NC Budget and Tax Center

Legislation disguises tax giveaway to wealthy investors as aid for struggling communities

Money Exchange

Special interests often use the dog days of the legislative session to see if one of their old hounds can still hunt. As has become an almost yearly ritual, out of state companies appear once again to be trying to secure a huge tax give-away for their clients.

Under the guise of supposedly helping low-income communities, language inserted into HB 994 last week in the House Finance Committee would open a new tax loophole for wealthy investors and insurance companies. The provision would establish a state tax credit that would layer on top of the Federal New Markets Tax Credit. As drafted, there’s no guarantee that we would attract any projects that were not going to happen anyway while potentially costing the state millions of dollars over the next five years.

Created in 2000, the Federal New Markets Tax Credit incents investment in low-income communities by giving investors a tax discount based on how much they invest. Investment funds are channeled through banks or non-profit organizations certified as Community Development Entities (CDEs) that provide loans or equity investments in companies that operate within designated low-income communities. Tax credits generated under the federal program are then passed from CDEs to the companies or individuals who provided the investment capital.

The proposed North Carolina program would create an additional tax credit that investors can use to reduce their payment of state taxes. While the federal program has successfully spurred development in under-served communities and the goal of a state New Markets Tax Credit may be a worthy one, the current state proposal has some major flaws that make it more boondoggle than a boon.

Creates a special tax loophole for profitable insurance companies.

The current proposal creates a tax loophole that can only be used by profitable insurance companies. The bill would only allow credits to be taken against the state premium tax, a backdoor way of ensuring that most North Carolinians could not participate in the program and privileging certain business models. Only insurance companies pay the premium tax, so the bill effectively makes the provision unusable for the vast majority of potential investors in the state.

Pushed by out-of-state special interests.

There is no groundswell of support for this proposal from companies and investors that actually reside in North Carolina. Instead, the bill’s supporters are essentially out-of-state companies that specialize in NMTC investments. When the House Finance Committee discussed the proposal last week, the only company to speak in favor was Advantage Capital, a firm headquartered in St Louis which boasts of helping to distribute “$1.5 billion in state tax credits over its 20 year history.” You read that right, this proposal is avidly supported by a company whose business model relies on helping rich companies and individuals avoid paying state taxes. If this proposal was carefully designed to actually benefit struggling North Carolina communities, lots of instate companies and organizations would be lining up to support it.  But that’s not what’s happening.

Broad agreement on the dangers of this proposal.

Concern over state New Markets Tax Credit proposals knows no partisan or ideological boundary. Many of the problems identified here were also highlighted last week in a column by Becky Gray of the John Locke Foundation. Read more

NC Budget and Tax Center

North Carolina’s unemployment insurance system is the envy of no one

Last week the Center for American Progress and National Employment Law Project released a review of unemployment insurance as a federal and state partnership and the choices in recent years that have made it less effective at reaching jobless workers.

North Carolina policymakers, of course, aggressively pursued the worst changes in unemployment insurance. The result is a system that ranks among the least effective at providing temporary wage replacement for jobless workers while they search for work and delivering a stabilizing force in local communities and the economy overall.

The challenges they outline in the report face North Carolina acutely:  too few unemployed workers have access to tools for successful re-employment, first employment and/ or training; American workers are more vulnerable than ever to involuntary unemployment, yet fewer are protected by unemployment insurance; and finally, the unemployment insurance system is unprepared for the next recession.

The report authors provide a set of policy recommendations that would address these challenges and go a long way to not just protecting workers and communities from the shock of unemployment but would actually prepare for jobs loss by investing in the re-employment, training and other measures that retain jobs and support smoother transitions to new ones.  Here are some their recommendations: Read more

NC Budget and Tax Center

Summer months mean going without healthy foods for many NC kids, study finds

Making sure that kids in low-income households have access to nutritious foods over the summer helps improve their overall health, the U.S. Department of Agriculture (USDA) found in a recently completed five-year study.

For hundreds of thousands of children in low-income households across the state, the summer months often mean fewer healthy food options because of the loss of access to school breakfast and lunch programs. These kids are coming from the estimated 16.7 percent of North Carolina households that face challenges putting food on the table.

The USDA conducted a five-year pilot study of how to reduce food insecurity through additional measures and improve health outcomes for these kids. They found that an extra $60 each month on families’ Electronic Benefit Transfer cards during the summer increased children’s fruit and vegetable consumption and improved nutrition outcomes.

The research also identified three main reasons why not all eligible children participate in summer nutrition programs that are available when school is not in session.  These reasons include:

  • Lack of Transportation
  • Limited operating hours
  • Lack of publicity

Year-round commitments are clearly needed to address poverty and spark community dialogue to help ensure all who need it have access to the necessary food to be healthy and well.

 Click here to find summer meal site near you.

NC Budget and Tax Center

House lawmakers approve stricter penalties for SNAP recipients

A new rule also requires DHHS to investigate modest lottery winnings

Last week, House lawmakers undercut SNAP, the Supplemental Nutrition Assistance Program, which is the nation’s most important anti-hunger program and plays a critical role in ensuring that North Carolinians have enough to eat. They made it more difficult for those who receive SNAP to access this critical nutritional support by increasing disqualification periods to the maximum level allowed under federal law. The bill also requires the Department of Health and Human Services to investigate unreported lottery winnings in excess of $2,250 among SNAP recipients.

The approval comes just two weeks before some of North Carolina’s poorest adults, who are already living on the edge, stand to lose food assistance as the SNAP time limit returns to the state’s most-economically struggling counties. The time limit kicked in earlier this year for the 23 counties with healthier economies.

