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Commentary, NC Budget and Tax Center

The ballooning cost of recent state tax cuts is one of the key stories of 2014. While state leaders argued over how to pay for increasing teacher salaries, it was easy to forget that the 2013 tax cut package was a huge part of the reason that funds were so hard to come by. The 2013 tax cuts, which largely went to the wealthiest North Carolinians, are forcing us to make unnecessary choices between funding schools or roads, healthcare or economic development, local governments or state services. It didn’t have to be this way and, as the charts presented here clearly show, the costs of the 2013 tax cuts are becoming increasingly clear.

Many proponents argued that the 2013 tax cuts would stimulate new economic growth and, as a result, the cost of reducing rates would be largely offset because there would be more economic activity to tax. The idea that tax cuts will actually increase revenue is based on a simple intuition popularized by Art Laffer. Laffer’s thought experiment holds that lowering the cost of doing business will cause people to invest and spend more, so the total economy will grow, which will ultimately result in government collecting more revenue. Like many exercises in theoretical economics, the “Laffer Curve” is just a mathematical equation. It looks nice on a napkin, and has an pleasantly simple logic, but the real world is often allergic to this kind of treatment and refuses to behave as theorists’ models expect. Unfortunately, the consequences of putting faith in the Laffer Curve are anything but theoretical. As this economic experiment on North Carolina continues, the results are not looking good for the subject.

2014 End of Year Charts_tax cuts dig a hole

While sober analysis always showed that the 2013 tax cuts would reduce revenues, the hole keeps getting deeper every time we look at it. As can be seen in the chart above, initial estimates projected a roughly $500 million reduction in state tax revenues for the 2014-15 fiscal year. Estimates released this month have the cost rising to almost $900 million and, according to our analysis, the bill could top $1 billion. Thus far this fiscal year, actual tax collections have been lower than was expected even with the cost of the tax cut included. The December state revenue update shows that we are $190 million short of projections. We will know the real fiscal impact after sales taxes from the Christmas shopping season known and income tax returns are filed next year, but all indications to date are that the 2013 cuts will blow an enormous hole in current and future state budgets.

2014 End of Year Charts_underfund the recovery

The result of the ballooning revenue shortfall, is that state spending has not recovered to pre-recession levels. When the economy collapsed in 2008, it dramatically undermined state revenues, forcing a series of unusual measures to try to fill the gap. Under normal conditions, the return to positive economic growth brings in more revenue, allowing departments and divisions in state government to address needs they had put off during the squeeze. As can be seen above, this is the pattern for each of the last three recessions dating back to the early 1980’s. Each recession initially forced North Carolina to spend less than was anticipated when revenues fell, but spending bounced back within a few years allowing North Carolina to get back to business. Policy choices in the recent recovery are a departure from previous budgetary practice. We have usually seen reduced state spending during the initial downturn, followed by accelerated investing during the recovery to make up for lost ground and restore the state’s public service infrastructure. We are seven years removed from the onset of the Great Recession and, because of the 2013 tax cuts, state revenues remain roughly 10 percent below their pre-recession levels.

All of this means undercutting the future of North Carolina. The state still has a backlog of expenditures that were put off during the recession, positions unfilled, buildings overdue for repair, roads and bridges that need fixing or expanding, local governments who have lost state support for key services, and much more. We also face an increasingly competitive global marketplace. Many of the people who lost their jobs during the recession still need help retooling their skills and the challenge of preparing children to survive in the 21st century economy keeps getting more complex. As the legislative session gets started in 2015, remember that the choice to reduce taxes on the most fortunate among us is a major reason that key investments for the rest of North Carolina are not being made.

Commentary
Eric Garner

Photo: www.commondreams.org

The issue of young men of color dying in police custody has been dominating the national news of late and rightfully so. Millions of Americans in many cities — mostly people of color — live in fear and/or distrust of the police in their communities and this is not a recipe for a healthy society. Concerted action — protests, demands, and action by community leaders and elected officials — are all necessary if we are are going to tackle this unacceptable situation.

Dana Millbank of the Washington Post was right recently when he wrote that President Obama would do well to seize the moment surrounding the outrage that’s occurred across the political spectrum in the Eric Garner case out of New York (tragically pictured above) in which a young man was killed by a police choke hold. As Millbank noted, the Garner tragedy offers some glimmers of hope in that the killing is actually drawing harsh assessments from white commentators on the right who rushed to the defense of the police officer in the Ferguson, Missouri case.

What to really DO about the situation, however, is less clear. Millbank says President Obama should  look at creating alternatives the grand juries for investigating police deaths. Others are pushing the idea of police body cameras. Those are both promising ideas as far as they go.

