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.
- Basing the formula that profitable corporations use to calculate their state income tax only on sales will benefit a few businesses at the expense of revenue needed to grow the economy and spur job creation. Other states have tried this; of the eight states that had the “single sales” formula in effect from 2003 through 2012, six were below the average of all states in retaining manufacturing jobs. This change is expected to reduce annual revenue in North Carolina by more than $70 million upon full phase-in.
- Limiting or eliminating important local revenue sources (for example, capping the Local Option Sales Tax at 2.5 percent) would make it harder to provide services essential to the safety and wellbeing of North Carolina communities. And the proposed change in allocation of sales tax revenue from largely point of sale to a per capita basis could undermine existing plans for infrastructure investment and ignores the role of cities in a regional effort to promote economic development. A per capita basis allocation formulas means that areas with high levels of commercial activity would lose a share of their existing sales tax dollars to less-commercially vibrant areas, but would still have to fund the infrastructure and public services that support commercially vibrant areas. While per capita allocation may in theory allow local governments to better provide public services to populations regardless of the size of their commercial centers, the issues above suggest that a hold harmless provision should be considered.
- Proposed changes to the state’s main economic development incentive program double down on tax cuts instead of economy-boosting investments. The proposal shifts resources away from critical industrial infrastructure development in the state’s most distressed counties. Instead, the Senate offers bigger tax incentives in those counties, allowing recipient companies to avoid paying up to 80 percent of their tax liability. And while it is encouraging that the proposal would set new wage standards for the jobs that recipient firms must create in order to receive their Job Development Investment Grant incentive, in fact the standards aren’t high enough to ensure long-term quality job creation in distressed regions. Since wages in rural counties will likely continue their decade-long decline as manufacturing gives way to low-wage service jobs, setting the standard at the level of the county’s average wage means tax dollars will subsidize ever-lower-wage jobs as the county average continues to decline.
Building a strong, prosperous economy should be North Carolina’s top priority – and these tax-cut proposals won’t do it. The continued commitment to tax cuts and subsidies for large, profitable businesses at the expense of investing in great schools and helping hardworking North Carolinians support their families takes the state down the wrong path. Staying on that path means North Carolina will continue to cede ground gained from a long and deep commitment to ensuring that economic opportunity is possible for all.