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A new report from the experts at the N.C. Budget and Tax Center paints a sobering picture of what the new “recovered” North Carolina economy really means for average people:

“North Carolina’s recovery from the Great Recession has been marked by slow job growth and persistent challenges for working families to make ends meet. The minimal job growth has been concentrated in low-wage industries, a new report finds, which will only make North Carolina’s economic recovery that much more difficult. Read More

NC Budget and Tax Center

North Carolina’s economic development efforts took a turn for the worse last night, when the Senate passed a bill that privatizes the state’s business recruitment, retention, and development activities. A similar proposal will likely pass the House today, and while the lower chamber’s privatization plan is marginally better than the Senate’s scheme, both leave a lot to be desired in terms of ensuring more effective job creation and protecting taxpayer dollars.

Privatizing job creation efforts is hardly a new idea, although it’s proven to generate more scandals than results in the sixteen states that have experimented with this approach. According to the General Assembly’s own Fiscal Research Division, the kinds of economic development public private partnerships envisioned in the House and Senate bills haven’t proven themselves any more effective at boosting job creation in the states that adopted them than in those states that simply kept their job recruiting efforts inside agencies of state government.   At the same time, FRD and other researchers have found that these privatization schemes have been marked by financial mismanagement (Wisconsin), conflicts of interest and pay-to-play incentive-granting (Texas and Florida), and the inability to raise private funds, leaving taxpayers on the hook (Missouri).

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NC Budget and Tax Center

Yesterday evening, members of the Senate Finance Committee gathered to consider a modified version of House Bill 1050 (HB 1050) which includes repealing the local privilege tax. A repeated claim by proponents of the tax repeal is that additional revenue from the local sales tax – resulting from the tax plan passed last year – will make up for the revenue lost from repealing the local privilege tax.

A closer look at a fiscal note provided by the General Assembly’s Fiscal Research Division, however, highlights that the math simply doesn’t add up to support this claim.

Fiscal Research estimates that a full repeal of the local privilege would result in nearly $63 million in less revenue for cities and counties across the state. Revenue from an expanded local sales tax is projected to bring in an about $10.9 million in additional annual local revenue and sales taxes from online sales via Amazon is expected to bring in around $2.9 million – for a total of $13.8 million in local revenue from an expanded sales tax.

Local Privilege Tax Repeal

It is clear that $13.8 million in additional local sales tax revenue is not sufficient to replace $63 million in lost revenue from the repeal of the local privilege tax. Less revenue means local governments will likely be further challenged with providing its residents with core public services and an attractive quality of life.

NC Budget and Tax Center

The Senate Finance Committee is scheduled to convene at 7 PM tonight to consider a modified version of House Bill 1050 (HB 1050), which includes a provision that would restrict the ability of local governments to manage their budgets and public investments in their respective communities.

One provision, among many, within HB 1050 would repeal the local privilege tax beginning next year. State law currently permits local governing authorities to levy a local privilege tax on various businesses that engage in significant economic activities in their respective locales. Repeal of the local privilege tax would result in nearly $63 million in less revenue for public investments in cities and counties across the state.

State policymakers point to the tax plan passed last year as a way to offset the lost local revenue from repealing the local privilege tax. Particularly, proponents expect the expansion of the sales tax base to some services to generate additional revenue.

The proposed repeal of the local privilege tax means businesses would get a tax cut that will be paid for largely by middle- and low-income North Carolinians who pay more of their income in sales tax than higher income taxpayers. And if the local sales tax fails to generate sufficient revenue to make up for lost revenue from repealing the local privilege tax, local governments will either have to find revenue in other places (e.g. increase local property tax rate), reduce the level of services provided to residents, or a combination of both.

Cities and counties, like the state, faced tough budget decisions during the economic downturn and recovery. They are relying on revenues to catch up and keep up with the needs of their residents. This bill puts that progress at risk.

Changes to the local privilege tax could have been made in a way that held local governments harmless, as was done in tax modernization proposals back in 2009 and earlier; however, policymakers chose this path. Under this tax change, local governments could become further challenged with providing its residents with core public services and an attractive quality of life.

NC Budget and Tax Center

Tax cuts never live up to the extravagant promises of job creation and economic growth so often made by their supporters, and last year’s tax reductions are unlikely to turn out any differently. The most recent example is Kansas, which enacted massive tax cuts in 2011. Two years later the state has experienced slower job growth than the national average, contraction in the number of businesses employing people, and loss of its AAA bond rating resulting from its catastrophic, 50% loss in revenue.

While there remains no consensus among academic economists that tax cuts are a strategy to grow the economy—instead, evidence is mounting of their harm—some think tanks keep trying to play the same hand to get a different result. One example is the Beacon Hill Institute, which has frequently deployed its State Tax Analysis Modeling Program (STAMP) during tax cut debates in various states across the country, including last year in North Carolina. Using this model, Beacon Hill claims to show that lowering taxes, or refusing to raise them, will benefit state economies. In the case of North Carolina, they also went a step further to claim that all income groups get a tax cut on average.

A new report from the Institute on Taxation and Economic Policy reveals a number of serious flaws in the STAMP approach that undermine the accuracy of its claims. In doing so, it calls into question the rosy scenario Beacon Hill paints for tax-cutting states like North Carolina.

Follow me below the fold for are some of the problems identified by ITEP:

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