Commentary, Education, Legislature, NC Budget and Tax Center, News

Budget & Tax Center: Another cut for big business that will reduce revenue for schools, communities

N.C. Senate finance leaders are moving a tax cut bill for businesses with high net worth this week, even as the legislature has failed to put forward a comprehensive investment plan addressing the priorities of communities across the state.

That’s right. There is no final, comprehensive budget for our communities, but legislative leaders in the Senate will still give tax breaks to big companies.

Senate Bill 578 will adopt the franchise tax cuts proposed in the legislative budget at a time when corporations across North Carolina are paying the lowest corporate income tax rate applied to their profits in any state that taxes corporate income.

As the Budget & Tax Center detailed in an earlier analysis, this is not a tax cut that will reach the majority of businesses in North Carolina, and like corporate income tax cuts before it, it is unlikely to change the decisions of businesses around hiring or location.

There are numerous rigorous studies of the issue to confirm that the theory behind such claims hasn’t played out in reality: Businesses aren’t going to relocate en masse because of a franchise tax cut.  This makes sense given what researchers have noted as the real-world problems with suggesting that a tax cut for business will deliver new economic activity.

  1. When businesses get a tax cut, particularly at the state level, that means that other people will have to pay in the form of higher taxes or spending cuts. Balancing out the net effect on the economy has led most researchers to conclude that even new economic activity doesn’t replace those dollars or minimize the harm of the tax shifts and spending cuts that result from the loss of revenue.
  2. All state and local taxes paid are a very small share of businesses’ total expenses, estimated at between 2 and 4 percent. That means even substantial tax cuts will have little effect on profitability.
  3. Relocation decisions are rare and not the primary source of job creation in a state. And most researchers have found that relocation decisions are more likely driven by proximity to markets or suppliers, quality of roads and transportation networks and availability of workers, for example.

Perhaps the most pernicious false claim around this and all tax debates in North Carolina is that tax cuts will generate more revenue by driving greater economic activity.

The reality, of course, is North Carolina will have less revenue because legislative leaders chose to cut franchise taxes for companies, particularly companies with net worth over $20 million from which most franchise taxes are collected.

The legislature’s Fiscal Research office estimates the franchise tax provision will reduce revenue by $240 million in the first year, and grow to $270 million in Fiscal Year 2023-24.

Those dollars could make significant progress toward pressing needs for everyday North Carolinians by:

  • Making child care more affordable
  • Investing in affordable housing development
  • Supporting home health care and services for the state’s older population
  • Monitoring the quality of our air and water and the level of regulation needed to more adequately protect against toxic dumping

North Carolina leaders have not prioritized these pressing needs for North Carolinians in their piecemeal budget approach, but they appear certain to continue to deliver a piece to big companies.

Alexandra Forter Sirota is the director of the N.C. Justice Center’s Budget & Tax Center.  

Commentary, NC Budget and Tax Center, News

New labor market data point to continuing N.C. economic slowdown

The Budget & Tax Center released its analysis of the latest N.C. labor market data, which was published on Friday. Patrick McHugh, Senior Policy Analyst with the Budget & Tax Center, a project of the NC Justice Center, points to the data as a sign that North Carolina’s economy has been stumbling this year. According to his analysis:

Economic challenges facing North Carolina include:

  • Job growth has slowed in 2019: Employment growth in 2019 has slowed across the country, and the drop-off compared to the strongest periods of expansion since the Great Recession has been particularly dramatic here in North Carolina. Between 2014 and 2016, employment growth in North Carolina regularly exceeded 2 percent a year, still somewhat modest by historical standards, but significantly more robust than what we’ve seen this year. Annual job growth has hovered around 1.5 percent throughout all of 2019, roughly half of the most recent high point of growth set in February 2015. In raw job terms, the first nine months of North Carolina were less productive than several years during the current economic expansion. North Carolina added 45,800 jobs between January and September, well off the first nine months of 2014, 2015, and 2016, when the state added over 60,000 during the first nine months of the year.
  • Number of unemployed North Carolinians has increased in 2019: The number of North Carolinians looking for work has increased during 2019, reversing a long trend of shrinking unemployment rolls. Roughly 17,400 more North Carolinians were looking for work in September than in January of this year, even while the number of job-seekers nationwide declined by over 760,000 over the same period.
  • North Carolina’s unemployment rate is notably higher than the nation: With slowing growth and an increasing number of people looking for work, North Carolina’s unemployment rate has increased during 2019. After largely mirroring the national rate throughout most of 2017 and 2018, North Carolina’s headline unemployment rate is now notably higher than the national average. North Carolina’s unemployment rate stood at 4.1 percent in September compared to a national rate of 3.5 percent. While the national rate has dropped from 4 percent at the beginning of the year, North Carolina’s headline rate increased from the January reading of 3.8 percent.
  • Share of North Carolinians with a job still below pre-recession levels and the national average: North Carolina still has not recovered to the level of employment that existed before the Great Recession. In December 2007, just before the onset of the Great Recession, 62.1 percent of North Carolinians had a job, a level of employment that had been the norm throughout the early 2000s. In September 2019, however, only 59.3 percent of North Carolinians were employed.

Read the full release here. 

