Education, NC Budget and Tax Center

Income tax rate cap amendment would cement N.C.’s missed opportunity in education

Imposing an arbitrary income tax rate cap in the North Carolina Constitution could fundamentally compromise our state’s ability to fund our schools, ensure the educational preparation of young children, and boost the educational attainment of our workforce.

Such a cementing of a missed opportunity in education could happen as the tax load shifts even further onto middle- and low-income taxpayers, while the state’s highest income taxpayers, the top 1 percent, continue to benefit from recent tax changes since 2013.

In the Budget & Tax Center’s report on the costs of a proposal to lower the maximum tax rate allowed on incomes, we find that by cutting off the potential for top brackets on high-income earners, North Carolina will not have $2.4 billion available to meet unmet needs.

These needs are real in classrooms across the state and for families with children in every community.

  • Per pupil spending remains below pre-Recession levels – 25 percent lower than South Carolina.
  • The teacher pay penalty in N.C. is second worst in the nation, behind only Arizona.
  • Students are learning in buildings with mold and leaking roofs.
  • Students are lacking access to the tools that support their learning — technology and textbooks — and their well-being — school nurses, counselors and food.

With $2.4 billion, North Carolina could address these needs and help every child reach their full potential.  Failing to do so puts at risk our constitutional commitment to public education.

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

NC Budget and Tax Center

3 things we learned from the Elon poll about the income tax amendment

At this stage in the election cycle and in a state where so many changes to the state Constitution are being proposed at once, it’s not surprising that voters don’t have all the information they need to make an informed decision on ballot measures.

That may be the headline of news coverage of the recent Elon poll, but here are three key findings on the income tax rate cap amendment that should be capturing more attention.

  1. Voters don’t support this amendment when they hear the official explanation of what it is. The opposition to the change in the proposed income tax rate moves from 15 percent to 27 percent after hearing the details of what the amendment will do.   Support falls below the majority needed to change the state constitution.
  2. Voters aren’t going to the polls because the income tax cap rate cap is on the ballot. One of the theories discussed during the legislative process was that legislative leaders felt that this measure needed to be on there to turn out voters.  Fifty-seven percent of those polled said this proposed change doesn’t motivate them to go to the polls.
  3. Voters understand that it won’t affect their tax rate. The language of the amendment was changed in the last days of the legislature to include in the ballot question language that the amendment “reduces taxes,” even though the effect of the proposal would only be to cap the maximum allowable rate in the state constitution ABOVE where it currently is.

The takeaway from the Elon poll should certainly be that more education and information is needed to ensure voters can make an informed choice at the ballot.

It should also be clear that North Carolina voters aren’t fooled by tricks from legislative leaders.  They won’t be tricked into going to the polls. They won’t be tricked by language that obscures the benefits to the wealthy and the harm to their communities. They won’t be tricked into thinking that they will benefit.

As we detail in our recent analysis of the proposal to cap the income tax rate at a lower maximum rate, this is a costly measure for North Carolina taxpayers and communities.

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Statement on the Passage of the Income Tax Cap Proposal

The passage of Senate Bill 75, proposing a Constitutional amendment capping the income tax rate to lock in recent legislative decisions to reduce rates, is fiscally irresponsible and unnecessary.

In order to keep funding vital public services such as schools and public safety, lawmakers will likely have to raise the sales tax or fees, which will eat into middle class families’ paychecks and financially hurt those who are already struggling to get by.

Lawmakers are not trying to bring greater democracy to the budget process; they are trying to take choices away from future generations of North Carolinians.  Voters in November should reject this effort to limit the tools available to future policymakers and the will of future voters.

Constitutions should be flexible and enduring frameworks for governing, not the place to impose the arbitrary whims of the moment on future generations.

The vote shows just how arbitrary the rate is that legislators choose to enshrine in the state Constitution. The bottom line is that this is about further locking in low tax rates that primarily benefit the wealthy, cutting public investments that serve the common good, and shifting the costs for our state’s needs to local governments and the middle class.

In the end, the results of this unnecessary amendment will be costly for us all.

NC Budget and Tax Center

An income tax rate cap is still bad policy

A modified Senate Bill 75 was approved by the House Finance committee this afternoon, raising the proposed income tax rate cap from 5.5 to 7 percent, to try to address concerns with the previous state Constitutional amendment proposal.

There is no fix that can make the income tax rate cap work for North Carolina.

If the goal is to keep taxes and spending low, income tax limits have been found in several academic analyses to be ineffective. These analyses find that pressing needs for public services and funding end up being supported through other fees and taxes going up. Shifts to greater local government responsibility for funding have also commonly been found to occur, which in North Carolina would primarily result in property tax increases.

The American Enterprise Institute, a strong supporter of austerity and small government, found tax limits to be largely ineffective and a poor “substitute for the hard work of long-term public education and persuasion about the central benefits of limited government.”

The reality is that North Carolina policymakers in the leadership have already pursued their goal of lower income taxes with 10 straight years of declining state investments as a share of the economy.  The result has been fewer dollars for each child’s education in the early years and through high school,  more expensive post-secondary education, crumbling infrastructure, and declining investment in the well-being of families—from water quality to public health—and communities.

An income tax cap won’t allow future policymakers to ensure that the tax code can meet these current and future needs. Already Fiscal Research projects that the current tax choices will put pressure on future policymakers to cut spending or raise other taxes in the near future.

Capping the income tax rate in the state Constitution to lock in recent tax decisions is ineffective, unnecessary and harmful to North Carolinians and our state, now and in the future.

NC Budget and Tax Center

Limits on income tax will put immediate pressure on policymakers to raise other taxes

The income tax cap being considered by the House this week would put public investments at risk and is likely to force policymakers to raise other taxes to meet growing needs in the near term.

Last summer, the Fiscal Research Division provided a 5-year forecast of the state’s fiscal position that took into account the state’s growing population and the cost of delivering just current service levels to more people over time.  Their findings were, that in Fiscal Year 2019-2020, North Carolina policymakers would not have the revenue to deliver the same diminished services to future populations. Even under revisions to revenue collections next year, this finding holds.

The state’s current tax code, resulting from the tax cuts since 2013, and  growth still slow relative to historic performance is primarily to blame.  An income tax cap now would lock in the $2.6 billion in annual revenue loss from these tax changes since 2013 and make it more difficult to make decisions that responsibly balance the state budget.

The near term prospect of state policymakers raising revenue is real.  It is not hypothetical.

Indeed, in the briefing of House Finance on the bill, the Senate sponsor made clear that many other taxes could be raised should the state need to meet growing needs—franchise taxes, sales taxes and more.  He also made clear that many deductions or credits could be gotten rid of, including reductions or elimination of the standard deduction.

The income tax cap is not about holding taxes low for everyone. It is about limiting the tools available to future policymakers and locking in the income tax cuts that have primarily benefited the state’s wealthiest taxpayers.