The real solution that no one really seems to want to talk about, however, is this: Read More

Commentary

TaxesCatherine Rampell of the Washington Post has an excellent essay in this morning’s edition of Raleigh’s News & Observer about how the American aversion to taxes has become an irrational and destructive affliction. Not only are we leaving core public structures and services chronically underfunded, we’re skewing our entire political system by turning our public servants into scavengers who must concoct ever-more-elaborate schemes to pay for the services we demand.

“Voters hate taxes and will punish any politician who threatens to raise them (or, in many cases, does not accede to cutting them). But schools, roads, police forces, garbage collection, firefighters, jails and pensions still cost money, even when you cut them back as much as voters will tolerate. So instead of raising taxes, state and municipal governments have resorted to nickel-and-diming constituents through other kinds of piecemeal, non-tax revenue raisers, an outcome that is less transparent, and likely to worsen the economy, inequality and social injustice.

Think of recent, infuriating stories on civil asset forfeiture, in which law enforcement seizes cash and other property from people who are never charged with crimes. Often the departments that do the seizing get to keep the proceeds, which leads to terrible incentives. Officers around the country now attend workshops that offer tips on the best goodies to nab (go for flat-screen TVs, not jewelry).

Forcing cops to remit forfeiture proceeds to the state or local treasury, rather than allowing an eat-what-you-kill policy, might discourage bad behavior to some degree. But at heart, the reason such actions are so commonplace is that government revenue has to come from somewhere, if it ain’t coming from taxes.”

As Rampell goes on to point out, this ridiculous state of affairs is transforming how we fund government from a broadly-shared, democratic enterprise  into a regressive, market-distorting mess. She might’ve also mentioned that it’s helping to transform how we think about government as well. Where once all citizens were stakeholders/owners, we’re now becoming cheapskate bargain hunters looking only to get the best deals for ourselves (e.g. private school vouchers).

Her solution: “It’s time to take off the fiscal blinkers and start rewarding politicians who have the courage to advocate raising revenues the old-fashioned way: through taxes.”

Amen to that.

Commentary

ThanksgivingIf you’re preparing for the inevitable political discussions that will accompany your family get-togethers this week, here are three new Thanksgiving-themed posts that might help you out:

#1 is today’s Fitzsimon File, which highlights the hypocritical change of heart that so many conservative politicians display toward people in need around the holidays. As Chris notes, the disconnect between what the politicians say about the same needy people during the holidays and the other 11 months of the years is frequently breathtaking.

#2 is a new Q&A from the N.C. Budget and Tax Center entitled “How to talk about the economy and taxes with your family.” Here’s an example:

WHEN THEY SAY: “This state is spending more than ever on public education.”

YOU SAY: We’re funding public schools in NC nearly 6 percent less than in 2008 when you adjust for how much things cost.  This would be like the Panthers claiming a touchdown at the 6 yard line.

As the economy improves—and it is improving—we need to invest in our public schools to ensure that we educate our kids and build a sound foundation for future economic growth. Without investing more, we can’t ensure that our classrooms, teachers and students have the cutting-edge tools to improve learning.

Finally, #3 is this morning’s edition of the Weekly Briefing (“Food for thought on the immigration question”) in which several key facts are spelled out (and myths exposed) about President Obama’s executive order on immigration last week. For example: Read More

NC Budget and Tax Center

Voters in Mecklenburg, Guilford, and Rockingham counties each rejected a ballot initiative to increase its local sales tax by one-quarter cent. Under these referendums, consumers would have paid 25 cents in additional sales tax per $100 spent on goods and services subject to sales tax. The sales tax increase was expected to generate around $32 million for Mecklenburg County, $14 million for Guilford County, and $1.5 million for Rockingham County in additional local revenue each year.

This rejection of a sales tax increase highlights the tenuous reality of funding for public education in North Carolina. Last year, state lawmakers passed a tax plan that significantly reduced revenue available for public schools and other important public services. The tax plan has proven to be more costly than state policymakers’ initial estimate and the implications of this self-imposed revenue crisis will reverberate across the state in the years ahead. Meanwhile, some local governments are bracing for the revenue losses associated with the elimination of the local privilege license tax, which goes into effect next July.

Of the three counties rejecting a proposed sales tax increase, Mecklenburg County has experienced significant growth in its student population in recent years. Charlotte-Mecklenburg Schools (CMS) is the second largest, and one of the fastest growing school systems in the state. For the most recent 2013-14 school year, more than 144,000 students were enrolled in CMS, with nearly 10,000 additional students entering CMS classrooms since 2008. Guilford County has experienced modest growth in its student population (1,326 additional students) while the student population for Rockingham County has declined (990 fewer students) since 2008. Read More