Commentary, NC Budget and Tax Center

Income tax cap seeks to lock in a failed economic experiment

The current push to reduce North Carolina’s Constitutional income tax cap (SB75) is not rooted in sober analysis of hard economic data.

From the moment that legislative leaders proposed slashing income taxes in 2013, we were promised that it would radically transform North Carolina’s economy. Now, several years into this experiment, evidence abounds that tax cuts failed to change our economic trajectory. Employment growth in North Carolina has moved in virtual lockstep with our immediate neighbors through the recession and recovery, both before and after the recent wave of tax cuts started taking effect. In fact, several of our neighbor states have added jobs faster than North Carolina since the start of 2014, and none of our neighbors embarked on a similar set of income tax reductions.

The economic benefits of recent tax cuts may be undetectable, but the harm is plain to see. Tax cuts have reduced state revenue by $2.6 billion each year, seriously undermining our collective commitment to strong schools, healthy communities, and a competitive economy. For example, we have an estimated $8 billion backlog in school construction and repairs statewide, we’re not aggressively building 21st-Century broadband infrastructure, and we have dramatically reduced our efforts to protect the public from harmful toxins and contaminants.

Locking in recent tax cuts would become even more damaging in the next few years. The non-partisan Fiscal Research Division of the General Assembly projects that the current tax system won’t raise the revenue needed to continue current services, falling billions of dollars short in the next few years. If the income tax cap passes, it would then force legislators to cut vital public services even more, or to increase sales taxes, fees, and other levies to fill the hole.

The unfortunate fact is that we have fundamental economic challenges that tax cuts simply cannot address.  Poverty remains far too prevalent, wage growth remain tepid, and many communities still face barriers to opportunity. To make matters even worse, roughly  one-third of North Carolina’s counties actually lost jobs over the past year, deepening longstanding racial and regional economic divides. This week, researchers revealed that North Carolina’s rural economy would expand by $5.3 billion if we ensured that everyone who wants a job can find one.  We can’t realize that potential through tax cuts—we need investments in rural regions, systems that deliver the training and business supports to grow a competitive rural workforce, and 21st-Century infrastructure that connects communities from the mountains to the coast.

An income tax cap won’t make North Carolina any more prosperous, or any better prepared for an uncertain future. It will simply make it harder for us to respond to the real challenges facing our state.

Patrick McHugh is an Economic Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

Lowering the income tax cap would come back to haunt N.C. when the next recession occurs

Among the proposed ballot initiatives hanging in the air as the 2018 legislative session draws near its end is a move to change the North Carolina Constitution to lower the income tax rate cap . While this proposal has not received a great deal of attention, it could have profound and long-lasting impacts on the fiscal health of state and local governments. The proposal would dramatically reduce our ability to respond to changing economic circumstances, a problem that will likely be felt most acutely whenever the next economic downturn occurs.

It is not clear when the next downturn will happen, but current risks and historical precedent indicate that the run of growth will not last forever. The current economic expansion is already one of the longest on record and, if there is one thing we know about economic conditions, it is that they are bound to change.

Prolonged periods of growth tend to create what economists call “irrational exuberance”, a collective forgetfulness that long-term decisions should be calibrated to deal with bad times as well as good. “It’s just the time when it feels like all is going fabulously that we make mistakes,” says Mark Zandi, chief economist of Moody’s Analytics.

Dramatically lowering the maximum income tax rate permitted under the North Carolina Constitution is a good example of irrational exuberance, because it is likely to come back to haunt us whenever this run of growth comes to an end. Lowering the income tax cap would tie our state’s fiscal hands when the next recession occurs, effectively forcing the state government to increase sales taxes, franchise taxes, fees, and other levies when the next recession creates a hole in public finances. Local governments could also be forced to increase property taxes if state funding dries up during the next recession. Read more

NC Budget and Tax Center, News

Without coming right out and saying it, proposed budget could kill light rail in North Carolina

A single sentence buried on page 179 of the budget bill could effectively kill light rail in North Carolina by creating a kind of Catch-22 for transportation officials.

The seemly innocuous passage reads: “A light rail project is ineligible for scoring, prioritization, and State funding until a written agreement is provided to the Department establishing that all non-State funding necessary to construct the project has been secured.”

While this may not seem so bad on the surface of things, these few words could make it practically impossible to build light rail systems to serve North Carolina’s booming metropolitan areas. Because the state generally must provide matching funds to access federal grants for light rail, this provision could make it impossible to draw down the federal dollars that are available for these kinds of projects. If the provision is not fixed, federal funds would likely flow to other states while North Carolina communities that want light rail would have little recourse.

The provision also flies in the face of legislative leaders’ stated goal of removing politics from transportation investments. In 2013, the legislature created a new system for making Strategic Transportation Investments, a system that was meant to make transportation choices more evidence- and need-based. While defending the plan, Senate President Pro Tem Phil Berger outlined his desire to “be sure that our process is one that’s not political, it should be one that is data driven, focuses on prioritization and encourages planning.” By those standards, the proposed budget language would be a disaster. It would prevent cities from planning for their current and future transportation needs and reinserts politics into the heart of mass transit investments.

