NC Budget and Tax Center

Latest sales tax expansion highlights need for state EITC

Today North Carolinians will begin paying sales tax on various installation, repair and maintenance services on everything from appliances to musical instruments to vehicles. This modest expansion of the sales tax base was included in the state budget passed by state lawmakers last year and represents another step towards aligning the state’s tax code with a more service-based economy. Today, the purchase of services is far more common than the purchase of goods compared to prior periods and this economic activity trend is likely to continue.

The effort to better align the state’s tax code with a 21st century economy is important. However, proponents of the sales tax move have used this good tax policy to fuel far more bad ones. The sales tax base expansion is part of a larger transformation of the state’s tax code that shifts away from the income tax, which is a better tax policy tool for achieving long-term revenue adequacy via a structure that’s based on ability to pay. Furthermore, this shift away from the income tax and to a greater reliance on the sales tax fails to acknowledge the increased tax responsibility on low- and middle-income taxpayers and away from the wealthiest who have reaped the greatest benefits from tax changes since 2013.

State lawmakers continue to be susceptible to special interests and this was highlighted with decisions regarding the expansion of the sales tax. Read more

Commentary

Editorial: Further shift onto sales tax is a bad move for NC

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.”

Commentary

More flaws revealed in state’s hasty, back-of-the-envelope tax policy changes

The latest issue of the Justice Center’s Prosperity Watch is out and it explains some big practical problems that have become apparent in the new sales tax distribution changes that became law with the FY2016-17 state budget. As economist Patrick McHugh explains:

“The new allocation system does not target the states’ areas of most dire economic need. North Carolina divides counties up into three economic tiers, with Tier 1 being the most distressed and Tier 3 the most economically robust. As shown above, the forty Tier 1 counties receive roughly 1/3rd of the new allocation, while the majority goes to Tier 2 and 3 counties that are comparably better off. In fact, the average allotment received by Tier 2 counties is almost twice as large as what the average Tier 1 county will receive. While some struggling rural communities will get a bump in revenue, a more targeted mechanism or a direct appropriation made possible by an adequate state tax code could have sent even more to where it is needed the most.

There’s also concern about whether this new fund will come from new revenue, or will cannibalize existing sales tax collections. The bulk of the funds to be distributed according to this new system are projected to come from expanding the sales tax to a variety of repair and maintenance services, but it is next to impossible to accurately predict how much revenue will come from expanding the sales tax base in this way. If expanding the sales tax does not raised the projected revenue, this new fund could eat into the dollars distributed according to the existing formula or require greater appropriation of state dollars, resulting in a smaller net gain for counties that receive a part of this new fund.”

Add to this the fact that the changes were included in a budget that, as McHugh puts it, “will undermine state and local governments’ ability to build good schools and vibrant economies,” and you’ve got even more reason to be very worried about what lawmakers and Gov. McCrory have wrought with their duct-tape-and-baling-wire budget and tax package. The graph below illustrates the disconnect in the new law:

NC Budget and Tax Center

Budget uses new method to shift local sales tax revenues around, to much the same effect as previous proposals

A provision in the budget will, if enacted, will change the way sales tax is distributed. The budget creates a new pot of $84.8 million to be distributed to county and municipal governments for economic development, public education, and community college purposes.

Similar Senate proposals earlier this session met a frosty reception in the House and a promise from Governor McCrory to veto any budget that included such a move. On the surface, what’s in the budget looks very different from earlier proposals, and there are important distinctions, but the cumulative impact is actually quite similar to what we have already seen.

Before getting into the details on how the new system would work, a few top-level points should be underscored:

  • It is good to discuss how we can help struggling local communities to meet the economic and educational challenges that they face: This proposal is rooted in a very real fact. Many local communities, particularly in rural North Carolina, are strapped. Regardless of what you think about the proposals floated this session, it is good to see the legislative leaders acknowledging that many local communities don’t have the resources to build a strong economy or provide a sound education.
  • This proposal won’t fix the economic problems in rural North Carolina: None of the proposals to date would generate enough revenue to meet the economic and educational challenges that many communities face. In fact, the legislature has contributed to the problem in recent years by limiting how local governments can raise funds and by cutting back on what the state passes along to the local level. The budget proposal would set aside almost $85 million for suburban and rural counties, which isn’t chump change, but still not enough to make up for years of under-investment.

The actual budget mechanism for shifting funds around is a bit complicated, and we won’t know the real effect for some time, but the cumulative impact is likely to be similar to proposals we’ve seen already: Read more

Commentary

Crickets chirping: The right falls silent as McCrory and G.A. enact regressive tax hikes

Here’s the deal on the subject of expanding the sales tax base to include services as Gov. McCrory and the General Assembly have decided to do: It actually can be a good idea, but only if it’s paired with a plan to lower the overall sales tax rate and provide targeted tax cuts (like the Earned Income Tax Credit) to lower income people.

Unfortunately and remarkably, however, McCrory and state lawmakers are simply ignoring this simple truth and instead pairing the sales tax expansion with personal and corporate income tax cuts that overwhelmingly favor the wealthy. As Chris Fitzsimon pointed out this afternoon:

“Supporters of the new sales tax plan claim that it is not a tax increase, that it will be offset by a reduction in the personal income tax rate. But that’s not true for the folks at the bottom of the economic ladder who will receive very little, if anything, from the income tax cut.

Millionaires by the way will receive a $2,000 break and that’s on top of the windfall they received in the 2013 tax cut package.

Low income folks won’t be so lucky.

You might be wondering how this regressive tax scheme passed the General Assembly and what people said it about it as it made its way through the legislative process.

It never went through any committee. It appeared out of nowhere in the final budget agreement and questions about the formula and how to distribute the money in future years were not answered

Proposals to restore the state Earned Income Tax Credit to help low wage workers and their families that could offset a sales tax hike have also been repeatedly ignored.

There are plenty of reasons why the budget unveiled by House and Senate leaders this week takes North Carolina in the wrong direction.

One big one is that it raises taxes on people who can least afford to pay more.”

Meanwhile, that sound of crickets chirping? That’s the response to the new plan from the far right think tanks that have lectured us for years about the supposed evil of raising taxes in North Carolina. By all indications, they go along with the Governor’s bizarre take that raising taxes on people at the bottom is okay so long as the result is to reduce state revenue overall. Talk about your worst of all worlds outcomes.