NC Budget and Tax Center

NC Budget and Tax Center

Both House and Senate budget writers did the right thing by putting the $400 million projected surplus this year towards reserves.  This is important because North Carolina’s revenue collection surprise in April was largely the result of national trends that saw strong performance in capital gains income, a likely one time event.

The challenge, of course, is that budget writers do reduce the corporate income tax rates in the context of this one-time event.  The House allows the automatic trigger to go into effect reducing the rate profitable corporations pay down to 4 percent because the one-time collection above expectations meets the revenue threshold established in statute.  The Senate makes permanent the tax cuts for corporations regardless of current or future revenue collections but does so, in part, using the latest revenue news as justification.  Importantly, while collections are above expectations, as my colleague identified in a previous post, they are not above pre-recession levels or stronger than historic performance. Thus the decision to further reduce the state’s revenue sources based on a one-time event is not fiscally prudent.

In this week’s Prosperity Watch we wrote about more of the research into the national trend that drove an increase in personal income tax collections at tax time.

38 of the 41 states that have a broad-based personal income tax saw an average year over year growth in personal income tax collections of 11.5 percent according to a new report by the Rockefeller Institute of Government. Overall, 36 of the 38 states saw growth in personal income tax collections, with only Kansas and Illinois seeing a decline. North Carolina joined 25 other states in reporting double-digit growth in year over year personal income tax collections. Notably, other states that experienced similarly strong growth in their personal income tax collections did not pursue tax cuts and some states, California and Connecticut for example, raised taxes.

Read more here.

 

NC Budget and Tax Center

When the Senate leadership provided an overview of their budget proposal, what you didn’t hear were all of the investments that are missing from their proposal due to the huge price tag of their tax plan – a tax plan that will do nothing to strengthen our economy. If it weren’t for this tax plan, North Carolina would have more to invest in our public schools, in the health of families, the efficient delivery of justice and in communities across the state. We wouldn’t see Teacher Assistants sacrificed for smaller class sizes or higher tuition rates at community colleges to finance pay raises for professors.

But even more troubling is the speed with which policymakers hope to move forward on a proposal that was not released in full until midnight and for which amendments to the tax plan were not allowed in committee.. A more transparent and inclusive process for developing this important document that sets the state’s priorities is needed to ensure that the choices are clear and considered.

NC Budget and Tax Center

Last week, we raised concerns with the Senate leadership’s new tax plan. Rather than reinvesting and regaining ground lost in recent years, the Senate is pursuing another round of costly income tax cuts. When fully implemented, the $1 billion price tag for the Senate tax plan will mean North Carolina must forgo investments in the foundations of a strong economy—educating our children, ensuring courts run efficiently, building healthy and safe communities.BTC Who Pays Senate Tax Plan

The Senate tax plan does nothing to fix the problem with the state’s upside-down tax code, according to analysis of the plan using an economic incidence model that provides population-level estimates of the average tax change for taxpayers by income group of all tax changes. In fact, the Senate tax plan makes such small changes regarding who pays taxes it suggests that the goal of the plan is not to fix the problems with the tax code but continue to make the tax system less adequate and thus underfund public services. The figure below demonstrates the total share of income paid in state and local taxes by income group identified by the average income in each quintile and for the top 5 percent and 1 percent respectively. The red bar reflects current law and shows that low and middle income taxpayers in North Carolina pay more than those at the top. The green bar shows law under the changes proposed in the Senate tax plan: not much different.

Here are a few more key findings from an analysis of the Senate tax plan:

