Three numbers that illustrate the folly of North Carolina’s latest austerity budget

North Carolina’s final budget includes deep personal income tax cuts and elimination of the corporate income tax over the next 10 years that will deepen hardship and prolong the recovery rather than supporting people and their well-being.

Sadly, rather than invest the state’s available billions in meeting basic near- and long-term needs, lawmakers chose to rely on federal funds to funnel temporary relief to those hit hard by the pandemic, while holding back from sustained investments in housing, health care, and education.

Despite huge structural needs and inequities exposed by COVID-19, lawmakers on both sides of the aisle have renewed the state’s commitment to the failed trickle-down approach of the status quo.

By once again choosing tax cuts over our collective well-being, elected leaders have put their faith in the wealthy few and out-of-state corporations, hoping they will somehow save the day and lay the groundwork for an economically prosperous and resilient state.

The record shows that this promise is unlikely to materialize. Since North Carolina began dramatically cutting income taxes in 2013, it has not fared better than any of its neighbors.

The state could provide the jobs and growth needed by investing in its homegrown potential and its own people by ensuring the rules of the game work in favor of average households. Instead, the new budget will widen economic inequality, hinder employment equity, and worsen our state’s overall economic outcomes.

Meanwhile, the revenue that will be lost from sending tax breaks to the wealthy and profitable corporations will block the state from becoming more resilient in the future.

Here are three numbers that help illustrate these hard truths:

  • We will lose 20 percent of General Fund tax revenue, or $8 billion over the next 10 years. This money could help ensure that schoolchildren can receive a sound basic education, and that their families have a shot at obtaining health care, decent and affordable housing, and basic protections against COVID-19 in every workplace. This is a steeper revenue reduction than experienced in any of the recent economic downturns in North Carolina and an artificial one—created by policy choices that will deliver worse outcomes. It builds on the reductions already locked in by the 2013 income tax changes that have decimated public health infrastructure, resulted in lower wages for public employees, and limited progress in addressing the affordable housing crisis.

  • $10 billion is a conservative estimate of the gap between available revenue and required expenditures that future policymakers will face when the tax cuts are in full effect in FY ’30. This figure takes into account the state’s constitutional requirement to fund a sound, basic education and the need to keep up current service levels in the face of rising costs and a growing population. The actual number will likely be even higher. That we don’t know what will be required to protect people’s health and well-being and adapt to a changing employment and technological landscape a decade from now makes this figure even more worrisome.

  • 10.25 percent is the astounding state sales tax rate that would be required to fill the massive new hole caused by these cuts. To be clear, this would be a disastrous option that would shift the state’s tax load even more dramatically onto middle- and low-income taxpayers than it is already. The poorest 20 percent of North Carolinians would see their state and tax contributions as a share of income increase by more than 3 percent—adding to an already upside-down tax code that asks increasingly less from millionaires. Sadly, however, based on the trend of protecting the wealthy and powerful few, it seems the most likely choice if the option of raising new revenue to meet future needs is ever again placed on the policy table. The alternative would be reducing services in communities or shifting the responsibility to local governments.

It isn’t inevitable that North Carolina policymakers on both sides of the aisle had to choose these deep income tax cuts.

There is a combination of policy choices that put people first and ask the wealthy and corporations to pay what they owe. Such policies would deliver a better outcome for all North Carolinians and put us on stronger economic footing for the future.

The consequences of this new budget will ripple through our everyday lives for years to come, and North Carolina will fall even further behind in securing the well-being of people and the economy.

Alexandra Sirota is the director of the N.C. Budget & Tax Center.

Recent legislative action will further undermine the health of state’s unemployment insurance system

Source:  US DOL, Quarter 4 of 2020, Unemployment Insurance Data Summary

As the 2021 session of the North Carolina General Assembly draws to a close, legislative leaders should be taking action to strengthen the state’s inadequate and miserly unemployment insurance system.

Unfortunately, they are pursuing precisely the opposite course.

Recently, in fact, they added an amendment to an unrelated bill that will block modest scheduled increases to unemployment insurance tax rates for employers that keep the system solvent.

Meanwhile, there has been no action to address problems in the system that earned North Carolina the title of being the worst state to be unemployed.

North Carolina’s unemployment insurance system fails to provide people who’ve lost their jobs through no fault of their own with sufficient replacement of lost wages to cover basic needs. What’s more, it provides those meager benefits for too short a time to support a worker through their job search.

The current system also falls far short of fulfilling its mission to stabilize the economy during downturns (click here for a list of simple and necessary policy changes that lawmakers should enact in 2021).

Of course, North Carolina has always had one of the lowest tax rates in the nation — both in terms of the rate and the amount paid per employee. In 2020, employers contributed $121 on average for each covered employee. In that same year, North Carolina had a tax rate lower than 39 states, and as a share of total wages paid in the state, the tax rate was half the national average.

Keeping such low rates in place will have immediate and long-term negative consequences. Simply put, when unemployment insurance tax rates are kept low and benefits meager, working people suffer. That, in turn, causes economic recoveries to drag on and raises the costs to us all in the form of increased hardship, poorer  health outcomes, reduced lifelong earnings, and lower economic mobility for people.

