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NC Budget and Tax Center

State budget writers are currently grappling with the task of ironing out a final budget in the face of last year’s huge tax cuts that are hampering our ability to invest in the building blocks of a strong economy. As we entered into the new fiscal year without a revised budget, the News and Observer Editorial Board called upon lawmakers to reconsider their revenue-losing, lopsided tax plan. Here’s more from their editorial that ran over the weekend:

As North Carolina lawmakers struggle to agree on the second year of the state budget, it’s becoming clear that last year’s decision to cut taxes came too early and went too far. The state compressed its three-level personal income tax rates of 6, 7 and 7.75 percent to a flat 5.8 percent and reduced the corporate tax rate from 6.5 to 6 percent.

Had the Republican-led General Assembly held off on these cuts, North Carolina would be enjoying a budget surplus now. There would be money to increase teacher pay without cutting education elsewhere. There would be money to invest in the University of North Carolina and in the state’s neglected roads, bridges and water systems. And there would be money for modest, well-targeted tax cuts.

Instead, the legislature’s Republican leaders and Republican Gov. Pat McCrory cut taxes in a way that is creating an artificial crisis. The state doesn’t have enough money to meet the needs of its growing population and can’t find a sustainable way to lift the public schools teachers’ pay that has sunk to 48th in the nation. In North Carolina, the rich are getting richer as the stock market hits all-time highs and corporations are profiting from a rising economy, but the state has forgone the tax boom that should have come with that recovery.

….

Lawmakers should take another look at taxes and find a way to generate revenues that will meet the state’s needs and support its ambitions.

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One of the top Democrats in the state House or Representatives owed more than $100,000 in unpaid taxes, according to court filings and tax records reviewed by the Carolina Journal for this report.

State Rep. Michael Wray

State Rep. Michael H. Wray, a Gaston Democrat serving as the deputy minority leader, owed more than $100,000 for federal, state and local taxes that went unpaid on businesses and properties he owned, according to the investigative report by the Carolina Journal’s Don Carrington. (The Carolina Journal is part of the John Locke Foundation, a conservative Raleigh-based thinktank.)

Wray, who describes himself as a small business owner on his legislative website, has been in the state House since 2005, and recently defeated a Democratic challenger in the Mary primary. He has no Republican opponent in the general election this November for his district in northeastern North Carolina that covers parts of Halifax and Northampton counties.

Federal IRS officials also filed two tax liens in February on Wray’s property in Northampton County, seeking $83,979 in unpaid taxes.

Wray did not respond to requests from the Carolina Journal for comment, though an attorney for Wray told Carrington the taxes had been paid off.

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The WRAL story about the Senate Finance Committee approving another round of tax cuts includes an exchange which summarizes this legislative session so far and the disdain the folks running the General Assembly seem to have for the people they represent.

The committee was considering legislation that among other things would cost cities and towns millions of dollars in revenue by ending the local business privilege license tax.  Even some Republicans thought that might be worth some input from folks outside the committee.

“Are we going to have any public comment that’s going to be made before the vote, sir?” asked Sen. Tommy Tucker, R-Union. Rucho replied, “We hadn’t opened it up to that so, at this point, no.”

No reason to hear from anybody else. Senate leaders know what’s best for all of us.

NC Budget and Tax Center

The Senate Finance Committee is scheduled to convene at 7 PM tonight to consider a modified version of House Bill 1050 (HB 1050), which includes a provision that would restrict the ability of local governments to manage their budgets and public investments in their respective communities.

One provision, among many, within HB 1050 would repeal the local privilege tax beginning next year. State law currently permits local governing authorities to levy a local privilege tax on various businesses that engage in significant economic activities in their respective locales. Repeal of the local privilege tax would result in nearly $63 million in less revenue for public investments in cities and counties across the state.

State policymakers point to the tax plan passed last year as a way to offset the lost local revenue from repealing the local privilege tax. Particularly, proponents expect the expansion of the sales tax base to some services to generate additional revenue.

The proposed repeal of the local privilege tax means businesses would get a tax cut that will be paid for largely by middle- and low-income North Carolinians who pay more of their income in sales tax than higher income taxpayers. And if the local sales tax fails to generate sufficient revenue to make up for lost revenue from repealing the local privilege tax, local governments will either have to find revenue in other places (e.g. increase local property tax rate), reduce the level of services provided to residents, or a combination of both.

Cities and counties, like the state, faced tough budget decisions during the economic downturn and recovery. They are relying on revenues to catch up and keep up with the needs of their residents. This bill puts that progress at risk.

Changes to the local privilege tax could have been made in a way that held local governments harmless, as was done in tax modernization proposals back in 2009 and earlier; however, policymakers chose this path. Under this tax change, local governments could become further challenged with providing its residents with core public services and an attractive quality of life.

NC Budget and Tax Center

Tax cuts never live up to the extravagant promises of job creation and economic growth so often made by their supporters, and last year’s tax reductions are unlikely to turn out any differently. The most recent example is Kansas, which enacted massive tax cuts in 2011. Two years later the state has experienced slower job growth than the national average, contraction in the number of businesses employing people, and loss of its AAA bond rating resulting from its catastrophic, 50% loss in revenue.

While there remains no consensus among academic economists that tax cuts are a strategy to grow the economy—instead, evidence is mounting of their harm—some think tanks keep trying to play the same hand to get a different result. One example is the Beacon Hill Institute, which has frequently deployed its State Tax Analysis Modeling Program (STAMP) during tax cut debates in various states across the country, including last year in North Carolina. Using this model, Beacon Hill claims to show that lowering taxes, or refusing to raise them, will benefit state economies. In the case of North Carolina, they also went a step further to claim that all income groups get a tax cut on average.

A new report from the Institute on Taxation and Economic Policy reveals a number of serious flaws in the STAMP approach that undermine the accuracy of its claims. In doing so, it calls into question the rosy scenario Beacon Hill paints for tax-cutting states like North Carolina.

Follow me below the fold for are some of the problems identified by ITEP:

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