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Last week, budget negotiators announced that they had come to agreement on a revenue plan that would raise $990 million. Most of the revenue would come from a 1% increase in the state sales tax with lesser amounts coming from increases in taxes on purchases of cigarettes and alcohol and a 2% income tax surcharge on income taxes owed by all households.

The plan fell apart largely due to the Governor’s objection to the income tax surcharge being imposed on working families. As Elaine Mejia wrote earlier in the week, the proposed 1% sales tax increase would have been far worse on low- and moderate-income households than the income tax surcharge.
Now, it appears that House and Senate leaders have agreed to new tax package. It contains all of the same changes to the sales tax (a 1% hike) and excise taxes, but took into consideration a key BTC recommendation to make the package slightly more equitable. Rather than applying the income tax surcharge to all households, the new plan would apply a 2% surcharge to married households with taxable income between $100,000 and $250,000 a year and a 3% surcharge if taxable income is above $250,000.

While this change does not lessen the impact of the sales tax increase on low-and moderate-income households, it at least ensures that higher income households are being asked to contribute a little more than before. However, as BTC and ITEP’s analysis of the new plan shows (btc-july-22nd-plan-compared-to-july-30th-plan), the complete package asks more from the bottom 80% (as a percentage of their total income) than the top 20%.

Two silver linings in the compromise tax package:
1) The House and Senate plan to raise $990 million in new revenue will allow the state to continue making important investments in education, public safety and healthcare. The new revenue will help to prevent the most devastating of cuts, however, for every $1 raised in new revenues, there is at least $2.50 in cuts.
2) There is momentum for comprehensive tax reform. It appears likely that a group of lawmakers from the House and Senate will work together this fall to put together a plan to improve the fairness, stability and long-term adequacy of the state’s revenue system.
btc-july-22nd-plan-compared-to-july-30th-plan

According to one recent media report, the NC House has a new idea for breaking the revenue stalemate – temporary tax increases.

If this is the case, it is a disappointing development considering that the Senate, House and Governor so far have all presented versions of permanent, reform-minded revenue packages that will not only help to raise the revenues needed for the next few years but will also create a more stable and fair tax system for the future.

There is emerging consensus amongst economists that the recovery will be “L-shaped” (or at best “U-shaped”) rather than “V-shaped.” In other words, it is going to be a while before the economy turns around. And history has shown us that revenue recovery lags economic recovery. The General Assembly’s chief economist, Barry Boardman, told legislators last month that it will be 2013-2014 at the earliest before North Carolina’s tax system is able to generate the same amount of revenue that it was projected to generate just last year.

Following the 2001 recession states faced shortfalls for four consecutive years (FYs 2002 through 2005). Given the severity of the current recession, the magnitude of the resulting budget gaps, and the likely trajectory of the economic recovery, it is hard to imagine that the state’s budget problems won’t continue for at least 3 more years, probably more like 5-6, or even longer. And, keep in mind that the federal recovery dollars the state has received will expire after FY10-11.

If members of the General Assembly don’t want to keep coming back year after year and going through the painful process of renewing temporary taxes (ala 2003, 2005 and 2007) they should enact permanent, reform-minded measures now, not quick fixes that only postpone the real work.

 
Robert Reich had a great op-ed in the New York Times on Wednesday that deserves a read.  He argues that addressing the growing income inequality gap is the only true way to stimulate the economy, especially over the long-term.  His case is compelling, particularly to those of us interested in finding and fixing root causes rather than putting band-aids on problems. 

His suggestions include increasing the wages of the bottom two-thirds of Americans, significantly expanding the Earned Income Tax Credit, strengthening our unions, and providing better educational opportunities to our low- and moderate-income children.

This is not to take away from the benefits of the short-term stimulus package signed this week- they are a start- but in general, we need better long-term thinking and solutions.