A costly tax cut during the pandemic is bad for NC

When North Carolinians with earned income below $60,000 have yet to see employment return to pre-COVID-19 levels — and while those with higher income have fully recovered and corporate profits are soaring — North Carolina needs to invest in supporting a more just recovery and to target any tax cuts to those hardest hit by the pandemic.

Instead, Senate leaders released their plan for changing the tax code. They are flouting the no-net-tax-cut provision in the American Rescue Plan. They are potentially jeopardizing Fiscal Recovery Funds for North Carolina. And they’re doubling down on a march toward austerity that has made us less safe and less resilient in the face of significant public health and economic challenges.

The proposed committee substitute, which had already passed the House as House Bill 334 as a more modest alignment to federal tax treatment of Payroll Protection Program loans, is now an omnibus tax bill that aligns with the worst theories about how to help the economy and support people’s well-being.

  • It targets tax cuts to the top. The combined personal and corporate income tax changes will deliver 56%of the tax cuts in the bill to the top 20% of North Carolina taxpayers.
  • It fails to reach those struggling to get ahead in the economy. The bottom 60% of taxpayers would receive just 23% of the net tax cuts. The continued rejection of working family tax credits by legislative leaders leaves out many people across the state who pay taxes but don’t earn enough to pay income taxes or file taxes.
  • It emphasizes out-of-state, well-connected corporations and shareholders over local businesses and working people. The corporate tax changes alone will primarily benefit out-of-state corporations who currently pay taxes on profits that are determined based on only sales in the state. Research, including by the Congressional Budget Office, has pointed to the fact that owners of stock and other capital ultimately pay corporate taxes, and an estimated 90% of the tax cut from elimination of the corporate income tax would flow out of state.
  • It makes no long-term plan for supporting small businesses and establishing a foundation for home-grown solutions to our economic challenges. The proposed grant program with American Rescue Plan would reach only those already in receipt of state and federal grants, leaving out many of the Black-owned and immigrant-owned businesses that were less connected to the financial institutions providing access to immediate economic support. Furthermore, because the revenue losses will undermine the ability of the state to invest in education, targeted community economic development, and critical quality of life measures, state leaders are hoping that outside help will continue to sustain us.

Tax cuts are not the remedy for what is ailing North Carolina’s economy.  Tax cuts don’t build affordable housing, tax cuts don’t put food on the table, and tax cuts don’t create jobs.

Tax cuts do reduce our ability to invest in the public institutions, infrastructure and services that make sure everyone can do well. They reduce our ability to invest in businesses so they can start and expand, get goods to market and have the workforce they need. They reduce our ability to ensure low-wealth communities are included in economic growth, so they can deliver a quality of life and level of opportunity that sustains the economy.

Tax cuts in recent years in North Carolina have gone hand-in-hand with austerity budgets. North Carolina is already spending at historic lows. The full revenue loss to the state from this proposal will reduce the state’s capacity for investment by $2 billion. An additional $1 billion will be unavailable to local governments.

The result has been and will continue to be under-investment in our schools, child-care system, higher education, roads, public transit and affordable housing — all of which weaken our ability to recover and grow inequality. Where you live in North Carolina matters more than ever for whether you will have access to the internet, a good job and a sound basic education; state leaders have abandoned their responsibilities to make sure that every person is on an equal playing field when it comes to opportunity.

Economic mobility and financial security have suffered even as the wealthy and big companies have reaped benefits. There is no evidence that the tax cuts since 2013 boosted our economy. Yet there is a lot of evidence that inequities have remained. The failure to reduce poverty and put every person — Black, brown and white on equitable footing in our state hurts us all.

A more detailed look at the provisions shows that this proposal would hurt our rebuilding effort and at the expense of building stronger, together. The bill includes:

  • An elimination of the corporate income tax rate that would benefit corporations with profits, primarily businesses with out of state operations and in-state sales, and out of state shareholders
  • An increase in the standard deduction, effectively raising the threshold after which the income tax rate applies for all taxpayers.
  • A reduction in the income tax rate applied for all taxpayers from 5.25 to 4.99%, maintaining a flat income tax rate that asked the same of millionaires as it does of workers earning poverty wages.
  • An expansion of the child deduction by $500, which reduces the taxable income of a taxpayer before the income rate is applied, but will not reach children in households that have very low incomes and don’t have to file income taxes but pay sales, property and excise taxes
  • A change to the calculation of the franchise tax by adjusting the base subject to the tax and the tax rate applied to a business, which could reduce revenue collected from companies with highly valuable real property.
  • A decoupling from various federal tax changes, which would result in North Carolinians paying state taxes on student loan payments and the first $10,000 in Unemployment Insurance income

North Carolina can’t rely on each of us going our own way or on outside big business to address our persistent economic challenges.  Doing so only creates more costly harms to our health and well-being, as well as the stability of our communities and democracy. In this moment, North Carolina needs to pool our resources — and ask the wealthiest and powerful to do their share — to advance the well-being of us all.

Alexandra Sirota is the Director of the Budget & Tax Center, a project of the NC Justice Center.

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