NC’s tax code reinforces racial exclusion; Senate’s proposed budget would make matters worse

New tool allows policymakers to assess and improve the impact of tax policy on racial equity

Tax policy is not race-neutral, and specific tax policy designs can be traced to outcomes that have blocked Black, Indigenous, and brown people from reaching their full potential and achieving a high quality of life.

Right now, the General Assembly has the opportunity to assess potential impacts on Black, brown, Indigenous, and white North Carolinians in advance of adopting tax changes in the final budget. By considering those impacts — alongside the already documented benefits to the richest North Carolinians and losses to critical revenue for community priorities — policymakers can make a final decision about how to maintain the revenue the state needs to invest in what is best for every North Carolinian.

When one applies a unique tool developed by the Institute on Taxation and Economic Policy to assess the racial and ethnic impact of the budget proposal approved by the state Senate in June (SB 105), it become clear that the proposed income tax reductions will worsen the state’s exclusionary tax code. This analysis should serve as a cautionary note for House budget writers, as well as the Governor, regarding the disproportionate harm that would result from the Senate tax plan and the greater cost to us all of growing a more unequal society.

Here are three charts summarizing the analysis.

First, the personal income tax cuts contained in SB105 are skewed toward wealthier families, a disproportionate share of whom are white because of the rules and practices that have governed our economy and excluded people of color from wealth-building, equal pay, and access to the best paying jobs and education. White families earning six-figure incomes make up just 16 percent of all families in North Carolina, yet they would reap 54 percent of the tax cut being proposed. Overall, 77 percent of the tax cut would flow to white families even though white families make up just 67 percent of all tax returns in North Carolina.

Second, white families with income below $59,000 would receive just 10.1 percent of the total tax cut from income tax changes, compared to the 54 percent of the tax cut being received by the richest white North Carolinians. Those North Carolinians with incomes in the bottom 60 percent of the income distribution across all races are not receiving a proportional share of the tax cuts.

Finally, Black and Latinx families would fare poorly under this proposal. The average tax cut for Black families ($480) would be 42 percent smaller than the average tax cut for white families ($831). Similarly, the average tax cut for Latinx families ($426) would be 49 percent below the average tax cut ($831) for non-Latinx white families.

In short, the Senate tax cuts would move our state backward. The House should present a clear alternative in its budget by driving our public dollars toward public goods that expand access to economic well-being for everyone, as well as by undoing the disproportionate benefit afforded to the richest by targeting any tax cuts to those with the lowest incomes.

To learn more about this subject and how to bring a greater degree of racial equity to tax policy, check out the following resources: Read more

Choosing tax cuts today blocks North Carolina from a resilient future

Image: AdobeStock

This morning, the state Senate Finance committee had limited debate about the massive tax cuts proposed in the recently released Senate budget — a budget that will block North Carolina from securing a full and just recovery.

North Carolinians deserve to know why Senate leaders are proposing to cut taxes for the few and for the shareholders of corporations largely operating outside of the state.

As my colleague Suzy Khachaturyan wrote earlier today, the personal income tax rate reduction alone will deliver 74 percent of the tax cuts to the richest 20 percent of North Carolinians when fully phased in. It will do nothing for the North Carolinians struggling with low wages and facing real hardship in putting food on the table and securing affordable housing.

Senate leaders continue to forget that all North Carolinians pay taxes, and the singular focus on changing income tax rates and deductions can’t help the upside-down nature of the sales tax that asks more from the poorest North Carolinians. North Carolinians need a more comprehensive view on taxes than the singular focus on the powerful and well-off that Senate leaders continue to take.

The recently released fiscal note also gives us a first look at the cost. By 2026, the reduction to state revenue — used to support public schools, public health, environmental protection and so much more of the building blocks of our quality of life — will total nearly $5 billion annually. That is roughly 17% of revenue collections for the current fiscal year and adds to the already deep hole that North Carolina finds itself in after nearly a decade of tax cuts.

And even this is likely an underestimate, as the Senate budget proposes outright elimination of the corporate income tax by 2028, and the complete picture of the extent of lost revenue is uncertain.

By phasing in these tax cuts in the years to come, Senate leaders are making a bad bet. There are a lot of reasons to think that the past year of revenue collections are unique. Robust federal aid, changes to tax filing deadlines and on-line sales tax collections, and the inability of the General Assembly to pass a final budget that meets the priorities of communities has meant more dollars collected.

Tax cuts won’t make things better for the everyday people who are the economy. They will make things worse.

