NC Budget and Tax Center

An income tax rate cap is still bad policy

A modified Senate Bill 75 was approved by the House Finance committee this afternoon, raising the proposed income tax rate cap from 5.5 to 7 percent, to try to address concerns with the previous state Constitutional amendment proposal.

There is no fix that can make the income tax rate cap work for North Carolina.

If the goal is to keep taxes and spending low, income tax limits have been found in several academic analyses to be ineffective. These analyses find that pressing needs for public services and funding end up being supported through other fees and taxes going up. Shifts to greater local government responsibility for funding have also commonly been found to occur, which in North Carolina would primarily result in property tax increases.

The American Enterprise Institute, a strong supporter of austerity and small government, found tax limits to be largely ineffective and a poor “substitute for the hard work of long-term public education and persuasion about the central benefits of limited government.”

The reality is that North Carolina policymakers in the leadership have already pursued their goal of lower income taxes with 10 straight years of declining state investments as a share of the economy.  The result has been fewer dollars for each child’s education in the early years and through high school,  more expensive post-secondary education, crumbling infrastructure, and declining investment in the well-being of families—from water quality to public health—and communities.

An income tax cap won’t allow future policymakers to ensure that the tax code can meet these current and future needs. Already Fiscal Research projects that the current tax choices will put pressure on future policymakers to cut spending or raise other taxes in the near future.

Capping the income tax rate in the state Constitution to lock in recent tax decisions is ineffective, unnecessary and harmful to North Carolinians and our state, now and in the future.

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

Federal tax plan and ongoing federal budget debates make N.C.’s future uncertain

Six months have passed since the federal tax law took effect, and there should be no uncertainty by now that President Trump and many in Congress intend to continue to call for more federal budget cuts and promote a federal cost-shift to the states.

While the $1.5 billion federal rescission package that Trump proposed appears to have been stopped by the Senate this week, the federal dollars that were at risk that support many critical state programs and services is concerning.  The truth is that real uncertainty exists today and is likely to remain in the coming years as the President and some in Congress intend to reduce the discretionary federal budget—a large part of which is sent to state governments to support local community priorities. Furthermore, uncertainty will continue to lurk on the federal horizon as more legislation is introduced to change the federal tax law and more health-care changes are proposed. Our nation faces a highly challenging fiscal future, and this requires all states to maintain fiscal flexibility to adapt effectively.

North Carolina receives approximately $14 billion from the federal government every year to support critical programs and services across the state, including Medicaid for seniors, children, and people with disabilities; highway transportation improvements; child support enforcement; workforce training; emergency preparedness; and substance use disorder prevention grants.

If federal budget cuts are made to these programs, our state lawmakers will be confronted with some very difficult choices. Read more

NC Budget and Tax Center

U.S. House leadership may force another vote on harmful Farm Bill

This week, it is highly likely that the US House will take a second look at their harmful version of the Farm Bill. The bill originally failed to pass the House because of its many harmful provisions that would have taken SNAP (the Supplemental Nutrition Assistance Program, formally known as Food Stamps) away from North Carolinians struggling with food insecurity.

Last year, North Carolina was the 10th hungriest state in the nation, with more than 600,000 households struggling to place food on the table each night. SNAP is a critical tool in helping to address that need. In the same year, more than 1.3 million North Carolinians participated in SNAP.

While the US House proposal will hurt our state, the US Senate version will do the opposite. Not only does the Senate bill fully fund SNAP, it invests in Employment and Training programs that help SNAP recipients find meaningful work.

Take a look below to see how else the House and Senate versions differ:

Brian Kennedy II is a Public Policy Fellow for the Budget & Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

Limits on income tax will put immediate pressure on policymakers to raise other taxes

The income tax cap being considered by the House this week would put public investments at risk and is likely to force policymakers to raise other taxes to meet growing needs in the near term.

Last summer, the Fiscal Research Division provided a 5-year forecast of the state’s fiscal position that took into account the state’s growing population and the cost of delivering just current service levels to more people over time.  Their findings were, that in Fiscal Year 2019-2020, North Carolina policymakers would not have the revenue to deliver the same diminished services to future populations. Even under revisions to revenue collections next year, this finding holds.

The state’s current tax code, resulting from the tax cuts since 2013, and  growth still slow relative to historic performance is primarily to blame.  An income tax cap now would lock in the $2.6 billion in annual revenue loss from these tax changes since 2013 and make it more difficult to make decisions that responsibly balance the state budget.

The near term prospect of state policymakers raising revenue is real.  It is not hypothetical.

Indeed, in the briefing of House Finance on the bill, the Senate sponsor made clear that many other taxes could be raised should the state need to meet growing needs—franchise taxes, sales taxes and more.  He also made clear that many deductions or credits could be gotten rid of, including reductions or elimination of the standard deduction.

The income tax cap is not about holding taxes low for everyone. It is about limiting the tools available to future policymakers and locking in the income tax cuts that have primarily benefited the state’s wealthiest taxpayers.