In the same session that North Carolina senators approved a proposal to cut taxes for high net worth companies, lawmakers have also passed legislation increasing the standard deduction.
The stated reasons for doing so is that it will reduce taxes for everyday North Carolinians by increasing the threshold of income upon which the low flat income tax rate, 5.25 percent, is applied. It will also, as proponents claim, mean fewer people will file income taxes.
The policy reasons for reducing the income tax rolls are limited. In the end, fewer people filing income taxes means fewer people are able to receive credits and deductions that could help them with the higher tax load they carry due to sales and excise taxes — not to mention rising property taxes at the local level.
The biggest problem with continuing to raise the standard deduction threshold is that a large number of North Carolinians claim the standard deduction rather than itemize. By continually increasing the income threshold, we are delivering a costly tax break that is poorly targeted to families struggling to get by. It is a policy that does less work than is needed right now to address the upside-down nature of the tax code.
Analysis from the Institute on Taxation and Economic Policy shows that 27 percent of the total net tax cut from the increase in the standard deduction will actually go to the top 20 percent, while just 7 percent will go to the bottom 20 percent whose income leaves them in poverty each year. Read more