The state’s revenue collections are still below what is needed to keep up with the needs in communities. That is the true measure of whether the dollars we have are sufficient. North Carolina continues to fall behind in our commitment to a sound, basic education, our stabilization of the early childhood system, and the accessibility of a post-secondary education. We aren’t protecting the air and water that support the health of people across the state and the natural resources that increase our quality of life.

North Carolina leaders continue to dig a hole when they could have used this moment to build a path to a future where hardship isn’t the norm and every person is considered in our policy process, not just the wealthy few.

By starting the biggest tax cuts after 2024, Senate leaders have signaled that they are aware of the no net tax cut provision yet have chosen to put forth a proposal that would still result in losses for North Carolina

Estimated tax cuts allowed under the American Rescue Plan versus the estimated impact of tax cut proposed, by Fiscal Year

FY21 FY22 FY23 FY24
Tax cuts allowed under the de minimus rule $301,431,000 $306,706,000 $312,687,000 $319,097,000
Estimated revenue losses in Senate Bill 105 $610,000,000 $1,899,800,000 $2,709,800,000

Sources: Center on Budget and Policy Priorities analysis; NC Fiscal Research Division, Senate Bill 105 Legislative Fiscal Note

Our economy needs people to be healthy, to have educational opportunities and a safe, affordable home. Our leaders need to ask profitable companies and the richest to contribute to our efforts to make this state a great one. Only if we go all-in can we build a state that is a great place to live for all people.

Alexandra Sirota is the Director of the Budget & Tax Center, a project of the NC Justice Center. Suzy Khachaturyan, Public Policy Analyst, and Patrick McHugh, Research Manager, contributed to this post.

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. Read more

Gov. Cooper introduces the first North Carolina plan for rebuilding with American Rescue Plan resources 

Gov. Cooper last week released his plan for American Rescue Plan dollars, focusing primarily on the $5.7 billion in federal funds that will be available to North Carolina to shift from relief and response to rebuilding and recovery. There’s a lot of merit to the governor’s proposal, but the long-term impact will hinge on how these investments are made and whether the legislature gets serious about meeting the needs that cannot be addressed with federal money alone. 

The dollars coming to North Carolina were an essential part of the American Rescue Plan, a transformational piece of federal legislation signed into law on March 11, 2021, that will reduce child poverty nationwide by half. The allocation of federal funds for states and local governments, in particular, addresses the critical role that state and local leaders and public institutions must play in addressing systemic failures and responding to the greatest need.  

Gov. Cooper proposes deploying those dollars across a range of investments with a focus on two critical goals: to address the hardship people continue to face, and to build infrastructure that will strengthen people’s connection to opportunities in the classroom and for jobs 

First, Gov. Cooper builds on the Extra Credit Program to establish a cash grant for people who have yet to see their jobs recover. For these North Carolinians, the program would provide $500 or $250, with greater amounts for those with the lowest income.

By targeting the program, Gov. Cooper can provide a more significant boost to those most severely harmed by the pandemic and downturn. There are still details to be worked out, like how to reach the hundreds of thousands of North Carolinians who don’t file income taxes, but the administration should consider the lessons of the first round of Extra Credit grants. Increasing household incomes holds significant promise for supporting well-being and should be part of the state’s permanent policy agenda. 

Second, and the greatest single area of investment, is the allocation of American Rescue Plan funds to broadband infrastructure and affordability. Gov. Cooper’s plan allocates $1.2 billion to closing the digital divide, including $600 million for infrastructure, with a goal of providing broadband service at significantly higher speeds than the federal definition of broadband. This is an important goal, as the federal definition is woefully inadequate for providing the speeds people need to access educational resources, job applications and remote work. The plan also recognizes that infrastructure alone is not enough, and includes $420 million to support subsidies for services to households, along with dollar to support devices and digital literacy.  

The proposal also includes $800 million for local water and sewer projects, $160 million for lead and asbestos remediation in local schools, and $175 million for downtown revitalization. This funding can provide much needed local assistance, but they won’t fix all that’s broken. For example, the N.C. Department of Environmental Quality estimates that more than $25 billion may need to be invested in North Carolina’s water and wastewater systems over the next few decades. 

The governor also proposes complementing investments in rental and homeowner assistance with dedicated dollars to increase the supply of affordable housing through renovation and building. This commitment to addressing the supply is critical to ensuring the housing cost burden facing too many North Carolina households is not just temporarily addressed.  

