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