  • The net tax changes result in modest, if any, changes to the tax contributions across the income distribution. The bottom 20 percent would receive a total tax cut of around $20 on average while the top 1 percent would receive on average a tax cut of slightly more than $300. That dollar amount for the top 1 percent represents 0.03 percent of their average annual income.
  • The biggest winners of the tax plan are the wealthiest North Carolinians because the status quo is maintained. The plan does nothing to fix the upside-down nature of North Carolina’s tax code which asks more from middle and low-income taxpayers and a lot less from the state’s wealthiest. The choices in this proposal build on the 2013 which made worse the inequities in the tax code. An estimated 90 percent of taxpayers in the top 20 percent receive an income tax cut under this plan. For the bottom 80 percent of taxpayers, just 72 percent would receive an income tax cut.
  • The sales tax base expansion will ask more of the state’s low- and middle-income taxpayers as a share of their income. Without a better-targeted tool, like a refundable state Earned Income Tax Credit, the increase in sales taxes is not effectively offset by the proposed higher standard deduction. For the bottom 20 percent of taxpayers, the income tax cut is reduced by 40 percent because of sales tax changes. The sales tax base expansion is also modest in its ability to generate revenue. The sales tax changes represent roughly $200 million in revenue, covering just a third of the revenue lost from personal income taxes in the second year according to the Fiscal Research Division.
  • The combined changes to personal income, corporate income and sales tax will reduce state revenue by $1 billion when fully implemented. Not only does the plan fail to address the upside-down nature of the tax code, it falls short of achieving another core principle of a tax system: adequately funding public services. One billion dollars less in state revenue will mean fewer textbooks in the classroom, no teacher pay raises, no funding for additional students, no dollars for modernization of the justice system and no support to provide for the health and well-being of seniors, children and our struggling communities.

The income tax rate cuts in the Senate tax plan have the effect of eroding the state’s ability to invest while making little to no impact on economic outcomes for individual taxpayers or the broader economy.

NC Budget and Tax Center

Immigrants are increasingly important to North Carolina’s long-term economic vitality. The smokescreen of rhetoric surrounding immigration can obscure facts on the ground, but that makes it all the more important to take a sober look at the actual evidence. As documented in a recent Budget & Tax Center report, immigrants bring needed skills and expertise, swell the ranks of Main Street entrepreneurs, help to reverse population decline in many rural parts of the state, and ultimately improve our communities.

Table 2-no number-PW

Comparing North Carolina counties with sizable immigrant populations to counties that have relatively new residents who were born outside of the United States provides perhaps the most compelling evidence that immigrants help communities to prosper. As shown in the table to the left, counties made up of more than 6% immigrants fare significantly better than counties where the immigrant population is less than 3%.

By allowing hard fact to scrub the political air, it is clear that immigrants help communities across North Carolina to prosper. On average, communities with substantial immigrant populations have lower unemployment rates and levels of poverty, and higher wages than communities with few immigrants. This trend also holds when you look at rural counties, evidence that immigrants help communities large and small.

This kind of evidence has more and more communities across the country extending a helping hand to immigrants. Cities like St. Louis, Detroit, and Charlotte, just to name a few, recognize that immigrants will play a huge role in their economic prospects going forward. Immigrants have always been part of America’s economic foundation. Our future economic vitality will depend on how well we build upon that legacy.

Legislative Update

House Bill 328, sponsored by Representative Harry Warren (Republican, Rowan County) was recommended by the House Finance Committee earlier this week on a 22-11 vote. The bill would allow undocumented immigrants who pass a criminal background check to receive a temporary driver’s license in North Carolina. The bill received bi-partisan support, but has an uncertain future. It is not clear when, or if, the bill will be debated by the full House. Governor McCrory has said that he opposes the bill and it is unclear how it would be received in the Senate. Still, the Finance vote is the second favorable vote in a House committee and the bill has support from a variety of constituencies.

For more on the Finance Committee vote, visit

 

NC Budget and Tax Center

The state Senate unveiled a proposal yesterday that would take the modest revenue gains that our state is experiencing and give them away in the form of tax cuts rather than reinvest them in the building blocks of community well-being. That would be a mistake. Lawmakers already deeply cut revenue collections in 2013 and this plan would double down on those cuts and flawed strategy.

The proposal would hand out more costly tax cuts to large, profitable corporations, lower the personal income tax for the third time, and slightly expand the sales tax to more services—all at the expense of everyday North Carolinians. It will neither enable the state to replace the worst cuts enacted in the aftermath of the recession nor restore the state’s economy to a sound footing, as my colleague explained yesterday.

The cost of the Senate leadership’s proposal grows to nearly $1.1 billion per year once the plan is fully phased in.* That cost is roughly the amount of money that the state invests in the entire Community College system, which serves all 100 counties and is tasked with preparing today and tomorrow’s workforce. Over the next biennium alone, revenue losses would total $951 million. That means a lost opportunity to catch up, rebuild, and keep up with the needs of children, families, and communities across the state.

All North Carolinians will the pay price. The graphic below illustrates the potential reach of those revenues and highlights how the revenue could instead be reinvested in things that benefit us all. Read More