NC Budget and Tax Center

Want a better economy? Make sure wealthy residents pay their fair share

States that require wealthy residents to reinvest in their communities did better over the past decade, according to a new report from the Institute for Taxation and Economic Policy. States that collect more income taxes from wealthy people generally outperformed their peers that chose to give their most fortunate residents a comparative pass on supporting public goods between 2006 and last year—contrary to claims made here in North Carolina and nationally to justify tax cuts that primarily benefit the wealthy.

“Lawmakers who support reducing or eliminating state personal income taxes typically claim that doing so will spur economic growth. Often, this claim is accompanied by the assertion that states without income taxes are booming, and that their success could be replicated by any state that abandons its income tax. To help evaluate these arguments, this study compares the economic performance of the nine states without broad-based personal income taxes to their mirror opposites—the nine states levying the highest top marginal personal income tax rates throughout the last decade.

The study’s broad finding is that the states with the highest top tax rates are experiencing more favorable economic conditions than the states without income taxes. While this finding does not indicate that higher income tax rates necessarily cause economic growth, it does call into question the notion that cutting or abandoning state income taxes leads to a clear improvement in state economies.”

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Commentary

State legislature targets retiree health benefits for teachers and state employees

Buried in the fine print of the final budget is a provision that will eliminate retiree health benefits for teachers and other state employees hired after 2021, a move that is both unnecessary and unwise.

This is an extreme solution for a moderate problem. North Carolina could do a better job of preparing for the future costs of retired state employees’ healthcare, but there is no immediate crisis that necessitates extreme measures. Analysts at the General Assembly and State Treasurer Dale Folwell have noted that there are many ways to financially strengthen the state retiree healthcare system so it can continue delivering lifesaving care for retired public servants. If you accidentally wade through some poison ivy, it may be uncomfortable and require some ointment, but that doesn’t mean that you just amputate the injured leg and move on.

This change will ultimately make it harder for North Carolina to attract skilled and committed people into public service. State employees and teachers have long grumbled about a series of policy changes that have made it harder to do their jobs, and more of a hardship to work for the people of North Carolina. Justin Parmenter, a language arts teacher in Charlotte, wrote in the News & Observer that he fears that public service is already falling out of favor with North Carolina’s young professionals, “as teacher salaries have stagnated, additional pay for master’s degrees has been revoked and insurance premiums have steadily risen, our state’s 15 public universities have experienced a 30 percent decrease in education students over the past few years.” This trend will not destroy public services overnight, but in the long run it can dramatically weaken our ability to deliver quality education, build a modern economy, protect public safety, and otherwise keep the proverbial trains running on time.

It’s also rash to make this dramatic of a change without knowing where healthcare policy is headed at the federal level. Many of the healthcare changes being contemplated in Washington could directly impact our options for providing care to retired state employees and the quality of care that is available through different avenues. We have no idea how potential federal changes could impact how fast healthcare costs grow, whether funding for Medicaid and Medicare will be chopped, or if new systems to deliver healthcare to retirees will be developed. With all of this uncertainty swirling around the healthcare system in the United States, it’s just not the time to make the far-reaching changes that this could prove to be.

Commentary, NC Budget and Tax Center

Temporary economic slowdown or signs of worse to come?

The state and national economies continued to grow in May, but there are signs that economic momentum may be waning. Job growth through the first five months of 2017 was slower than in same period for either of the last two years, North Carolina has largely stopped making progress in bringing people back into the labor market, and our unemployment rate remains higher than the national average.

It’s too early to tell whether we are looking at a temporary blip or a major inflection point, but these signs are not encouraging. Given where the labor market is and where it could be headed, it is crucial that we bolster the systems such as Unemployment Insurance that protect people when the economy takes a downturn.

Here are a few of the indicators that point to a dip in economic growth:

Job growth has slowed in recent months: Year-over-year job growth in North Carolina averaged 2.5 percent for the first five months of 2017, below the 2.9 and 2.7 percent rates for 2016 and 2015, respectively. This slowdown underscores the need to ensure that our Unemployment Insurance system is prepared if the economy takes a turn for the worse. The U.S. has seen an unprecedented run of consecutive months of job growth, yet as we see weakening in the labor market, we must ensure we are not caught unprepared when the next economic downturn takes hold.

North Carolina’s unemployment rate is still above the national average: North Carolina’s headline unemployment rate remains below 5 percent, which still translates into over 220,000 individuals looking for a job and a higher rate of unemployment than the national average. In fact, North Carolina’s unemployment rate has been higher than the national average for the last six months, and has only been at or below the national rate for four months out of the last two years.

We have stopped making progress in bringing people back into the labor market: One of the most concerning indicators in recent months has been the lack of growth in labor force participation rate, or the share of North Carolinians who are either employed or actively looking for work. A lack of job opportunities drove many North Carolinians out of the job market during the Great Recession and although the state and nation had been making progress in bringing people back, that momentum has stalled over the last year. In May, 61.8 percent of North Carolinians were working or looking for a job, exactly where we stood in May of 2016. Given that we have never returned to pre-recession levels of labor force participation, this is a clear sign that recovery in North Carolina remains incomplete.

 

NC Budget and Tax Center

House wants to give retirees a bonus, Senate wants to cut benefits for future retirees

Stark differences exist between how the budgets passed by the North Carolina House and Senate would treat retired public servants. While the House wants to provide a one-time bump in pension payments, the Senate contemplates eliminating retiree healthcare coverage for future state employees. The House proposal is a modest step in the right direction and the Senate’s vision would make life harder for the people who to teach our children, protect our communities, and deliver myriad other vital public services.

The House budget moves to provide a one-time supplement to retired state workers’ pension payments. For years, pension payments have not been adjusted to reflect inflation, leaving retired state workers struggling to cover growing expenses. As a one-time payment, the House proposal is not a true cost-of-living adjustment, but it at least recognizes the financial pinch that stagnant pensions have imposed on state employees and devotes some resources to addressing the problem.

In contrast, the Senate budget would strip retiree healthcare coverage for all state employees who are hired after July 1, 2018. This provision echoes a bill heard earlier this session (that has not passed either chamber) that would eliminate pensions for state employees. Proponents of cutting retirees healthcare and pension benefits often claim that we simply can’t afford the expense, but that’s not telling the whole story. Read more

Commentary, NC Budget and Tax Center

Amazon and other merchants could get a big tax break from House budget

A provision way down on page 351 of the House Budget could deliver big tax breaks to distribution companies like Amazon. It is difficult to say how many companies this provision would benefit, or how much revenue state and local governments stand to lose, but these types of special tax deals often cost more and deliver less than promised.

The provision (SECTION 38.9) would exempt “sales of equipment, or an accessory, an attachment, or a repair part for equipment” to “a large fulfillment center” from North Carolina sales tax. To qualify, a distributor must invest at least $100 million and create 400 jobs within five years.

As a general rule, building economic incentives into the tax code is risky business. Once written into tax law, these types of provisions can turn out to be much more expensive than originally thought and can be very difficult to eliminate, even if they aren’t delivering a substantial return on investment. There has not been time to fully vet the current House language, but it is certainly possible that smart accountants and fancy lawyers can find ways to bend these provisions beyond their initial purpose. Read more