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The tax plan that North Carolina’s Senate leaders unveiled yesterday should not be mistaken for tax reform. It is, in reality, a plan to gut North Carolina’s schools, public colleges and universities, infrastructure, and other key state investments that promote long-run prosperity.

The plan’s massive tax cuts, which would mainly benefit large corporations and the wealthy, would cost the state $1.3 billion each year once fully in place, roughly the entire annual budget for North Carolina’s community colleges. Blowing such a massive hole in the budget would jeopardize the quality public schools, nationally-recognized public university system, and other assets that have attracted businesses — and jobs — to the state in industries like financial services and scientific research.

Other states that considered similar proposals this year backed off in part because of the reality that huge tax cuts for the wealthy must be paid for with untenable reductions in funding for schools and other state services, tax hikes on others, or both. The North Carolina Senate’s plan ignores that reality and opts instead for wishful thinking.

Claims that the Senate plan will cause North Carolina’s economy to boom are simply empty promises. Any boost from cutting income taxes will be canceled out by the spending cuts or tax increases the state will be forced to adopt to balance its budget.

Elimination of the corporate income tax is largely a giveaway to multistate corporations that — rather than creating jobs — will likely stick the savings in an out-of-state bank or use it to pay higher dividends to stockholders, most of whom don’t live in North Carolina.

The plan’s personal income tax cuts won’t likely create jobs, either. Most small businesses would get a tax cut so small that it wouldn’t even cover one worker’s salary. Plus, small businesses rely on state education, roads, and other services that would degrade year after year under this plan.

To ensure a bright economic future, North Carolina should focus on strengthening the K-12 and higher education systems that have set the state apart in the past but faced deep cuts in recent years due to the recession. Blowing a huge hole in the state budget would make that crucial task much harder. North Carolina has nothing to gain and much to lose from the Senate’s misguided plan.

NC Budget and Tax Center

A major detail has been ignored in the rush to adopt a flat income tax rate. With a flat income tax, revenues will grow more slowly over time, leaving North Carolina unable to maintain its most important investments, such as education, which has already suffered from significant spending reductions in recent years. That means we will have to raise other taxes to make up the difference or suffer the consequences of underfunding our priorities.

In the presentation to House Finance of the bill, Representative Lewis stated that the income changes–including most significantly the adoption of a flat tax–would hold revenue growth to about 4.5 percent per year. If revenue had grown that slowly over the past 20 years, North Carolina would have been unable to make  many of its most important investments. In 2007, for instance, North Carolina would have had nearly $5 billion less for North Carolina’s schools, colleges and universities, roads, public safety, and other services. That $5 billion is more than our budget combined for the Department of Health and Human Services, Department of Commerce, Department of Justice, Indigent Defense Services PLUS funds to address the NC pre-K waiting list and half of the child care subsidy waiting list. Read More

NC Budget and Tax Center

Like the Senate, the House budget fails to invest in our state’s future. Since the House budget contains costly new policies, such as a school voucher program, it will be very difficult for the state to provide our kids with a quality education, which hurts not just kids, but our economy too. Businesses need a skilled workforce to grow and thrive, so failing to adequately invest in education will cause long term pain in our state.

The House budget also has a placeholder for an expensive tax package. The $525 million that the House plans to spend on tax cuts for the wealthy would be better used to improve our schools and communities.

NC Budget and Tax Center

The House is taking a vote on the tax plan that was rushed through committees this week with little time for discussion of the real impact. This new House plan, like all the other plans proposed, will undermine North Carolina’s future by shifting taxes from the wealthy onto everyone else and will leave the state unable to make its most important investments.

Our full analysis of what this will mean for taxpayers can be accessed here. What does this tell us about the vote that House members are moments away from taking?

  • The top five percent will get tax cuts while the bottom 95 percent of taxpayers see their taxes increase, on average. This analysis is the most reliable way to assess what will happen to the population overall under this plan. It doesn’t cherry pick taxpayers with certain filing characteristics but summarizes the diversity of experiences under the House tax plan to tell us what the impact will be for a taxpayer on average in each income group.
  • The largest benefits of this plan overwhelmingly go to the top one percent. Millionaires would receive a tax cut of nearly $9,000. In fact, the small number of millionaires in this state would receive almost 40 percent of the total income tax cut that results from flattening the rate and removing the cap on charitable contributions.
  • The so-called “protections” for low- and middle-income taxpayers are ineffective and poorly targeted at those who are hurt by this tax plan. It will fail to shield those taxpayers from changing sales tax to services. The House tax plan combined with the end of the state’s Earned Income Tax Credit will raise taxes for taxpayers with an average income of $12,000 by 0.7 percent, while cutting taxes for taxpayers with an average income of $940,000 by -1 percent.
  • The House tax plan will cost the state $1.6 billion over five years. That means fewer dollars to invest in the foundations for economic growth—like K-12 and higher education—at a time when spending is already at historic lows.

Tax cuts for the wealthy paired with tax hikes for everyone else will not help North Carolina’s economy. But it will cost us our most important priorities.

NC Budget and Tax Center

Here’s the full story on the House tax plan: It will increase taxes for middle- and low-income households while giving a large tax cut to the wealthy. The bottom ninety-five percent of taxpayers would see their taxes go up, on average, under the bill version that will be heard in House Appropriations today.

Those who focus only on the income tax changes and say this is a tax cut for everyone are ignoring how the sales tax changes – a major part of this tax plan – will hurt average families. Those who are using data from the Fiscal Research division to extrapolate that the majority will see a tax cut are also mistaken. These claims only obscure the harmful impact of this tax plan on the majority of North Carolinians.

The House tax plan does provide an income tax cut to taxpayers across the income spectrum, but that’s not the whole story and still 27% of all taxpayers would see an income tax increase. The greatest cut goes to the top: More than third of the income tax cut goes to the richest 1 percent. But as all North Carolinians know, we don’t just pay income taxes; we also pay sales tax. That’s why we must look at income and sales tax changes in order to evaluate whether the House tax plans are good for our state.

The House tax plan expands the services that are subject to the sales tax. Because they spend a greater share of their income on taxable goods and services to meet their basic needs, middle- and low-income families will pay more of their income in sales taxes than the wealthy. In the House plan, the expansion of the sales tax is, on average, enough to cancel out the income tax cut, on average, for the bottom 95 percent of taxpayers. Read More