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NC Budget and Tax Center

The latest Who Pays? report released today by the Institute on Taxation and Economic Policy (ITEP) takes a look at the fairness of state tax systems. For North Carolina, the lowest income North Carolinians pay over 70 percent more in state and local taxes as a share of their income compared to the state’s wealthiest residents, the ITEP report highlights.

The lowest 20 percent of North Carolinians – with an average income of $10,700 – pay 9.2 percent of their income in state and local taxes, the study finds, compared to 5.3 percent for the top 1 percent, the average income for this group is $969,100.

North Carolina’s unfair tax system presents both short- and long-term challenges and concerns. The state’s unfair tax system not only contributes to widening income inequality in the short term, but also leaves the state struggling to raise adequate revenue for public investments in the long term, ITEP notes. These realities are already playing out in the North Carolina. As state lawmakers return to Raleigh this week for the 2015 legislative session they face an ongoing revenue shortfall as a result of tax cuts passed in 2013.

North Carolina has moved away from many features that create a fairer tax system. State lawmakers replaced a graduated personal income tax rate structure (meaning the higher one’s income, the higher one’s effective personal income tax rate) with a flat rate that doesn’t take into account a taxpayer’s ability to pay, allowed the state’s Earned Income Tax Credit to expire, expanded the sales tax base, and allowed the corporate income tax rate to be cut from 6.9 to 5 percent and potentially as low as 3 percent.

These changes have resulted in a sizable reduction in revenue, with the state now challenged with funding basic public obligations such as education and healthcare services for the elderly and poor. Returning to a graduated income tax rate structure, reestablishing a state Earned Income Tax Credit, creating a renter’s credit or an enhanced and refundable Child Tax Credit, and stopping further tax cuts that largely benefit the wealthy and profitable corporations are important opportunities to create a fairer state tax code.

A state tax code that works for all North Carolina taxpayers is important for ensuring that economic opportunity and prosperity is broadly shared. The Who Pays? report highlights that there is work to be done to make this a reality.

NC Budget and Tax Center

The 13th Annual Economic Forecast Forum, sponsored by the North Carolina Chamber of Commerce and North Carolina Bankers Association was held on Monday, January 5th. The event raised a range of issues, but a few are particularly relevant to the upcoming legislative session and the economic prospects of North Carolinians.

More cash for incentives is Governor McCrory’s first legislative priority: In his remarks, Governor McCrory launched an impassioned plea for a new economic development fund to lure large businesses to North Carolina. Saying that he is negotiating with companies that are considering investing in North Carolina, the Governor said that his first legislative priority is creating a new incentive fund. North Carolina already gives away millions of dollars a year in incentives, but being even more generous with large companies is the Governor’s first order of business for the new legislative session.

Regardless of what you think about incentives generally, it is rather odd to see the Governor making the creation of a new fund his top priority. First, incentives often go to companies that locate in parts of the state that already enjoy robust economic growth, so doubling down on this approach to economic development will likely do little to help areas that are struggling the most. Second, the program that the Governor described would only help very large corporations, which would ignore the vital role that small and medium sized companies play in creating new jobs. Third, we are heading into a legislative session where funds are already stretched thin for vital state services, so it is unclear what would have to be cut in order to free up funds to pay out to large mobile companies. If this policy is passed early in the legislative session, as the Governor insists is necessary, the real cost will only become clear when it comes time to produce a balanced budget several months later.

Head of Blue Cross Blue Shield of North Carolina touts Medicaid expansion: Brad Wilson, President and CEO of Blue Cross Blue Shield argued that state leaders should change course and opt to expand Medicaid, a move that would cover hundreds of thousands of people, with the bill being largely paid by the federal government. Wilson pointed out that the failure to expand Medicaid has left more than half a million North Carolinians without health coverage and has cost the state $1.1 billion in federal funding. Not expanding Medicaid results in North Carolina taxpayers subsidizing health care costs in other states with none of those funds returning to serve the residents of our state. Moreover, because people who would otherwise be covered by expanding Medicaid are forced to seek medical care through emergency rooms, and often lack the resources to pay for that care, health insurers are forced to increase premiums on North Carolina rate payers to cover the costs of covering the uninsured. The result is that North Carolinians end of paying twice for not expanding Medicaid, once when we file our federal taxes and again when we pay our health insurance bill.

Mr. Wilson referenced a new economic report showing that all counties would benefit from expanding Medicaid. In contrast to most economic development grants, Medicaid expansion would inject capital and create jobs in virtually every community across North Carolina, while also improving the health and productivity of the workforce in the process.  Wilson’s statements are important in and of themselves, but they are also part of a larger trend. More Republican governors, like Florida’s Rick Scott, who initially wanted nothing to do with anything connected to Obamacare, have come to support expanding Medicaid. Beyond the moral dimension, expanding Medicaid has significant economic upside for the state, and it is telling that this event featured a prominent member of the business community making just that case.

