NC Budget and Tax Center

NC Budget and Tax Center

Due to the speed at which passage of the bill is moving, we’re highlighting here five important findings from our analysis of the proposed tax-cut plan.

The Budget & Tax Center will release a more detailed analysis of the tax plan in the next day, so stay tuned.

The bottom line: yet again policymakers chose to cut taxes — a strategy that doesn’t address North Carolina’s real economic challenges. By doing so they undercut the foundations of what has proven to be economy-boosting public investments. Rather than debate what is needed so every child in North Carolina receives a high quality education, for example, policymakers narrowed their choices by cutting taxes to say it’s either teachers or textbooks; smart technology in the classroom or a teacher assistant; a one-time bonus or bringing teachers closer to the national average in pay.

North Carolina can’t afford to debate what a successful state looks like at the margins. The bar should be higher. We need to build on the investments that have made our state great and follow the time-tested better pathway to a strong economy that works for everyone.

Here is why the tax plan fails to meet North Carolina’s high standards of fiscal responsibility and will fail to put the state in a competitive position against our neighbors and the nation:

  • It’s a big revenue loser. No surprise here — but the impacts of that revenue loss aren’t fully accounted for in this two-year budget. That is because policymakers designed the tax changes to kick in down the road when future policymakers will need to contend with an even greater gap between resources and public needs, like a growing number of students and the inability to move teachers to the national average in pay.

Tax Cuts Joint Budget Deal

  • The wealthiest keep getting the biggest breaks. The move to cut the top state income tax rate to 5.499 percent from 5.7 percent appears to only serve the ideological commitment to income tax cuts. By design, it doesn’t address the fact that low- and middle-income taxpayers already pay more as a share of their income in state and local taxes than the wealthiest taxpayers do. That gap will even widen a bit under this plan. Just slightly more than one-third of taxpayers with income below $20,000 get a tax cut at the same time that 99 percent of those with income greater than $423,000 do.

  • The sales tax base expansion should not be used to pay for income tax and should include a state Earned Income Tax Credit. Increasing the goods and services subject to sales tax is important to keep up with today’s economy and provide much-needed revenue.  But relying more on the sales tax while reducing the income tax is a step in the wrong direction. It threatens the balance provided by two taxes that perform differently in different economic circumstances. In the long term North Carolina’s revenue system will be more subject to erosion in economic downturns – just when public needs tend to be the greatest. Equally important is that using an expanded sales tax to pay for costly income tax cuts fails to account for the reality that the lower one’s income the higher percentage of it they pay in sales taxes. A $500 increase in the standard deduction is insufficient to address the greater tax load that low- and middle-income taxpayers will pay. Again, the wealthiest get the biggest benefit.
  • The corporate income tax rate will definitely drop to 3 percent at some point next year. Changes to the language driving the reduction mean that revenue collections don’t have to meet the low revenue threshold set, a bar that they will likely surpass given the national economic recovery, by the end of Fiscal Year 2016. Whenever they reach that threshold, the rate will be reduced resulting in an additional $350 million in lost revenue for public schools and targeted economic development efforts beginning in the second year.  Moreover, changes to the way in which corporations profits are subject to tax will also change such that multistate corporations will only pay tax based on the share of their national profits generated from sales to North Carolina consumers and no longer need to account for their property or payroll.
  • Allocating sales tax revenue to local communities under the proposed complex formula won’t make them whole. Many questions remain about how the complicated formula for sending sales tax revenue to localities will be implemented — and how much money will be involved. Is it just the revenue anticipated from expanding the sales tax? Or could revenue generated from sales tax also be in the mix if anticipated revenue collections from broadening the sales tax fall short?  Importantly too, the roughly $84.8 million identified is unlikely to sufficiently change the dynamics in rural communities where water & sewer infrastructure needs persist, main street revitalization and support to existing businesses to expand are needed and job training and pathways require regional connections. A vision and policy agenda for rural economic development cannot be achieved with a state tax code that falls short.

The proposed tax plan is not reform. It won’t help the state’s economic position. It has been proven over time that tax cuts don’t drive significant job creation or improve wages. They can’t ensure that economic activity happens in communities that are being left behind by current economic growth.

What tax cuts do is reduce the ability of the state to build a foundation for a strong economy. That is crystal clear. The harm to public schools, health, the justice system and economic development from adoption of a strategy that doesn’t work will be felt by us all.

NC Budget and Tax Center

Yesterday, legislative leadership unveiled a joint budget deal that puts the train on the wrong tracks by pursuing deeper tax cuts at the expense of strengthening public education, public health and safety, and the other building blocks of a strong economy. The deal includes another costly round of income tax cuts, additional tax breaks for selected industries, and an expansion in the sales tax base to include installation, repair, and maintenance services. The tax plan will lose $383.6 million over a two-year period, with the annual loss ballooning to $692.9 million in by the fifth year.

The state Senate is scheduled to give preliminary approval of the 500-plus page deal at 2pm today and final approval tomorrow, despite its 11:30pm release last evening. The House is expected to vote on the deal as early as Thursday, with it headed to the Governor’s desk after a final vote. The stop-gap spending measure that is currently in place expires Friday at midnight and would need to be extended for a fourth time if a final budget deal is not in place by then.

While most of the public budget debate this week will be on the spending side, examining how lawmakers pay for the budget deal is just as important. This is especially true due to this new round of costly tax cuts that come on top of the $1 billion annual tax cuts approved two years ago. Both tax plans drain resources that otherwise could have been used to build opportunity and replace the worst cuts enacted since the economic downturn. Read More

NC Budget and Tax Center

North Carolina leaders have missed another opportunity to build an economy that works for everyone.

