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NC Budget and Tax Center

Revenue is up in North Carolina—which is no surprise because the national and state economies are growing. But before jumping to the conclusion that tax cuts are the reason why, take a look at the numbers. Revenue collections for the first half of this 2016 fiscal year are higher than the same period last fiscal year, a report from the state’s controller’s office highlights. However, when compared to the same period for FY 2013, receipts from the personal income tax are down and receipts from the sales tax, which now applies to more goods and services, are up (see table below). This is the tax shift that state lawmakers put into motion in recent years.

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This tax shift – less reliance on revenue from the income tax and more from the sales tax – is an expressed desire of state leaders. Read More

NC Budget and Tax Center

You may have heard that North Carolina’s business climate is nearing top-10 status according a new ranking by the Tax Foundation, a tax policy research organization that favors tax cuts. If that sounds strange to you, it should.  Many of the inputs that businesses look to in order to succeed have failed to rebound after the recession because of neglect from state policymakers.

The 2016 State Business Tax Climate Index has many flaws that have been highlighted by critics over the years. It is clear, however, that one way to zip up the ranking is to simply cut taxes, often in ways that primarily benefit large multi-state corporations. And this result in forgoing the kinds of investments needed to improve the economic climate that allows all businesses and all North Carolinians to prosper.

As I’ve noted in a prior post, proclaiming that North Carolina’s business tax climate has leapt from one of the worst to now one of the best largely as a result of tax cuts provides no insight regarding the fiscal and economic health of the state.

Here are five reasons that the Tax Foundation rankings are the wrong foundation for making tax policy in North Carolina.

  1. Ranking focuses on cherry-picked tax policies that the Tax Foundation doesn’t like, rather than on the range of factors that genuinely drive business investment decisions.

The Tax Foundation index simply chooses elements of tax policy it likes best – e.g. a flat income tax rather than a progressive income tax structure – without solid empirical evidence as to the impact of favored tax policies on states’ economic growth. A flat tax income tax, for example, which the Tax Foundation favors, doesn’t take a taxpayer’s ability to pay into account and largely benefits the well-off. A progressive income tax structure, by contrast, considers ability to pay but is not favored in the ranking. Furthermore, states with relatively lower tax rates are favored without considering the impact of lower tax rates on their ability to raise adequate revenue for public services. The Tax Foundation mixes these selected tax policies together and labels the result a state’s “business climate.”

This sole focus on a state’s tax structure leads to an index that mistakenly assumes taxes are the most important factor in shaping states’ business climates and tells us nothing about a state’s economic health – like whether schools are good, higher education is affordable, roads and rails are in good shape, or the workforce has the skills needed for 21st century business. Read More

News

The state legislature has set aside $8 million to defend lawsuits challenging the litany of controversial laws passed by the Republican majority in recent years, according to the Associated Press.

The litigation list is long and includes several state and federal actions seeking a rejection of voting maps adopted in 2011 and a reversal of voting law changes enacted in 2013, as well as challenges to the state’s same-sex marriage ban, the private school voucher program and the “Choose Life” license plate offering.

Funds for litigation costs go to private counsel retained to represent state officials in court, typically the job of the Attorney General. In some instances though, Attorney General Roy Cooper has declined to represent the state in cases which his office has determined are indefensible.  For example, after the 4th U.S. Circuit Court of Appeals in Richmond ruled that a Virginia gay marriage ban violated the U.S. Constitution, Cooper stated that his office would no longer defend the similar North Carolina ban in court. It was time to stop fighting court battles the state could not win, he said at the time.

In other instances, Republican lawmakers have retained private counsel even while Cooper was likewise defending the state, voicing concerns that he wouldn’t adequately represent their interests.

The primary beneficiary of the General Assembly’s largess has been the Raleigh office of Ogletree Deakins Nash Smoak & Stewart, with attorneys from that firm representing state officials in several lawsuits, including the voting rights and redistricting cases. That’s the same firm that also advised Republican leaders during the drafting of the 2011 redistricting plan.

