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During yesterday’s tax reform debate on the House floor, we heard a lot about the need to cut personal income taxes so that small businesses can create jobs and the economy can grow.  This is a growing refrain among advocates for tax cuts for the wealthy, so common in fact, that policymakers made it once before—in 2011, when they passed an exemption of business pass through income, an exemption that they are now repealing (apparently the tax cut didn’t work).

As with many of the claims made during the debate about taxes this session, the idea that personal income tax cuts spur job creation is just not borne out by the facts.

Personal income tax cuts for the wealthiest taxpayers do not target actual small business job creators. Only 2.7 percent of personal income taxpayers are owners of small businesses that have employees, according to the U.S. Treasury Department. Moreover, profits from small businesses with paid employees account for less than 4 percent of the total income earned by households with incomes over $100,000 nationally.  There is no evidence that businesses owned by high income taxpayers have more employees than those owned by lower income taxpayers, and as a result, no reason to provide tax cuts that disproportionately benefit those with the highest incomes.  And for many small business owners of any income level, there is often limited interest in growing the size of their business—consider a family restaurant, for example—so again, cutting these business’s won’t lead to job creation.

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During yesterday’s Finance Committee debate over the latest iteration of the Senate’s billion-dollar tax cut plan, the bill’s sponsors repeatedly referenced the need to improve North Carolina’s economic competitiveness as the chief reason to cut income taxes.  While generating new job creation and economic growth is clearly a top priority for North Carolina, deep tax cuts to corporate and personal income tax rates are just not an effective way to accomplish these goals.

Much of the “evidence” tax cut proponents have cited in support of their proposals have been thoroughly debunked—both by the research of academic economists and the actual experience of states that pursued these policies. For example, out-of-state groups like the Tax Foundation have misleadingly claimed that “23 of 26” academic studies have shown that taxes hurt economic growth, but it turns out that these studies were either misquoted, cherry-picked, or failed to address the issue of tax policy at the state level.

Instead, a full look at the evidence reveals that tax cuts just don’t deliver. A panel of highly-respected economists from the state’s leading universities came before the Senate Finance committee last month and gave their much more rigorous and informed  response—one also at odds with the Tax Foundation study and the views of Senate leadership. In their experience, these economists said, there was no economic consensus that cutting taxes would lead to improved economic growth.  And they also noted that it would be important to consider the negative effects of reducing state spending if that was the way tax cuts were “paid for.”

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STATEMENT FROM THE N.C. BUDGET & TAX CENTER:

Senate tax proposal shifts burden from the rich to the poor

RALEIGH (May 7, 2013) — The Senate leadership has released a proposal that will harm working families and the broader economy.

By cutting income taxes and expanding the sales tax to more goods and services, the Senate leadership has pursued a shift in tax burden from the rich to the poor, not tax reform. The result is a plan that not only requires low-and middle-income families to pay more while the highest income families pay less, but also reduces the state’s ability to invest in a foundation for economic growth by cutting state revenues by $1 billion each year. That is equivalent to the entire community college system OR the combined budgets of the DHHS Divisions of Aging, Child Development, and Child Health and the Judicial Branch and NC Biotechnology Center.

 

New this morning from the wonks at the Center on Budget and Policy Priorities:

“Federal taxes on middle-income Americans are near historic lows, our updated report explains, and that’s true whether you’re talking about federal income taxes or all federal taxes.

When it comes to income taxes, a family of four in the exact middle of the income spectrum will pay only 5.3 percent of its 2013 income in federal income taxes next year, according to a new analysis by the Urban-Brookings Tax Policy Center….”

Read the rest of this post by clicking here.

State income tax cutsMichael Leachman, one of the top fiscal wonks at the D.C.-based Center on Budget and Policy Priorities authored a very compelling post yesterday that makes clear why cutting (or, God forbid, eliminating) the state income tax is not the right path for North Carolina.

Leachman writes:

“A number of states, including Arkansas, Kansas, Missouri, North Carolina, Ohio, and Wisconsin, are considering deep cuts in personal income taxes to spur economic growth. But both recent history and empirical studies suggest that this approach doesn’t work particularly well, as our new report explains.

First, let’s look at recent history.  Of the six states that cut income taxes sharply between 2000 and 2007 (when the recession hit), three grew more slowly than the rest of the country in the years that followed.  The other three saw above-average growth, but they are major oil-producing states (Louisiana, New Mexico, and Oklahoma) that benefitted from a sharp rise in oil prices. Read More