Last week, we raised concerns with the Senate leadership’s new tax plan. Rather than reinvesting and regaining ground lost in recent years, the Senate is pursuing another round of costly income tax cuts. When fully implemented, the $1 billion price tag for the Senate tax plan will mean North Carolina must forgo investments in the foundations of a strong economy—educating our children, ensuring courts run efficiently, building healthy and safe communities.
The Senate tax plan does nothing to fix the problem with the state’s upside-down tax code, according to analysis of the plan using an economic incidence model that provides population-level estimates of the average tax change for taxpayers by income group of all tax changes. In fact, the Senate tax plan makes such small changes regarding who pays taxes it suggests that the goal of the plan is not to fix the problems with the tax code but continue to make the tax system less adequate and thus underfund public services. The figure below demonstrates the total share of income paid in state and local taxes by income group identified by the average income in each quintile and for the top 5 percent and 1 percent respectively. The red bar reflects current law and shows that low and middle income taxpayers in North Carolina pay more than those at the top. The green bar shows law under the changes proposed in the Senate tax plan: not much different.
Here are a few more key findings from an analysis of the Senate tax plan:
- The net tax changes result in modest, if any, changes to the tax contributions across the income distribution. The bottom 20 percent would receive a total tax cut of around $20 on average while the top 1 percent would receive on average a tax cut of slightly more than $300. That dollar amount for the top 1 percent represents 0.03 percent of their average annual income.
- The biggest winners of the tax plan are the wealthiest North Carolinians because the status quo is maintained. The plan does nothing to fix the upside-down nature of North Carolina’s tax code which asks more from middle and low-income taxpayers and a lot less from the state’s wealthiest. The choices in this proposal build on the 2013 which made worse the inequities in the tax code. An estimated 90 percent of taxpayers in the top 20 percent receive an income tax cut under this plan. For the bottom 80 percent of taxpayers, just 72 percent would receive an income tax cut.
- The sales tax base expansion will ask more of the state’s low- and middle-income taxpayers as a share of their income. Without a better-targeted tool, like a refundable state Earned Income Tax Credit, the increase in sales taxes is not effectively offset by the proposed higher standard deduction. For the bottom 20 percent of taxpayers, the income tax cut is reduced by 40 percent because of sales tax changes. The sales tax base expansion is also modest in its ability to generate revenue. The sales tax changes represent roughly $200 million in revenue, covering just a third of the revenue lost from personal income taxes in the second year according to the Fiscal Research Division.
- The combined changes to personal income, corporate income and sales tax will reduce state revenue by $1 billion when fully implemented. Not only does the plan fail to address the upside-down nature of the tax code, it falls short of achieving another core principle of a tax system: adequately funding public services. One billion dollars less in state revenue will mean fewer textbooks in the classroom, no teacher pay raises, no funding for additional students, no dollars for modernization of the justice system and no support to provide for the health and well-being of seniors, children and our struggling communities.
The income tax rate cuts in the Senate tax plan have the effect of eroding the state’s ability to invest while making little to no impact on economic outcomes for individual taxpayers or the broader economy.
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