The bill that the House approved has three major sections:

1. The bill includes a work penalty provision. Under this bill, SNAP recipients that are not in compliance with work requirements would be disqualified from benefits for three months for the first issue of noncompliance, six months for the second instance, and permanently for three instances. Examples of work requirements include registering for work, participating in an employment and training program, and not voluntarily quitting a job or reducing hours to below 30 hours per week without good cause. Some people are exempted, such as children, older adults, and people unfit for work.

The reality is that 4 out of 5 SNAP participants are working or not expected to work. Nearly half of the folks on SNAP are children who—like older adults and people with a disability—are not expected to work. And work rates are high among SNAP households that can work. Rep. Bert Jones, the bill sponsor, amended the bill to only subject the head of household to the disqualification period to ensure that children are not penalized for the challenges that their parents’ face in finding work or staying on the job.

2. The bill requires the State Lottery Commission to report cash lottery winnings of $2,250 or more to the Department of Health and Human Services, who then must crosscheck that information with SNAP recipients on a monthly basis. If the department discovers that there has been a case of unreported winnings, staff would investigate the SNAP household to determine fraudulent misrepresentation, which can carry a criminal charge.

Proponents of the bill cited fraud as a motivator of this provision despite data that shows error rates are at a near modern low.  Any amount of fraud is unacceptable. The lottery provision in this bill is in line with curbing fraud, and it is in line with federal law. However, it is worth nothing that less than 1 percent of SNAP benefits go to households that are ineligible, according to the Center on Budget and Policy Priorities.  That means that 99 percent of SNAP benefits go to households whom SNAP is designed to help put food on the table. The lottery cases are overblown in the media.

3. The bill authorizes a legislative study to review a federal option called categorical eligibility, which allows some North Carolina families with modest assets and low incomes—but high expenses such as child care, rent, and utilities—to be eligible for federally-funded food benefits. This policy makes sense because it enhances efficiency, saves North Carolina money, and helps at least 22,000 low-income people become eligible for food aid. Eliminating categorical eligibility, as the original bill would have done, is a substantial policy change that requires significant study. As such, the bill sponsor was wise to convert this provision into a study.

Let’s hope that the study committee reviews the compelling body of evidence demonstrating the harsh impact such a change would have on families, the operations of social service offices, and the broader local economy.

In general, the bill continues a shift in state policy designed to eliminate and/or limit public assistance and eligibility to the minimum level that is allowed. Lawmakers axed a modest but vital working family tax credit, drastically cut jobless benefits, required drug testing for some recipients of cash assistance, banned state waivers from the harsh SNAP time limit, and now again have their sights set on scaling back food assistance.

It is important for lawmakers to pivot and focus just as much attention as they have had on dismantling the safety net to growing jobs, ensuring that adults have access to jobs that pay enough to afford the basics, and investing state money into job training programs that can help these jobless workers regain their footing on the economic ladder.

NC Budget and Tax Center

Tax swap likely to create more problems than solutions

State leaders are on a relentless pursuit to radically change the state’s tax system to rely more and more on the sales tax, while working to eliminate the income tax. This tax swap is necessary, they say, to address the volatile nature of the income tax. What it means is that there will be a heavier tax load for middle and low income North Carolinians.

This is an approach to taxation that will likely create more problems than solutions.

Volatility refers to how the level of revenue collections is affected by what’s going on in the economy. Good economic times mean higher levels of overall tax revenue, while economic downturns typically result in state revenues plummeting. The strength of revenue collections, however, can be a product of both the business cycle and the design of the tax system. North Carolina’s current tax code is underperforming historic growth rates (see Gov.’s FY17 budget, Page 33), which could be a result of tax changes passed in recent years that have resulted in a flat income tax, for example.

A report by the Center on Budget & Policy Priorities highlights reasons that a tax swap—greater reliance on sales tax and less on income tax—will not only fail to address volatility concerns but also can generate additional problems.

  • Virtually all state taxes are volatile, albeit to varying degrees. Most major state taxes, including the sales tax, are subject to ups and downs with the economy. Indeed, under some circumstances, sales taxes can decline faster in recessions than income taxes.
  • While income taxes typically fall more steeply than sales taxes when the economy enters a recession, the reverse is also true:  income taxes rise more rapidly than sales taxes during periods of economic growth. Taking both periods of growth and decline together, only income taxes increase enough to fund normal expenditure growth and meet the evolving needs of residents and businesses. Sales taxes do not.
  • Eliminating the income tax won’t protect North Carolina from revenue losses in downturns. States without income taxes—Florida and Nevada for example—were among the hardest hit in the Great Recession. Most experts recommend a balance across various sources of revenue to offset the competing sensitivities and contributions that each can make to a revenue system seeking to achieve stability, equity and long-term adequacy.

Most fundamentally, North Carolina Senators proposal to eliminate the income tax would require policymakers to find other sources for more than half of the revenue that the state currently collects. A proposal that will likely lead to further erosion in the state’s commitment to public investments that help families, seniors and communities thrive.

Moreover, it is a solution that is unnecessary given the better tool of a Rainy Day Fund to address volatility—one that state leaders have committed to aggressively.  And while the timing and pace of state leaders’ contribution to the Rainy Day Fund now raises concern, it is clear that a responsible Rainy Day Fund policy, relying on a mix of state taxes that include an income tax and not restricting tools to generate revenue at the local level, are ways that can help address and manage volatility.

Shifting to greater reliance on the sales tax and eliminating the income tax will not give North Carolina the flexibility it needs to change with the ebb and flow of the economy. It will only shift the tax load and undercut the state’s tax code’s ability to achieve a core responsibility of funding the services that support thriving communities.