The Washington Post reports that the sequester confrontation in Washington is a “moment of truth” for the Tea Party. The story also quotes Congresswoman Renee Ellmers as endorsing the disastrous cuts sequestration will bring about.

“Rep. Renee L. Ellmers (N.C.), who is part of the 2010 class of Republicans but not a member of the tea party caucus, said she worries about the sequester, especially since her district, home to Fort Bragg, would be hit hard. But she said it may have to happen.

‘I do believe it will start a very important process that will help our economy to start to grow,” she said. “The debt that we have at the federal level is our biggest threat for our country.’”

NC Budget and Tax Center

This morning, the House Finance Committee voted to reduce the state Earned Income Tax Credit (EITC) provided to low-income working families across the state. More than 883,000 North Carolinians claimed the credit in 2010, which provides working families with dollars to spend in their local communities. Each year the state updates its tax code to address changes made to the federal tax code during the previous year, as North Carolina’s tax code is linked to the federal tax code.

Improvements to the federal EITC were extended as part of the fiscal cliff deal, including eliminating the marriage penalty and extending the credit to larger family sizes. In decoupling the state credit from the federal credit, the Finance Committee voted to reduce the state EITC from 5% to 4.5% of the federal credit for tax year 2013. The result is a cut of $11 million to the state credit.

The EITC helps boost the wages of low-income families and helps them pay for basic necessities. Cutting the tax credit will further challenge the ability of these families to make ends meet and minimize its ability to address the upside down nature of our state and local tax system. The House finance committee also voted to cut the Work Opportunity tax credit. However, the committee did vote to increase the amount of itemized deductions that individuals can claim, which would largely benefit high-income individuals.

NC Budget and Tax Center

It turns out government spending is the problem with the economy—there’s been too little of it over the last few months, according to Wednesday’s report from the U.S. Bureau of Economic Analysis (BEA).  

Gross domestic product (GDP) dropped by 0.1 percent during the 4th quarter of 2012, the first GDP contraction in three years. While this would ordinarily seem an ominous sign for the health of the nation’s economic recovery, most economists and market-watchers have argued that the contraction is temporary and likely the result of government policy, rather than signs of a long-term downturn.   

Specifically, the fourth quarter contraction is due to sharp reductions in government spending on national defense contracts coupled with a $40 billion drop in business inventories resulting from the same policy environment.

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NC Budget and Tax Center

On Wednesday, the US House voted to suspend the federal debt ceiling—the statutory limit on the amount the US Treasury can borrow to finance existing obligations—until May, backpedaling on previous threats to withhold the debt limit increase unless Congress and the White House agreed to significant cuts in federal spending.  As a result, Congress managed to avoid default and a potential financial crisis that risked the nation’s creditworthiness and economic recovery. At the same time, however, House leaders promised to use three additional chokepoints in the budget process as leverage to secure their ultimate objective—deficit reduction based entirely on unspecified but dramatic reductions in federal spending and the transformation of entitlement programs Social Security and Medicare.

Although achieving a sustainable course for the national debt is clearly important to putting our nations’ fiscal house in order, any deficit reduction plan must take a balanced approach that includes new revenues (beyond the first step achieved in the Fiscal Cliff deal) and strategic spending cuts that do not disproportionately impact working families or damage state budgets.

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