NC Budget and Tax Center

So-called “mini-budgets” put NC’s fiscal health at risk

For the first time in recent history, North Carolina has failed to pass a final state budget. Absent a comprehensive budget, the state leaders are passing individual spending bills, or “mini budgets.” Comprehensive budgets are preferable to piecemeal legislation because they allow for greater fiscal control, oversight, and planning. Unifying state spending within a single document helps monitor performance over time, provide clarity to the public on priorities, and facilitate long-term sustainability. 

In 2015, the Organization for Economic Cooperation and Development (OECD) released a set of budgetary principles imploring governments around the world to “present a comprehensive, accurate and reliable account of the public finances.” Without a complete budget, it is nearly impossible to achieve accuracy, clarity, inclusive participation, and transparency while maximizing value for money.

Ignoring these principles creates significant risks for duplicative spending, fragmentation, misinterpretation, inaccurate calculations, inadequate appropriations, and inaccessible documentation of expenditures. Together, these risks and realities compromise North Carolina’s fiscal health, undermine the credibility of the state, and “shake the foundations of our democracy.”

Failing to pass a comprehensive budget also restricts North Carolina’s ability to track how investments change over time. Even as GDP continues to rise, state investments as a share of GDP are at an all-time low. Research by the Washington Center for Equitable Growth confirms that low-income children and families are disproportionately harmed by under-investment in infrastructure, education, and innovation. 

Coupled with tax cuts for the rich, widening economic inequality keeps people from realizing their full potential and slows overall productivity. Now, when the economy is growing and interest rates are low, the state should be funding infrastructure projects that bring transportation to disconnected communities, public education initiatives that close the achievement gap, and research and development that can be used by businesses and entrepreneurs to spur innovation and growth. 

State budgets are important for many reasons, not the least of which is determining whether government spending is aligned with community needs and public priorities. Breaking the budget up into bite-sized bills makes it easier for special interests to influence spending decisions, increases structural inequality, and exacerbates socioeconomic disparities. If North Carolina wants to build a stronger, more vibrant, more inclusive, and more sustainable economy, it should pass a comprehensive budget that prioritizes public investments and cultivates shared prosperity.

Leila Pedersen is a Policy Analyst with the Budget & Tax Center, a project of the NC Justice Center.

NC Budget and Tax Center

New research confirms: Tough immigration enforcement policies do not lower crime rates

New research released by professors at the University of California at Davis finds once again that there is no relationship between deportation and the level of crime in communities. It also debunks the myth that programs of cooperation between local law enforcement and immigration authorities like Secure Communities and 287(g) agreements make communities safer, confirming the stance of sheriffs across North Carolina who have renounced such programs.

The research, looking at thousands of local communities across the country and using unique data on deportation and crime rates, finds that:

  • Places that deported the most appeared no safer than those that deported the fewest.
  • Aggressive enforcement and deportation does not lead to faster resolution of criminal cases.
  • Deportation is not an effective way to address crime.

For years, researchers have documented the lack of evidence supporting claims that more aggressive enforcement of federal immigration law contributes to public safety goals. As the New York Times reporters write:

“Research demonstrates that immigrants overall and undocumented immigrants in particular are less likely to be arrested than the native-born population; that both are less likely to be incarcerated; and that immigration does not raise an area’s local crime rates (neither does undocumented immigration).”

Our own research in North Carolina on the costs of aggressive enforcement by local governments of federal immigration law shows a high cost to all taxpayers. The cumulative cost to North Carolina taxpayers over the past decade of cooperation with the federal Immigration and Customs Enforcement was at least $81.7 million. These are dollars that could have been redirected to other public safety strategies and the promotion of opportunities for communities to thrive such as investments in youth development programs, and public education.

Alexandra Forter Sirota is the Director of the Budget and Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

N.C. lawmakers resort to trickery for budget that’s bad for our state

It appears that House leaders couldn’t get their way through debate and compromise, so rather than coming to the table with everyone, they used trickery to override the Governor’s veto of a budget that fails our state and every North Carolinian. Only 64 out of 120 House Representatives were present this morning when the vote was called after Democrats were told there would be no vote and some were at commemoration of the historic 9/11 attacks.

A final budget should lay out a vision for where our state is headed and how it plans to get there. It is the single most important policy decision that legislators make each year. It is a statement of their priorities and a marker of their stewardship of our tax dollars.

Legislators in our democracy are tasked with the tough work of negotiating those priorities and finalizing the budget. After failing at that work, legislators took the extreme step once again of changing the rules of the game.

The benefits of those changes will help very few in the near term and no one in the long-term.

This budget, which was vetoed by the governor and overridden by only about half our Representatives — which will go into effect should the Senate also override — fails to recognize the reality of a state that is growing apart economically and civically.

Where one lives in North Carolina determines whether there are jobs available for all those looking for work, whether there is quality child-care available for working parents, or even how long one will live. Public investments, particularly at the state level, can go a long way to making sure every community can thrive and every person can live a good life and reach their full potential. Despite the national economic expansion, North Carolina has continued to reduce spending as a share of the economy. Lawmakers have effectively dug a hole deeper than any modern-day recession has created in our state’s budget because of the priority that they have given to tax cuts for the wealthy and big companies.

When the Governor presented a counteroffer to legislative leaders after his veto of their inadequate budget, he asked them to prioritize the health of North Carolinians and stop tax cuts for high net worth companies so that greater progress could be made in investing in families and communities. Read more