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Yesterday evening, members of the Senate Finance Committee gathered to consider a modified version of House Bill 1050 (HB 1050) which includes repealing the local privilege tax. A repeated claim by proponents of the tax repeal is that additional revenue from the local sales tax – resulting from the tax plan passed last year – will make up for the revenue lost from repealing the local privilege tax.

A closer look at a fiscal note provided by the General Assembly’s Fiscal Research Division, however, highlights that the math simply doesn’t add up to support this claim.

Fiscal Research estimates that a full repeal of the local privilege would result in nearly $63 million in less revenue for cities and counties across the state. Revenue from an expanded local sales tax is projected to bring in an about $10.9 million in additional annual local revenue and sales taxes from online sales via Amazon is expected to bring in around $2.9 million – for a total of $13.8 million in local revenue from an expanded sales tax.

Local Privilege Tax Repeal

It is clear that $13.8 million in additional local sales tax revenue is not sufficient to replace $63 million in lost revenue from the repeal of the local privilege tax. Less revenue means local governments will likely be further challenged with providing its residents with core public services and an attractive quality of life.

State policymakers return to Raleigh tomorrow challenged with addressing a budget gap of $335 million for the current fiscal year as a result of a huge forecasted revenue shortfall for the current fiscal year and a Medicaid shortfall. Next year, state policymakers face a budget gap of around $228 million, which could reach as high as $637 million based on higher costs estimated from the personal income tax changes.

In the face of underperforming revenue, today the General Assembly’s Revenue Laws Committee voted favorably to pursue changing an arcane tax policy that would FURTHER reduce annual revenue by $10 million next year, FY 2015, and by more than $23 million for FY 2016.

In pursuit of ultimately shifting to a single sales factor apportionment formula, today the Revenue Laws Committee voted to give greater weight to the sales component in determining the amount of state income taxes paid by corporations. The state’s current tax system uses a formula that considers a corporation’s property, payroll, and sales in North Carolina. The tax change would give two-thirds weight to the sales component.

This tax change would create winners and losers. Around 3,000 corporations would see their taxes decrease under the tax change while around 6,000 corporations would see their taxes increase, according to analysis by the General Assembly’s Fiscal Research Division.

Proponents of this tax change claim that doing so will improve the state’s business climate by making expansion of property and payroll in the state more attractive to businesses. Other states that have adopted an SSF formula based on this premise have not seen this happen, however, and there is no reason to believe that North Carolina will experience a different outcome.

Furthermore, reducing the amount of revenue available for public investment will make the self-imposed budget challenge resulting from the tax plan passed last year worse. And everyone will pay the price because this will require further reductions to investments in educating our children, maintaining our infrastructure and protecting the safety and well-being of North Carolina families—investments that are needed to support a strong economy.

At a time when an increasing number of jobs in the state are expected to require some level of postsecondary training, North Carolina families and students have to shoulder more and more of the cost of a college education.

A report released today by the Center on Budget and Policy Priorities highlights that state spending per student for higher education in North Carolina is 25 percent below pre-recession levels when adjusted for inflation. Meanwhile, average tuition at North Carolina’s public, four-year colleges increased by more than 34 percent during this time period.

Some of the outcomes from these budget cuts have been well-documented on North Carolina’s campuses. For example, in the 2014 academic year, state funding cuts led NC State to eliminate 187 full-time equivalent positions and 27 positions from its library system, the report highlights. UNC-Chapel Hill has eliminated 493 positions, cut 16,000 course seats, increased class sizes, cut four of its seven centrally supported computer labs, and eliminated two distance education centers. Read More

At his Tax Day press conference, Governor McCrory repeated the often-heard claim that the effect of cutting taxes on the state’s economy speaks for itself. Last year’s tax cuts may be speaking, but they’re not telling the story its proponents hoped—for the very good reason that tax cuts are just a poor strategy for promoting business growth and long-term job creation.

Here’s the Governor on Tuesday:

“Businesses are relocating to North Carolina because of the changes we made in our tax code and that speaks for itself.”

This claim does not bear up under serious scrutiny. In fact, decades of evidence support the opposite—taxes don’t drive business location decisions. Rather, the public investments that taxes make possible are the most important factors in determining where companies decide to locate—investments like an educated workforce, infrastructure, strong industry clusters, and proximity to research and development institutions.

So let’s examine the evidence Governor McCrory presented, starting with Lee Controls—a New Jersey-based company that recently relocated to Brunswick County and cited tax reform as one of the major reasons for their move. The company is promising to create just 77 jobs over several years. While creating even one new job moves the state in a positive direction, the fact remains that trying to dig North Carolina out of the job losses from the Great Recession is going to require more employment growth than can be generated by one 70-job project at a time.

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What’s the deal in Kansas these days? That’s a question Governor McCrory and North Carolina’s state leaders should be asking themselves.

After passing huge tax cuts in recent years, the subsequent unimpressive economic performance and continued disinvestment in core public investments in Kansas serve as a cautionary tale for North Carolina.

A recently released report by the Center on Budget and Policy Priorities (CBPP) highlights how Kansas’ economic performance has failed to live up to the promises made by Governor Brownback and his legislative allies. Kansas passed huge income tax cuts in 2012 that reduced annual revenue for public investments by more than $800 million for FY 2014. Proponents claimed the tax cuts would boost the state’s economy.

Last year North Carolina followed Kansas’ lead when state leaders passed and Governor McCrory signed into law a tax plan that includes huge income tax rate cuts and reduces annual revenue by more than $650 million once all tax changes take effect. Here too, the governor and proponents claimed that cutting taxes will boost North Carolina’s economy.

So how is Kansas faring these days?

Kansas hasn’t experienced anything close to an economic surge in the wake of the huge tax cuts. Massive revenue loss has meant continued state funding cuts to core public investments – public schools, colleges and universities, and healthcare services, for example. Read More