers.
  • North Carolina had the largest decline among states in average teacher salaries from 2003-04 to 2013-14.
  • North Carolina ranks 41st in change in state spending per student at 4-yr public universities since 2008

TABOR would make sure that we are unable to boost investments in early childhood initiatives, public schools, and public colleges and universities at a time when doing so is important to North Carolina becoming a more competitive and attractive state.

Contrary to the saying that if you’re at the bottom the only way to go is up, if TABOR comes to North Carolina, the only fate for the Tar Heel State is a permanent place at the bottom in regards to our commitment to public education.

NC Budget and Tax Center

As North Carolina students embark upon a new school year, lots of media coverage has focused on waning state-level support for public schools. This waning support extends beyond public schools to both ends of the education pipeline – early childhood and higher education. Whereas North Carolina should be boosting investments in its entire education pipeline in order to become a more competitive and attractive state, we have taken a different path.

Early childhood programs, like NC Pre-K and the Child Care Subsidy Program, are crucial to promoting the healthy development of North Carolina children. Although child poverty has worsened since the Great Recession, state investments in early childhood programs remain woefully inadequate while waiting lists persist. Today, the NC Pre-K program serves approximately 8,000 fewer four-year olds compared to 2009 peak levels during the recession (see chart below).

Chart 1

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NC Budget and Tax Center

After enacting huge, costly income tax cuts in recent years that largely benefited the state’s wealthiest people and biggest, most profitable corporations, pursuing more tax cuts would threaten North Carolina’s economy – and yet it appears state lawmakers are doing just that.

Questions remain about what will or won’t be in the budget the Legislature passes. What is known, though, is that the spending target agreed upon by the House and Senate is $230 million less than what the state is projected to take in over the year from tax revenue.

If that turns out to mean a tax-cut proposal, it will come in the face of strong evidence that such a strategy doesn’t deliver widespread economic benefits.  North Carolina is experiencing a very uneven economic recovery. Many people still can’t find jobs and many who are working are being paid less than what it takes to make ends meet. Tax cuts aren’t going to create the jobs North Carolina needs and they take resources away from what the state should invest in to promote real growth – quality public schools, affordable higher education, modern infrastructure, and safe and healthy communities, for example.

A continued pursuit of failed trickle-down economics policies would occur as investments in those public services and others are still below pre-recession levels and insufficient to meet growing needs.

State lawmakers are pursuing two paths to usher in more income tax cuts.

One path builds more tax cuts into the state budget. Budgets passed by both the House and the Senate lower the corporate income tax rate to 3 percent from 5 percent over the next two years. These tax cuts will result in more than $450 million less available to the state for public services over the next two years. As we’ve highlighted previously, cutting corporate income taxes won’t boost North Carolina’s economy; taxes are but a fraction of a business’s costs. Furthermore, the Senate’s budget changes how corporations apportion their income for state income tax purposes and reduces the corporate franchise tax rate. In total, tax changes included in the Senate’s budget would result in nearly $1 billion in less state revenue over the next two years.

The second path, Senate Bill 607, would amend the state constitution to arbitrarily cap the state income tax rate at 5 percent. This would reduce annual state revenue for public investments by around $1.5 billion. The result would mean more erosion of vital services and probably other tax increases – most likely the state sales tax. In combination with other proposed changes to the state constitution, this path would hamstring state lawmakers in the years ahead from meeting the priorities of North Carolinians by restricting the overall level of investment in our public schools, public colleges and universities, and other important areas.

These two paths that state lawmakers are pursuing are troublesome, particularly at a time when investing in North Carolina’s future is important to the state’s economic prospects. Consequently, the continued pursuit of trickle-down economics fails to promote broadly shared prosperity and prevents the entire state from moving forward together.