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Tax shiftIn their never ending quest to tilt it more and more in favor of themselves and their wealthy backers, state lawmakers are again touting a plan to shift North Carolina’s tax system away from income taxes and further onto the sales tax.

As Raleigh’s News & Observer reported in this article, the move was endorsed this week at a legislative hearing by a right-wing group that calls itself the Tax Foundation. Critics of the idea were not invited to speak.

Such a shift is a dreadful idea.

Not only will it make our tax system more regressive than it already is (thereby taxing the wealthy at much lower rates than the poor and middle class), it will make the system much less flexible and resilient to meet the needs of a growing state. While it does make sense to broaden the base of the sales tax to capture more economic transactions, this should be married with a plan to lower sales tax rates so that the tax does not become a monster.

For a healthy revenue system that remains stable and is better able to withstand the ups and downs of the economy, North Carolina needs a healthy balance of a progressive personal income tax, a broad-based sales tax and reasonable property taxes at the local level.

An editorial in this morning’s Fayetteville Observer puts it gently but accurately in assessing this week’s hearing:

“Legislators didn’t invite any opposing viewpoints. It’s clear that the architects of state tax policy want to more aggressively cut corporate and personal income taxes.

If the lawmakers had invited tax experts with differing views, they might have considered the impact that a shift to broader sales taxes has on the poor, who spend a larger percentage of their incomes on basic goods and services. It’s the same problem that plagues proposals for a “flat tax.” Wealthier people who don’t need all of their income for living expenses pay a far smaller share of their earnings in taxes. The shift away from income taxes and toward consumption taxes is one of the driving forces behind the growing gap between rich and poor in the U.S.

While we agree that some shift of sales taxes to services was unavoidable in an increasingly service-based economy, we hope state tax code writers move with caution there, lest they create even broader gulfs between the haves and the have-nots.”

NC Budget and Tax Center

The Senate Finance Committee this morning voted to approve SB 607 which included a number of proposals that would make the state’s current economic challenges worse and undermine the foundations of a strong economy. This included an amendment to the constitution to cap the income tax at 5% and another undemocratic amendment creating a flawed formula-based limit on state investments that would force permanent cuts to education, roads and highways, health care and other key services that support our economy and quality of life. This amendment would also require a 2/3rd majority vote to increase spending beyond the formula. There is also a third amendment to the constitution included in the bill which would limit access to Emergency Savings Reserves by requiring a 2/3rd majority of legislators to access it.

The flurry of activity on tax and budget matters comes on the heels of the Senate announcement yesterday that they are willing to address certain policy matters outside of the budget, clearing the way for a final budget deal before the August 14th deadline.

A rigid, arbitrary, and fundamentally flawed formula for budgeting

The second proposed amendment which would remove authority from state lawmakers by setting an arbitrary formula for government spending has been tried in only one other state, Colorado, and has been widely acknowledged as a failure. In fact, it did so much damage in Colorado that voters chose to suspend it. Before they suspended it, this rigid formula forced drastic cuts to Colorado’s K-12 and higher education, and it became impossible for the state to keep pace with the rising cost of health care, forcing cuts to child immunization programs and prenatal health care. At the same time, it was clear that it was doing nothing to improve Colorado’s business climate, economy, or quality of life. As a result, business leaders in Colorado were major proponents of suspending the law.

The harm to Colorado was significant, but the use of such a rigid and fundamentally flawed formula would be particularly damaging in North Carolina where recent harmful budget cuts to our schools and other services average people depend on everyday would be locked in permanently and new emerging needs could not be met by future policymakers because their hands would be tied by this constitutional provision.  The capping of state spending to population plus inflation growth would lead to large, annual cuts that over time make it impossible to ensure a quality education for our children, maintain vibrant main streets in communities, and invest in the health and safety of families.

In North Carolina, such a rigid formula would mean forgoing an estimated $500 million in investments next year alone. This $500 million would provide for critical classroom funding for our kids, could allow the state to support rural economic development and support the research and development at public universities that drives innovation.

Additionally, it’s critical to understand that this type of law is a gimmick and does nothing to make government run more efficiently or ensure that tax dollars are well spent. Instead of making meaningful reforms, the proposal passed by the Senate Finance Committee simply turns lawmakers’ decision-making responsibilities over to a flawed formula. Meanwhile, it won’t do anything to make sure the state’s spending priorities are in line with the needs of North Carolinians or make the tax system fairer.

An undemocratic hurdle for our tax system

The other proposal passed today by the committee – a hard limit to the income tax rate of 5% would severely limit the state’s ability to ensure the tax code is adequate and fair over time. Such a proposal could cost taxpayers money by raising the cost of borrowing. It also would likely shift the financing of public investments to fees and other taxes that taxpayers will have to pay, including higher local property taxes, sales tax, vehicle fees, and college tuition.

These proposed constitutional amendments make it harder – not easier – for lawmakers to budget responsibly and they will weaken the foundation of our economy by ensuring the state cannot invest in its people and places. A budget that includes these flawed policy ideas will not help North Carolina move forward.

Uncategorized

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.

NC Budget and Tax Center

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

NC Budget and Tax Center

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.