2014 End of Year Charts_tax cuts dig a holeAs the fiscal wonks at the N.C. Budget and Tax Center have repeatedly warned us would happen, the 2013 tax cuts (which went overwhelmingly to the rich and large, profitable corporations) continue to wreak havoc with the North Carolina state budget. As reported late last night, a new memo to lawmakers from the legislature’s Fiscal Research Division warns that the state budget shortfall is now up to $271 million for the current year.

Remember, this is happening in a time of (albeit imperfect) economic recovery around the country. For the most part, other states are gaining back the ground they lost during the Great Recession and repairing the damage inflicted upon essential state services.

Here in North Carolina, however, the opposite is true. Public spending on core functions like public schools remains mired near the bottom of the 50 states and, amazingly, many state agencies are now being asked to plan for a new round of additional budget cuts in 2015-16.

The bottom line: If things continue this way, conservative state leaders will succeed in their quest to fulfill right-wing icon Grover Norquist’s dark and disturbing vision of shrinking government down to the size at which they can “drown it in the bathtub.” Moreover, from the looks of things, they’re going to take a lot of average North Carolinians down the drain with them in the process.

NC Budget and Tax Center

A new paper by UC Berkeley economist Danny Yagan provides further evidence that tax breaks that largely benefit the wealthy and profitable corporations are not a remedy for boosting the economy. In 2003, President George W. Bush passed one of the largest cuts ever to a federal capital tax rate – reducing the top tax rate on dividends to 15 percent from 38.6 percent. Using federal IRS data on corporate tax returns, Yagan compared corporations that benefited from this tax cut (C-corporations) to firms that didn’t benefit from the tax cut (S-corporations).

Corporations that got a massive dividend tax cut didn’t make any different choices about things that boost the real economy, the new paper highlights. The massive reduction to the federal dividend tax rate resulted in no meaningful change in corporate investment, net investment, or employee compensation for corporations. What did change following the huge dividend tax cut was an increase in payout to corporate shareholders. Simply put, the tax cut benefited corporate shareholders but not the overall economy.

Some lawmakers and outside groups in North Carolina are pushing to eliminate capital gains from state taxes. Governor McCrory recently announced his desire to eliminate the state’s capital gains tax for what he deems “innovation-related companies”. Either proposal to cut capital gains taxes would overwhelmingly benefit the wealthy at the expense of everyone else in the state, a recently released BTC report highlights. Proponents often claim that eliminating or reducing the capital gains tax rate will increase investment and help boost the economy. However, no apparent cause-and-effect relationship exists between changes in the top capital gains tax rate and savings, investment, or productivity growth. Instead, various analyses highlight how cutting capital gains tax rates have concentrated income at the very top. There is simply no reason to expect this reality to somehow be any different in North Carolina.

Bigger tax breaks for the rich while the state is cutting support for schools and other essential job-creation tools is not a path that promotes economic opportunity and prosperity for all North Carolinians. This new paper serves as yet more evidence that state lawmakers should reject calls to eliminate or cut capital gains taxes and instead work to make sure the wealthiest North Carolinians and profitable corporations pay their fair share.

NC Budget and Tax Center

A new report released today by the Budget & Tax Center highlights how eliminating North Carolina’s taxes on capital gains would largely benefit those who need it least while making things worse for families struggling to make ends meet.

Some lawmakers and outside groups in North Carolina are pushing a plan that would benefit the wealthy at the expense of everyone else by ending state taxation of profits from selling artwork, vacation homes and other high-end items owned by relatively few North Carolinians. The proposal is part of a larger push to radically alter North Carolina’s tax structure to the detriment of the long-term well-being of the state and its residents.

Cap gains allocation

Key findings from the report include:

  • Eliminating capital gains from state income tax would reduce annual state revenue by $520 million, meaning even less revenue for public investments that help drive the state’s economy forward. This revenue loss would be in addition to the costly 2013 tax plan, which is projected to reduce state revenue by as much as $1.1 billion for the fiscal year that ends June 30.

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NC Budget and Tax Center

The latest Who Pays? report released today by the Institute on Taxation and Economic Policy (ITEP) takes a look at the fairness of state tax systems. For North Carolina, the lowest income North Carolinians pay over 70 percent more in state and local taxes as a share of their income compared to the state’s wealthiest residents, the ITEP report highlights.

The lowest 20 percent of North Carolinians – with an average income of $10,700 – pay 9.2 percent of their income in state and local taxes, the study finds, compared to 5.3 percent for the top 1 percent, the average income for this group is $969,100.

North Carolina’s unfair tax system presents both short- and long-term challenges and concerns. The state’s unfair tax system not only contributes to widening income inequality in the short term, but also leaves the state struggling to raise adequate revenue for public investments in the long term, ITEP notes. These realities are already playing out in the North Carolina. As state lawmakers return to Raleigh this week for the 2015 legislative session they face an ongoing revenue shortfall as a result of tax cuts passed in 2013.

North Carolina has moved away from many features that create a fairer tax system. State lawmakers replaced a graduated personal income tax rate structure (meaning the higher one’s income, the higher one’s effective personal income tax rate) with a flat rate that doesn’t take into account a taxpayer’s ability to pay, allowed the state’s Earned Income Tax Credit to expire, expanded the sales tax base, and allowed the corporate income tax rate to be cut from 6.9 to 5 percent and potentially as low as 3 percent.

These changes have resulted in a sizable reduction in revenue, with the state now challenged with funding basic public obligations such as education and healthcare services for the elderly and poor. Returning to a graduated income tax rate structure, reestablishing a state Earned Income Tax Credit, creating a renter’s credit or an enhanced and refundable Child Tax Credit, and stopping further tax cuts that largely benefit the wealthy and profitable corporations are important opportunities to create a fairer state tax code.

A state tax code that works for all North Carolina taxpayers is important for ensuring that economic opportunity and prosperity is broadly shared. The Who Pays? report highlights that there is work to be done to make this a reality.


Despite the growing revenue challenge North Carolina faces, a new round of tax cuts went into effect with the start of the new year. While the growing revenue shortfall warrants immediate attention during the upcoming General Assembly legislative session that begins next week, inaction up to this point has already  dug a deeper hole as of January 1, 2015.

New personal income and corporate income tax rates are now in effect for 2015. The now-flat personal income tax rate dropped to 5.75 from 5.8 percent (the top marginal rate was 7.75 percent in 2013) and the corporate income tax rate dropped to 5 percent from 6 percent (it was 6.9 percent in 2013). These tax cuts will further reduce revenue for public investments and will largely benefit the wealthy and profitable corporation at the expense of low- and middle-income taxpayers.

The cost of the tax plan continues to grow higher than what state officials originally estimated. As of the end of the November, revenue collections are coming in $190 million below expectations. This loss is built on top of the already revised and anticipated revenue loss of $704 million due to the tax plan. Combined, this result in a nearly $900 million revenue loss for the state – much higher than the original $512 million cost estimate.

By the end of the fiscal year, BTC estimates a total revenue loss of around $1.1 billion Read More