What’s more, when unemployment insurance tax rates are kept low, the system isn’t likely to remain financially sound. North Carolina should have already learned this lesson in the 1990s. Tax cuts for employers during that decade set the state up for insolvency during the Great Recession. The burden of keeping the state system solvent was shifted onto jobless workers in the form of lowered and shortened benefits.

If tax contributions of employers had been kept at adequate levels, North Carolina could have done a much more effective job of aiding workers in crisis and boosting the health of its economy. Simply matching the national average tax rate on total wages would give North Carolina the funds to ensure jobless workers have better wage replacement rates and are supported for the average length of time it actually takes to find a job. The state could also use these funds to expand access to unemployment benefits for part-time workers and other historically excluded workers, support streamlined operations for workers and employers, and connect job seekers to workforce training.

The bottom line: By keeping employer taxes low while refusing to improve things for workers and their families, lawmakers have signaled that working people will continue to be an afterthought in legislative policymaking and are doubling down on an economic approach that will continue to serve us all poorly.

Alexandra Sirota is the Director of the N.C. Budget and Tax Center.

Elimination of the corporate income tax will hurt North Carolina

More than 60 percent of North Carolinians oppose eliminating the corporate income tax. In fact, most North Carolinians want to see profitable corporations contribute what they owe to ensure we can fund a better future for people across our state.

As the final state budget nears completion, legislative leaders and the Governor should listen to the people and keep in place an income tax on corporate profits, to ensure a just recovery from this pandemic and strengthen the health of communities for the long-term.

But will North Carolina policymakers listen to the people and plan for the future, or will they continue to legislate for the powerful few and lock future generations into a governance model that holds North Carolina back?

Here is the reality of just who will benefit and who will be hurt if policymakers refuse to choose a better future for North Carolina:

Who benefits from corporate income tax elimination? Elimination of the corporate income tax would send the vast majority of the $900 million annual tax break to shareholders out of state. Estimates suggest that less than 20 percent of the corporate income tax rate cut would stay with residents. Of those small number of shareholders in North Carolina, 69 percent of the next tax cut will go to the richest 20 percent of taxpayers. Read more

Build Back Better framework represents historic opportunity to improve the lives of North Carolinians

President Joe Biden in Scranton, Pa. on Oct. 21 (Photo by Patrick Abdalla/Pennsylvania Capital-Star).

NOTE: The Build Back Better framework released last week is currently being crafted into legislation and changes to the scope and scale will be updated or linked to at the top of this post. 

The Build Back Better framework released last week by the White House is a chance to take a huge step forward to increase opportunity, reduce poverty, and shrink racial inequities for North Carolina children, families, and workers.

While we await a final agreement and legislative text, some things are already clear: The framework would spur a historic reduction in child poverty and a marked decrease in child hunger. It also would provide affordable, quality health coverage to millions of uninsured Americans. It would expand access to stable, affordable housing at a time when housing instability and homelessness is a reality for far too many in North Carolina. And it would strengthen families and help parents stay in the labor force by reducing the cost of child care and expanding free access to universal pre-K.

Together, these investments will narrow racial disparities that are rooted in our nation’s long history of racism and discrimination. Especially in light of the massive and mounting costs that have come due during the COVID-19 pandemic, the design of public investments must now center the needs of those most harmed and advance equitable outcomes and recovery.

The Build Back Better plan will address an array of problems that grew especially acute in North Carolina during COVID-19, by supporting the educational outcomes of children and the early education workforce behind the workforce, addressing housing affordability and health care access, bolstering the financial security of those with very low incomes, and mitigating the risks of climate disasters and public health emergencies. Consider the following figures:

  • 47 percent of NC households that rent are cost burdened and the rental assistance as well as nationwide effort to build 1 million affordable rental units will provide near and systemic support to North Carolina households.
  • 629,956 young children (ages 0-5) in families earning under 2.5 times the North Carolina median income (about $201,846 for a family of 4) will have access to affordable child care, and families will pay no more than 7% of their income on high-quality child care.
  • 154,103 additional 3- and 4-year-olds per year will be able to access free, high-quality preschool, and the quality of preschool will increase.
  • Access to free school meals will be expanded to an additional 307,000 students during the school year and 903,450 students will be provided with resources to purchase food over the summer, ensuring that the nutritional needs of North Carolina’s children are met.
  • 388,000 uninsured people will gain coverage, including the 212,000 who fell into the Medicaid coverage gap, and 229,100 will save, on average, hundreds of dollars per year.
  • 593,900 low-wage workers in North Carolina will be supported by extending the American Rescue Plan’s Earned Income Tax Credit (EITC) expansion.
  • More than 924,000 children will gain access to the Child Tax Credit.

These critical investments are based on successful, sound policies in place in other nations and in some states. They will be fully paid for with provisions designed to make sure corporations and the wealthy pay more of their fair share in taxes. The framework will set a minimum corporate tax of 15 percent to address the avoidance strategies employed by many profitable corporations and puts in place a surtax on very high income individuals, while also closing loopholes and increasing collection capacity.  Read more

Without a change of course, the NC legislature is setting us up for perpetual fiscal crisis

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. Read more