Wells Fargo economist projects robust growth in coming years: Wells Fargo Managing Director and Chief Economist Mark Vitner is bullish about North Carolina’s economic prospects in the next few years. Saying that we have finally hit the “sweet spot” of the current expansion, Vitner expects 3-4% growth per year for 2015 and 2016. Vitner noted that all sectors except government saw employment growth in the last year, and expects to see the same this year. Even the residential housing market is starting to recover, having digested the glut of housing left by the recession, and North Carolina’s growing population creating more long-term demand for homes and apartments.

Current growth does appear to be strengthening but the recovery to date has been too reliant on low-wage jobs, has been largely concentrated in urban areas and frankly employment growth has been insufficient to keep up with the state’s growing population. So while North Carolina is poised to follow the national trend of an improving economy, we need to keep an eye on whether growth translates into decent pay and jobs for everyone in the state who wants to work.  State policy decisions over the next year will influence whether the recovery comes home across North Carolina. Policymakers will have opportunities to address the uneven recovery and ensure that people can find good jobs, affordable healthcare, quality education, and economically vibrant local communities.

Concerns about a “barbell economy”: A morning panel on the role of technology in North Carolina’s economic future repeatedly addressed the disappearance of mid-wage jobs. The term “barbell economy” was used to describe the rapid growth in low-wage and high-wage jobs in recent years, coupled with meager job opportunities in the middle of the wage scale. Panelists expressed concern that as technology replaces human labor in many industries, we could be looking at a long-term decline in the number of middle-income jobs. This may be the most troubling long-term trend facing North Carolina. The hollowing-out of the labor market, with more and more of the wealth generated by the economy going to a smaller and smaller group of people, makes it more difficult to sustain the middle class economic activities—buying goods and services, purchasing homes, sending kids to college– that support robust growth.

The forecast presented at the Chamber forum was generally sunny, with solid growth over the next few years across most industries, but there are deeper questions about the long-term structure of the labor market, and whether solid growth will continue to create enough medium-wage jobs to support a middle-class. This is not just a North Carolina story, but it is something that we can do something about, and it was heartening to see this issue highlighted at this event.

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Despite the growing revenue challenge North Carolina faces, a new round of tax cuts went into effect with the start of the new year. While the growing revenue shortfall warrants immediate attention during the upcoming General Assembly legislative session that begins next week, inaction up to this point has already  dug a deeper hole as of January 1, 2015.

New personal income and corporate income tax rates are now in effect for 2015. The now-flat personal income tax rate dropped to 5.75 from 5.8 percent (the top marginal rate was 7.75 percent in 2013) and the corporate income tax rate dropped to 5 percent from 6 percent (it was 6.9 percent in 2013). These tax cuts will further reduce revenue for public investments and will largely benefit the wealthy and profitable corporation at the expense of low- and middle-income taxpayers.

The cost of the tax plan continues to grow higher than what state officials originally estimated. As of the end of the November, revenue collections are coming in $190 million below expectations. This loss is built on top of the already revised and anticipated revenue loss of $704 million due to the tax plan. Combined, this result in a nearly $900 million revenue loss for the state – much higher than the original $512 million cost estimate.

By the end of the fiscal year, BTC estimates a total revenue loss of around $1.1 billion Read More

NC Budget and Tax Center

In 2015, many conservative state lawmakers across the country are retreating from the long-held belief that cutting taxes will generate more revenue and spur economic growth. Kansas, Wisconsin, and, yes, North Carolina along with Arthur Laffer, in their efforts to put into practice the flawed theories of trickle-down economics, have created more problems than improvements, according to a recent Politico piece.

Rather than serve as a beacon of competitiveness in the South, North Carolina instead has become a cautionary tale for other states across the country that are considering tax cuts.

The evidence is mounting that tax-cutting experiments aren’t delivering on the promises made by trickle-down economic theory.

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NC Budget and Tax Center

Recent media coverage of the mounting cost of the tax plan highlights the story of 2014. This story began in 2013 with the decision by policymakers to cut taxes for the wealthy and profitable corporations and will likely reach its climax in 2015. How policymakers choose to address the revenue crisis — through more cuts to core public services or a balanced approach that includes additional revenue — will either propel North Carolina forward or backward.  The moral of the story is already clear: North Carolina cannot hope to achieve a competitive and more inclusive position in a growing economy by cutting taxes for the wealthy and profitable corporations.

In early 2014, the reality that the tax plan will cost more than originally projected became clear.  By May, reports of a current year revenue shortfall appeared. Then new data from the IRS confirmed that the tax plan costs would likely be greater, in part, due to the original cost estimates being based on assumptions and income data reflective of an economic downturn rather than a recovering economy. The reality is that the ongoing economic recovery has been very uneven, with the bulk of economic gains flowing to the wealthiest individuals. The latest announcement this fall confirming an even larger revenue shortfall was just the next chapter in a story of an inadequate tax system. Read More