Lawmakers are set to squander the opportunity provided by federal COVID-19 relief
The leadership of the North Carolina General Assembly is ready to undercut the power of state aid from the American Rescue Plan by continuing its relentless pursuit of income tax reductions to the tune of at least $2 billion or, much more likely, greater than $5 billion. Federal COVID-19 aid to North Carolina totals $5.4 billion, so these proposed permanent reductions will squander our chance to catch up in the work of building a foundation of opportunity for every community.
Years of income tax cuts mean the state could have an estimated $11 billion less in revenue if the legislative tax changes take full effect. That number could be even higher if the House leadership and Governor agree to the outright elimination of the corporate income tax by 2028.
Such a reduction to the state revenue used to support public schools, public health, environmental protection, and so many other building blocks of our quality of life would be roughly equal to 30 percent of revenue collections in Fiscal Year 2027.
These deep income tax cuts are a self-imposed reduction to revenue that are equal to two times what was experienced during the Great Recession. At that time, budget cuts led to reductions in Medicaid provider rates and delivery of health care services like prescription drugs and dental care for children and drove higher tuition rates at community colleges and universities.
The elimination of the tax on corporate profits alone (from the current low rate of 2.5 percent) will reduce available revenue by $900 million annually. That $900 million is equivalent to a quarter of the annual funding increase required by the courts to make progress toward providing a sound, basic education in Fiscal Year 2028. The loss of these public dollars will have impacts to school districts statewide and affect their ability to provide textbooks, instructional support, transportation, and more to every child.
The personal income tax rate reduction would have an even larger impact on the state’s capacity to invest in opportunities for all. House tax cuts are estimated to reduce revenue by $1.5 billion, and analysis of fully phased-in Senate cuts to personal income tax suggests the revenue loss to the institutions and systems that support communities and people’s well-being would be an estimated $9 billion.
This $9 billion is nearly equal to the state’s support for the entire K-12 education budget through the General Fund.
The planned income tax cuts designed by Senate and House leaders aren’t going to drive economic growth — just as tax cuts haven’t put North Carolina on a better path than other states in the region in recent years. Instead, they will ensure that the very wealthy receive a disproportionate share of the tax break and will do nothing to address the growing inequality.
The personal income tax rate reductions in the Senate plan will still — even with the standard deduction increases — deliver 74 percent of the tax cuts to the richest 20 percent of North Carolinians when fully phased in.
At a time when the state is growing, these deep income tax cuts would reduce the capacity of the state to support people and key public institutions like schools and public health clinics. By Fiscal Year 2025, before the full impact in the Senate’s planned cuts to the personal income tax and elimination of the tax on corporate profits is felt, our collective commitment would be nearly $500 per person lower. That will make a huge difference in our ability to provide new textbooks or dental care to children or in building and maintaining the water and sewer infrastructure that keeps clean water available to families in every community.
Accepting legislative leaders’ proposed income tax cuts as inevitable will set us on a path with increased vulnerability to future crises and even fewer options to meet people’s needs in the future.
The American Rescue Plan State Fiscal Recovery Funds should make possible transformational investments that put all of our communities on stronger footing, not embolden policymakers to further consolidate the wealth and well-being of the select few.
A plan for equitable, robust public investments is urgently needed in North Carolina. Without such a public response, inequities will continue to deprive our state and communities in our state — including Black, Indigenous, Latinx, rural, poor white, and immigrant North Carolinians — from the benefits of an economy that works for all and a democracy that responds to hardship in its midst.
This relentless pursuit of income tax reductions will keep us all in perpetual crisis.
Alexandra Sirota is the Director of the N.C. Budget & Tax Center.