Today, the House Finance committee favorably approved its proposed substitute version of a tax plan that the Senate Finance committee passed earlier this month. While continuing the trend of more tax cuts, one positive takeaway is that the House tax plan does not include more corporate or personal income tax cuts – unlike the Senate’s tax plan, which further reduces tax rates that largely benefit the state’s highest income taxpayers and profitable corporations.
Perhaps most important in the committee meeting, however, was an extended and important debate about the state’s priorities and the consequences of tax choices on the ability of North Carolina to meet growing needs.
This particular debate arose from a proposed amendment to the tax plan that would dedicate revenue from the deed stamp tax to parks, recreation, and environmental initiatives. While acknowledging the importance of these investments and many others, House Finance committee members highlighted the challenge of dedicating revenue sources to specific purposes. When revenue comes in above projections, a lack of revenue availability would mean that policymakers would not be able to shift dollars to emerging priorities, for example. Furthermore, reducing General Fund dollars amid existing priorities in education, health and infrastructure likely means that these needs will continue to go unmet.
House Finance members did not acknowledge the broader context in which the tax plan was debated, however. Particularly, the state is operating under a tax code that is failing to adequately meet the range of needs in a state with a growing and aging population, unanticipated needs like rebuilding from Hurricane Matthew, a changing economy that is creating job loss and retraining needs, and redevelopment priorities in rural communities. BTC estimates that the state would have had $2.8 billion more today to invest in these priorities if the old tax code was in place.
It is time for lawmakers to assess and review tax changes passed in recent years and reconsider whether our tax code is truly meeting the needs of North Carolinians and communities across the state.
Instead of this needed broader discussion and debate, the proposed tax plan approved by House Finance today continues to pursue ineffective tax policies. The bill proposes increasing the standard deduction to provide a $55 tax cut to the many taxpayers who claim the standard deduction, a move that is costly and not effectively targeted to those who carry a heavier tax load under today’s tax structure. As BTC has highlighted before, better policy tools exist compared to increasing the standard deduction, like working family tax credits that are refundable and that recognize the impact of low-income taxpayers paying a greater share of their income in sales taxes compared to the highest income earners in the state.
The House Finance committee rejected an amendment to include a child and dependent care tax credit in its tax plan. The tax credit was eliminated by lawmakers in 2013 as state leaders began pursuing income tax cuts. The bill also raises the cap on itemized deductions for mortgage interest and property tax, a move that will primarily benefit taxpayers with higher incomes and houses with higher values. Rather than engage in an important discussion about the issue of housing affordability, instead the bill only addresses rising property taxes for certain groups. The tax plan also includes a new tax break for businesses with 50 percent of their business in rural areas of the state. This tax break was not debated, and questions about whether it will achieve its intended goal of truly reaching rural businesses engaged in research and development operations in the state’s struggling rural communities remain unanswered.
Despite the refreshing acknowledgement from House leaders that policymakers must be mindful of revenue availability for education and safe and healthy communities, state leaders continue to opt for tax cuts that hamper important public investments. A more robust debate is certainly warranted, and a different approach is needed as well.
Cedric D. Johnson is a Public Policy Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.
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