Forestalling light rail is also bad for working North Carolinians that lack reliable vehicles of their own. As our cities grow, many low-income residents are being forced to move farther and farther from their places of employment, and expanded mass transit options are vital to closing that gap. Light rail is not the answer everywhere, but it can be a vital piece of the solution in many communities.

Finally, this proposal could make it harder for North Carolina to compete for the jobs of the future. Technology-heavy companies know that many of the people they want as employees like using mass transit, particularly in densely populated urban areas. Relying on cars is already burdensome in some of our state’s biggest cities, and only likely to get worse as these areas continue to grow. North Carolina has been able to compete for many of these jobs based on the low cost of living, at least compared to places like San Francisco and Boston, but as it becomes more expensive to live in our state’s major cities, amenities like light rail will become increasingly important to landing the jobs of today and tomorrow.

Even though the budget will likely pass without the opportunity for amendment, there is still time fix this particular problem. The provision could be removed when the legislature works up a “technical corrections” bill, and that would help keep transportation investments rooted in the kinds of 21st Century options we truly need.

Patrick McHugh is an Economic Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

“Pork” proliferates in the 2018-19 budget

We saw once again this week that backrooms and private meetings are the native habitat of that never-endangered species, political pork. When legislative leaders pulled the curtain back to reveal their 2018-19 budget, it became quickly apparent that deviating from the traditional budget-writing process gave political pork room to grow and proliferate. To be clear, many of these line-items go to reasonable and valuable projects, but the unusually opaque process should give everyone heartburn.

By our count, appropriations that could be seen as pork add up to nearly $35 million in this year’s budget (see table below for the full list). While many of these projects serve important public services, this kind of legislative process is the wrong way to make good policy.

Building budgets is inherently about priorities and investing in the communities that everyone can thrive in.  There is often debate about how much to invest in education versus health care or parks versus roads, and that is particularly acute when lawmakers continue to limit what is possible with a focus on cutting taxes year after year.

But what is most clear over time in the difficult choices of budgeting is that the legislative process does a poor job of making more nuanced decisions about which town deserves a new roof for its community center, or which food bank most desperately needs an infusion of funds. The budget, in the end, should be about prioritizing the systems that will connect every place and every person to the services they need to thrive.

After all, legislators can’t be expected to understand enough about every community’s needs to make wise choices about which specific projects to fund, and even if they could, political pressures and legislative deal-making often intrude on the efficient use of public funds. In large part, the executive branch exists precisely to make specific allocations of funds more evidence-based and rooted in merit. Administrative agencies have the expertise and processes in place to minimize the influence of politics, require that local needs are well-documented, and ensure that recipients of public funds are accountable. Very little of this exists when the legislature steps in and starts directing funds to extremely specific local projects.

Even if many of the specific local projects funded in the current budget have merit, we have no idea how these priorities were chosen or which vital local needs are going unmet. (We also don’t know how the General Assembly’s experiment worked with the last round of hyper-local investments in the final budget last year. Is there evidence out there that taxpayers got a positive return?)

North Carolina has many systems in place to ensure that public funds are spent intelligently and transparently, but the amount of pork in this year’s budget represents a step in the wrong direction.

Patrick McHugh is an Economic Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.

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NC Budget and Tax Center, Trump Administration

Trump administration turning its back on refugees, a moral and economic failure

The Trump administration is following through on its threat to bar America’s doors against people fleeing violence and persecution. Trump’s cruel words are matched with devastating deeds, snuffing out America’s light of liberty in many corners of the world.

A new report from the Fiscal Policy Institute shows how dramatically refugee resettlement has declined on Trump’s watch and provides compelling evidence that we are turning away the very people that have long made America the economic power of the world.

Beyond documenting how dramatically the Trump administration has reversed America’s history offering safe harbor to people facing persecution the world-over, the report shows that these policies will hurt the U.S. economy.

The report’s authors interviewed business owners about their experiences hiring and working with people who arrived in the United States as refugees, and the results show that Trump’s policies are cutting businesses off from precisely the kind of dedicated employees that proprietors love to find. For example:

  • Refugees tend to be more loyal employees: Most business owners reported that, once hired, refugees tend to stay in their jobs longer than other workers. As any employer will tell you, replacing good employees is expensive and challenging, so having reliable refugees as part of a workforce can be an enormous plus.
  • Successful refugee hiring can help employers find more reliable workers: Once companies figure out how to successfully support refugees as they become employees, these businesses often find it easier to recruit more people from refugee communities. Just as with retention, finding skilled and dedicated employees efficiently can be an enormous boon for businesses.

Turning our back on people facing war and torment is wrong, and this moral failing will come with economic ramifications now and into the future.