Falling Behind in NC, NC Budget and Tax Center, Raising the Bar 2015

A tax plan state Senate leaders presented this week would promote neither shared economic opportunity nor prosperity across North Carolina. Far from it.

The proposal would cost more than $1 billion in annual revenue loss as the tax plan continues down the path of handing out more costly tax cuts to large, profitable corporations at the expense of everyday North Carolinians. This approach won’t restore the state’s economy to a sound footing.

The proposed tax plan does nothing about persistent stagnant wages, an uneven economic recovery in which all gains are going to the wealthiest North Carolinians, and the lack of economic and job growth in many parts of the state. Senate leaders would pay for only a portion of the income tax cuts by having North Carolinians pay more in sales taxes, which hit people making relatively low incomes the hardest. And the state would continue to walk away from its responsibility to make much-needed investments in our public schools, public colleges and universities, repair the state’s eroding infrastructure, and other building blocks of a strong economy.

Key aspects of the Senate tax plan stand out as strong reasons why its adoption would fail to promote broad prosperity.

  • The proposal’s reduction of the personal income tax rate to 5.5 percent from 5.75 percent has no benefits to the state’s economy or its competitiveness. At the cost of much-needed public revenue, the tax rate cut won’t drive significant job creation, motivate businesses or people to locate in North Carolina or encourage local investment. Not only do income tax rates affect these factors negligibly, if at all, North Carolina’s personal income tax rate is already in line with the region’s, falling in the middle among southeast states.
  • While putting a limit on how much in itemized deductions a taxpayer can claim is good policy, using the added revenue this produces to reduce tax rates isn’t. Because this proposal would place all itemized deductions—mortgage interest, charitable contributions, medical expenses, etc.—under the cap, it creates greater equity in the treatment of taxpayers. Capping itemized deductions reduces revenue loss from these deductions and helps address inequities in the tax code, as wealthier taxpayers typically benefit more from deductions.
  • Increasing the standard deduction is a wasteful way to address the problem of too many North Carolinians struggling to make ends meet because it deprives the state of much-needed public resources that could boost public investments that promote economic growth. A better way to help hard-working taxpayers keep more of what they earn is to adopt a strong refundable state EITC to help offset not only income taxes, but sales and property taxes that fall hardest on those with lower incomes.

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NC Budget and Tax Center

The budget passed by House members last week makes clear that North Carolina remains hampered by costly decisions made in recent years. Despite modest improvements in some areas of the budget, important public investments that drive the state forward remain well below pre-recession spending levels. The House budget is a reflection of choices and an example of missed opportunities.

Modest funding increases in the House budget are primarily the result of moving the goal post. For example, fully funding enrollment growth for our public schools and providing teachers and state employees a two-percent pay increase are typical budget practices, particularly in budgets crafted during a recovery.

The budget hikes various fees, increases tuition at community colleges, fails to reinstate the state Earned Income Tax Credit, and resorts to cutting funding from certain programs to fund others (e.g., the House reduced funding for textbooks in order to fund other areas of the public education budget).

Rather than address persistent underinvestment and seize opportunities to support a stronger economy, state lawmakers will allow another round of corporate tax cuts to go into effect – reducing annual revenue by $100 million in the first year, $350 million the second year, and more than $500 million in subsequent years.

Revenue lost just from these additional corporate tax cuts, which state leaders seem unwilling to debate, could provide funding for much-needed public services that strengthen our communities and the state’s economy. Read More

NC Budget and Tax Center

I recently noted the differing approaches of President Obama and Congress regarding tax changes, developing a budget and supporting the economy. In particular, I noted Congress’ push to eliminate the federal estate tax – which applies to very large inheritances by a small group of wealthy heirs.

Over the years, the amount of inheritance that is exempt from the federal estate tax has increased exponentially while efforts to raise the minimum wage in line with the growing costs of meeting basic needs have stalled.

In 2001, the federal minimum wage was $5.15 an hour and remained at that level until 2008 when it was increased to $5.85 an hour and then to $7.25 in 2010, where it remains today. On this issue, North Carolina has not differed from federal law, with a state minimum wage of $7.25 as well.

By contrast, in 2001, the amount of estate inheritance that could be exempt from the federal estate tax was $625,000. By 2008, this exemption amount increased to $2 million and for 2015 the exemption amount is $5.43 million. In 2013, North Carolina state lawmakers completely eliminated the state’s estate tax (only 23 North Carolina taxpayers paid an estate tax for the 2012 tax year). In the same year state lawmakers eliminated the state Earned Income Tax Credit, which helped more than 900,000 low- and moderate-income taxpayers who earn low wages keep more of what they earn to offset an already regressive state tax system. Read More

NC Budget and Tax Center

Members of the Kansas Center for Economic Growth are visiting North Carolina this week to share what has happened in Kansas following massive tax cuts signed into law by Governor Brownback back in 2012. Kansas has become a case study of the grave consequences resulting from a dogged pursuit of tax cuts as an economic growth strategy. The results are not that good.

In 2012, Kansas enacted tax cuts that were considered among the largest ever enacted by any state. Tax cut proponents in other states – including North Carolina state lawmakers – held Kansas up as a model to be replicated. Accordingly, North Carolina state lawmakers followed Kansas’ path and passed huge income tax cuts in 2013 that largely benefited the wealthy and profitable corporations and significantly reduced available revenue for public investments.

For Kansas, the reality in the wake of the costly tax cuts has been nothing to write home about. Here are some low-lights of Kansas’ experience, accordingly to the Center on Budget and Policy Priorities.

  • Deep income tax cuts caused large revenue losses. Kansas’ tax cuts last year cost the state more than 10 percent of the revenue it uses to fund schools, health care, and other public services, a hit comparable to a mid-sized recession. The revenue loss is expected to rise to 16 percent in five years if the tax cuts are not reversed.
  • The tax cuts delivered lopsided benefits to the wealthy. Kansas’ tax cuts didn’t benefit everyone. Most of the benefits went to high-income households and taxes were even raised for low-income families to offset a portion of the revenue loss.
  • Kansas’ tax cuts haven’t boosted its economy. Since the tax cuts took effect at the beginning of 2013, Kansas has added jobs at a pace modestly slower than the country as a whole. Furthermore, the earnings and incomes of Kansans have performed slightly worse than the U.S. as a whole as well while the number of registered business grew more slowly in 2013 than in 2012.

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NC Budget and Tax Center

The ongoing, raging debate at the federal level regarding tax changes highlights the contrast between the proposals being put forward by President Obama and Congress for developing a budget and supporting the economy. The President would like to provide tax cuts to middle-income taxpayers – by enhancing the Child Care Tax Credit and the Earned Income Tax Credit, for example. Congress, by contrast, would like to repeal the federal estate tax, for example, which would benefit the wealthy.

The estate tax is essentially a tax on very large inheritances by a small group of wealthy heirs. An estate must have a value of $5.4 million (after related debt is accounted for) before the estate tax applies. Only the estates of the wealthiest 0.2 percent of Americans – roughly 2 out of every 1,000 people who die – owe any estate tax.

A repeal of the estate tax amounts to a massive windfall for those heirs. Proponents often claim that the estate tax hurts small farmers and businesses by forcing people to sell their family farm or business. In North Carolina we have heard this claim despite no evidence presented to support the claim. Still, proponents have continued to make the claim over the years, as Dean Baker at the Center for Economic and Policy Research notes. In the early 2000s, the American Farm Bureau Federation, a leading advocate for repealing the estate tax, could not cite a single example of a farm lost because of estate taxes.

North Carolina state lawmakers latched onto this false claim back in 2013 to repeal the state’s estate tax. Read More