Outside bills since summer 2014 alone exceeded $3 million, according to the AP — $2.9 million of that incurred by Ogletree Deakins to defend the voting rights cases.

Those cases are far from over, as dispositive rulings from the federal district courts remain pending and appeals to the Fourth Circuit and the U.S. Supreme Court are likely to follow. The same is true for the redistricting cases in state and federal courts, and new lawsuits challenging other controversial laws are on the horizon.

As the AP points out, a challenge to the state’s “magistrate recusal” law, which allows magistrates to opt out of performing marriages based upon a “sincerely held religious objection” to gay marriage, could be filed in the coming months.

According to Roy Cooper’s office,  the Attorney General has defended state laws in at least 15 cases and didn’t need the help of costly outside counsel.

“Our office hasn’t requested that the General Assembly hire any of the private lawyers they’ve been paying, and we think it’s a waste of taxpayer dollars to pay outside lawyers to do the work we’re already doing,” Cooper’s spokesperson Noelle Talley said in a statement.

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Commentary

As noted in this space last Friday, the rules of the North Carolina House of Representatives clearly require that lawmakers refer the conference report on the 2016-17 budget to a standing committee for review prior to the full House vote that is scheduled for tomorrow.

House Rule 44(b) states that:

“a conference committee report which includes significant matters that were not in difference between the houses, shall be referred to a standing committee for its recommendation before further action by the House.”

House Speaker Tim Moore

House Speaker Tim Moore

The obvious point of this rule is to prevent lawmakers from cooking up new law changes that were not included in either of the original versions of the bill passed by the House or the Senate and then inserting them in to a conference report that’s negotiated and drafted in secret. It is, in other words, a modest but important rule to assure a modicum of sunshine and transparency so that rank and file lawmakers, the news media and the public at large can have at least some idea of what the hell it is that’s being voted on.

Though everyone is still sifting through the massive 429 page document, here are two significant matters that are in the conference report that were not in either version of the budget passed previously:

#1 – As Chris Fitzsimon pointed out this morning, the conference report includes a new and hugely destructive provision to undermine light rail plans in the Triangle.

#2 – A new, out-of-whole-cloth change to state law on the number of so-called terminal groins that will be allowed along the coastline (see page 207 of the report).

These are both extremely important law changes that were never approved by either House throughout the eight month-long legislative session. Read More

NC Budget and Tax Center

As part of ongoing negotiations to produce a state budget, state lawmakers would like to provide more tax cuts to North Carolina taxpayers. This tax proposal, while unclear in the details (is it another reduction to the already low 5.75 percent personal income tax rate?), would offset the increase in various DMV fees included in the budget passed by House members.

A refundable state Earned Income Tax Credit (EITC) is a great way for state lawmakers to fulfill their desired goal of ensuring working families aren’t paying more as a result of their budget choices. The EITC provides a modest boost to the wages of low- and moderate-income workers, which will help offset additional costs resulting from an increase in DMV fees. Prior to its elimination in 2014, more than 927,000 North Carolinians claimed the state EITC, with working families in each of the state’s 100 counties benefiting from the tax credit.

State lawmakers’ reported agreement to provide $110 million in tax cuts to offset the DMV fee hikes is close to the value of the state EITC. For FY 2013, prior to its elimination, the state EITC cost around $101 million, which is less than the tax cut target agreed to by state lawmakers. The EITC is the best targeted tool to address the upside-down nature of the state’s tax code. Better than an increased standard deduction, the tax credit is proven by years of experience and research to effectively target working families who earn low wages so that they can make ends meet, support their children’s healthy development and boost the economy.

If state lawmakers are serious about correcting the imbalance in the state’s tax code, a refundable state EITC is the most effective way to support children and working families and help spur economic activity in local communities across the state.