This is a key point. Gov. Cooper’s plan is ambitious, but it has to be. Years of tax cuts for rich people have left an even larger hole than these funds can fill. Lack of affordable housing meant people were struggling to pay the rent before the pandemic. Limited access to broadband made it more difficult to shift to remote school and work. The lack of investment in public institutions and public-sector workers meant less flexibility to adapt and deliver services over the course of the pandemic.

The result is that more dollars from the American Rescue Plan, which could have been used to double down on the poverty-fighting impacts nationally, must be spent to shore up state agencies and address a backlog of unmet needs.  

So while the American Rescue Plan will allow the state to take steps to redress the harm of nearly a decade of austerity, it won’t fix everything that is wrong right now with North Carolina’s economy and approach to policymaking. The investments proposed in the governor’s plan are important, but it’s going to take a longer-term commitment to build the foundations for future wellbeing. 

In the coming weeks, it is critical that the governor and legislative leaders engage with people in communities to discuss plans for these dollars learn about the needs and the solutions that can set us on the path to a more inclusive economy.   

It is critical that the governor and legislative leaders consider how to ensure the state has the resources to invest long-term in the people and communities of this state. That means rejecting tax cuts for the very wealthy and powerful, as well as rejecting arbitrary limits on tax and spending decisions. That means embracing the reality made clear during the pandemic that the well-being of every person should be the focus of policy. It will fuel a stronger economy and democracy. 

Why return-to-work bonuses are the wrong medicine for what ails the labor market

North Carolina Senators are proposing a $1,500 return to work bonus in an effort to bolster employers’ hiring of employees who lost their jobs during the COVID-19 pandemic.   

This isn’t an idea unique to North Carolina. Rather, it’s a copycat proposal making its way around the country as lawmakers listen to the concerns of employers who have not been able to fill positions in recent weeks.   

As we have noted before, the claims that the hiring challenge for employers is due to a labor shortage don’t have much support in the data. More likely is that employers are offering wages that are too low for potential hires to accept, given many will be asked to work under conditions that potentially jeopardize their health. 

The returntowork bonuses don’t address the fundamental fact that the low-wage labor market is not sustainable and working people know it. North Carolina’s current job openings are predominantly in low-wage work; the chorus of employers claiming they can’t find workers are in the industries notorious for low pay and no benefits. In a recent NC Policy Collaboratory article, analysis of the job openings through December 2020 shows growth in low-wage job openings 

In a functioning labor market, employers seeking to fill job openings would be raising wages to bring people back to jobs (and to retain people). Many employers across the country are doing just that and sustainably getting people back to work.  

In North Carolina, however, there is little sign across industries that employers have increased wages in recent months 

House Bill 128 attempts to further tilt the labor market in favor of the already powerful employer and subsidize their efforts to lure people back to low-paying jobs.   

The $1,500 bonus payment offer, however, does not address the fact that many occupations pay below what it costs to meet a families’ needs. Many of the occupations identified in news and employers claims pay below the living income standard of $18.50 for one worker and one child.  

To make matters worse, the proposal would penalize jobless workers who don’t follow strict, costly administrative rules. By doubling down on work search requirements, this bill will do more damage to a recovery that is already inequitable, in ignorance of the reality  that there aren’t enough job openings for the number of candidates in 99 of North Carolina’s 100 counties.  

As researchers at NELP have pointed out, raising the administrative burdens on jobless workers creates barriers to access to critical wage replacement, particularly for workers of color, and increases costs to the public. This in turn diminishes the power of Unemployment Insurance to stabilize spending and allow business to hire based on the fact that they have consumer demand for their goods and services.  

Return-to-work bonuses and work search requirements do nothing to address the persistent barriers that prevent or deter people from returning to work, such as the fact that there are still too few childcare providers in 52 counties across the state. Working parents can’t return to their jobs when care responsibilities remain. Even if a parent can find a slot, $1,500 doesn’t go far in making sure that childcare remains affordable long-term.    

The NC General Assembly needs to get serious about a Back to Work Agenda: one that would fully fund childcare assistance for working parents who can’t afford high quality care in their community and ensure providers have supports to open and pay educators to deliver quality early education to children. An agenda that supports the return to work for more workers would ensure every worker had access to paid leave and workplace protections, and it would make it unacceptable for an employer to pay a minimum wage that leaves its workforce in poverty.   

These are the fixes our labor market needs. This should be the work of our elected leaders instead of distorting the labor market so that powerful employers can get the cheapest labor.