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SmokeIn an allusion to the signal that’s seen in the Vatican when the leaders of the Catholic Church elect a new Pope, at least one news media report this morning is talking about “white smoke” being visible on Jones Street. The story accompanying the headline, of course, is that leaders of the North Carolina General Assembly signaled over the weekend that they have agreement on the framework of a state budget deal. Assuming it really comes to fruition, the agreement comes a full month into the 2015 fiscal year.

A closer look at those puffs of smoke, however, reveals them to bear a notably blue tinge — that is, the kind one typically see with an engine that’s leaking oil and about to blow. As Alexandra Sirota details in the post immediately below and Chris Fitzsimon highlights in this morning’s “Monday Numbers,” one important impetus for the agreement would appear to be the latest calculations of the General Assembly’s Fiscal Research Division staff that the income tax cuts enacted last year are harming state budget revenues even more than had been officially forecast – i.e. more along the lines of what the Budget and Tax Center has been predicting all along.

So, keep in mind a couple of things this week as lawmakers and the Governor are falling all over themselves to issue statements of  self-congratulations:

1) Notwithstanding their rosy claims, the engine driving state government — the tax system — remains cracked and badly in need of an overhaul.

2) The current proposed solution — rolling up the window and ignoring the smoke — will provide only a temporary solution at best.

A major detail has been ignored in the rush to adopt a flat income tax rate. With a flat income tax, revenues will grow more slowly over time, leaving North Carolina unable to maintain its most important investments, such as education, which has already suffered from significant spending reductions in recent years. That means we will have to raise other taxes to make up the difference or suffer the consequences of underfunding our priorities.

In the presentation to House Finance of the bill, Representative Lewis stated that the income changes–including most significantly the adoption of a flat tax–would hold revenue growth to about 4.5 percent per year. If revenue had grown that slowly over the past 20 years, North Carolina would have been unable to make  many of its most important investments. In 2007, for instance, North Carolina would have had nearly $5 billion less for North Carolina’s schools, colleges and universities, roads, public safety, and other services. That $5 billion is more than our budget combined for the Department of Health and Human Services, Department of Commerce, Department of Justice, Indigent Defense Services PLUS funds to address the NC pre-K waiting list and half of the child care subsidy waiting list. Read More

The House is taking a vote on the tax plan that was rushed through committees this week with little time for discussion of the real impact. This new House plan, like all the other plans proposed, will undermine North Carolina’s future by shifting taxes from the wealthy onto everyone else and will leave the state unable to make its most important investments.

Our full analysis of what this will mean for taxpayers can be accessed here. What does this tell us about the vote that House members are moments away from taking?

  • The top five percent will get tax cuts while the bottom 95 percent of taxpayers see their taxes increase, on average. This analysis is the most reliable way to assess what will happen to the population overall under this plan. It doesn’t cherry pick taxpayers with certain filing characteristics but summarizes the diversity of experiences under the House tax plan to tell us what the impact will be for a taxpayer on average in each income group.
  • The largest benefits of this plan overwhelmingly go to the top one percent. Millionaires would receive a tax cut of nearly $9,000. In fact, the small number of millionaires in this state would receive almost 40 percent of the total income tax cut that results from flattening the rate and removing the cap on charitable contributions.
  • The so-called “protections” for low- and middle-income taxpayers are ineffective and poorly targeted at those who are hurt by this tax plan. It will fail to shield those taxpayers from changing sales tax to services. The House tax plan combined with the end of the state’s Earned Income Tax Credit will raise taxes for taxpayers with an average income of $12,000 by 0.7 percent, while cutting taxes for taxpayers with an average income of $940,000 by -1 percent.
  • The House tax plan will cost the state $1.6 billion over five years. That means fewer dollars to invest in the foundations for economic growth—like K-12 and higher education—at a time when spending is already at historic lows.

Tax cuts for the wealthy paired with tax hikes for everyone else will not help North Carolina’s economy. But it will cost us our most important priorities.

Here’s the full story on the House tax plan: It will increase taxes for middle- and low-income households while giving a large tax cut to the wealthy. The bottom ninety-five percent of taxpayers would see their taxes go up, on average, under the bill version that will be heard in House Appropriations today.

Those who focus only on the income tax changes and say this is a tax cut for everyone are ignoring how the sales tax changes – a major part of this tax plan – will hurt average families. Those who are using data from the Fiscal Research division to extrapolate that the majority will see a tax cut are also mistaken. These claims only obscure the harmful impact of this tax plan on the majority of North Carolinians.

The House tax plan does provide an income tax cut to taxpayers across the income spectrum, but that’s not the whole story and still 27% of all taxpayers would see an income tax increase. The greatest cut goes to the top: More than third of the income tax cut goes to the richest 1 percent. But as all North Carolinians know, we don’t just pay income taxes; we also pay sales tax. That’s why we must look at income and sales tax changes in order to evaluate whether the House tax plans are good for our state.

The House tax plan expands the services that are subject to the sales tax. Because they spend a greater share of their income on taxable goods and services to meet their basic needs, middle- and low-income families will pay more of their income in sales taxes than the wealthy. In the House plan, the expansion of the sales tax is, on average, enough to cancel out the income tax cut, on average, for the bottom 95 percent of taxpayers. Read More

Alexandra Sirota, Director of the North Carolina Budget and Tax Center and the state’s leading independent tax policy expert issued the following brief statement this morning after the House Finance Committee debated and approved legislation to overhaul North Carolina’s tax code:

“This tax plan will provide the wealthiest North Carolinians a tax cut while middle-class and low-income taxpayers pay more.

The only amendment accepted makes things worse — adding $525 million to the price tag and bringing the revenue loss each year to nearly a $1 billion.  Without this vital revenue, North Carolina can’t  make needed investments in our economy, our children’s education, the health of our seniors and the safety of our communities.”  

Click here for a fact sheet with more information on the legislation (HB 998).