Rather than making the truly tough choices that reflect the priorities of North Carolinians, policymakers have once again decided to cut taxes and forgo critical investments that boost the economy.

Such investments include providing every child with a sound education; bolstering the public sector foundation that supports innovation, builds opportunities for research and development, and trains workers; and protecting the health and well-being of our state’s residents and communities.

These should be our leaders’ priorities, not tax cuts that continue to shift the tax load onto average North Carolinians and push costs down the road.

NC Budget and Tax Center

This Labor Day has renewed focus on the reality that wages for working families have been stagnating across the country and declining here in North Carolina.

This focus is a welcome change for our state where the full-throated defense of tax cuts as the solution to working families’ economic challenges has hit a hard reality. Income tax cuts have increased the tax load for many working families in North Carolina and generated untold costs for communities in the form of foregone education investments, crumbling infrastructure and more.

Still policymakers in North Carolina remain relentless in their pursuit of more income tax cuts. The final budget contemplates another $110 million in tax cuts for individuals on top of the already costly tax cuts for profitable corporations that will cost $100 million this year and $350 million next.

In our State of Working North Carolina report this week, we documented the fall in wages for the median worker since the start of the official recovery in 2009. The result is that working people don’t have the same buying power that they did before the Recession and that means businesses don’t have the same level of consumer demand for the goods and services they produce. Under such conditions, it will be hard to sustain growth in the economy and ensure that more are included in the benefits of that growth. No tax cut, especially one paid for through increased costs elsewhere, will fix that.

Policymakers have an immediate and direct mechanism in the final budget for addressing the state’s wage problem. By aligning state workers’ pay with what it takes to make ends meet, policymakers can boost the economy and strengthen the private sector. After all, state workers in North Carolina shop in privately owned grocery stories, bank at private financial institutions, purchase lawn services from private landscaping companies, and on and on.

Some would say that policymakers are trying. They have proposed an across the board $750 bonus for all state workers and bumped up the starting pay for teachers to $35,000. But by stopping their pursuit of flawed tax cuts, policymakers could actually make sure wages for public sector workers boost the economy.

Here are a few fast facts about wages and the reality for the state workers who run our courts, clean state buildings, manage permitting and support to businesses, and educate our children:

  1. Analysis by the Office of State Human Resources finds that “salary increases in state government have …cumulatively trailed CPI (aka inflation) by 4 percent over the last ten years, effectively decreasing employee “buying power.”
  2. The average weekly wage for state employees of $901 lags the national average and ranks the state 39th for its low pay.
  3. Those serving as housekeepers, health care technicians and office assistants in state government earn well below the statewide Living Income Standard for one adult, one child. In 12 out of 16 jobs that serve as benchmarks for the Office of State Human Resources, the base salary is below market rate.
  4. Base pay for a number of public-sector workers, including the teachers who educate our children, falls below what it actually takes to make ends meet today. The proposed starting pay for teachers of $35,000 is still below the statewide Living Income Standard for one adult, one child in 6 North Carolina counties.  The average pay for teachers in elementary and secondary schools has fallen by $5,000 since 2009 reducing their purchasing power even as the national economic recovery began.

The myopic interest in tax cuts on the part of policymakers has not only failed to boost the economy, it has also generated significant cost to the state. State agencies experienced a voluntary turnover rate of 7 percent in FY 2013-2014 which equates to roughly $201 million in cost to the state. Human capital is hard to replace and that is why competitive compensation and a positive work environment is critical. In the public university system, the state has lost a reported 3 out of 4 retention battles. Researchers who have left state universities took grants totaling $91 million and likely significant intellectual property of far greater value to the state.

It is time for policymakers to take seriously the wage challenges facing workers in North Carolina. Starting now with the budget to increase the buying power of state workers is the first step, the next one is to follow 29 other states and raise the minimum wage for all workers.

NC Budget and Tax Center

As part of ongoing negotiations to produce a state budget, state lawmakers would like to provide more tax cuts to North Carolina taxpayers. This tax proposal, while unclear in the details (is it another reduction to the already low 5.75 percent personal income tax rate?), would offset the increase in various DMV fees included in the budget passed by House members.

A refundable state Earned Income Tax Credit (EITC) is a great way for state lawmakers to fulfill their desired goal of ensuring working families aren’t paying more as a result of their budget choices. The EITC provides a modest boost to the wages of low- and moderate-income workers, which will help offset additional costs resulting from an increase in DMV fees. Prior to its elimination in 2014, more than 927,000 North Carolinians claimed the state EITC, with working families in each of the state’s 100 counties benefiting from the tax credit.

State lawmakers’ reported agreement to provide $110 million in tax cuts to offset the DMV fee hikes is close to the value of the state EITC. For FY 2013, prior to its elimination, the state EITC cost around $101 million, which is less than the tax cut target agreed to by state lawmakers. The EITC is the best targeted tool to address the upside-down nature of the state’s tax code. Better than an increased standard deduction, the tax credit is proven by years of experience and research to effectively target working families who earn low wages so that they can make ends meet, support their children’s healthy development and boost the economy.

If state lawmakers are serious about correcting the imbalance in the state’s tax code, a refundable state EITC is the most effective way to support children and working families and help spur economic activity in local communities across the state.