The good, the bad and missed opportunities in proposed House tax plan

Today, the House Finance committee favorably approved its proposed substitute version of a tax plan that the Senate Finance committee passed earlier this month. While continuing the trend of more tax cuts, one positive takeaway is that the House tax plan does not include more corporate or personal income tax cuts – unlike the Senate’s tax plan, which further reduces tax rates that largely benefit the state’s highest income taxpayers and profitable corporations.

Perhaps most important in the committee meeting, however, was an extended and important debate about the state’s priorities and the consequences of tax choices on the ability of North Carolina to meet growing needs.

This particular debate arose from a proposed amendment to the tax plan that would dedicate revenue from the deed stamp tax to parks, recreation, and environmental initiatives. While acknowledging the importance of these investments and many others, House Finance committee members highlighted the challenge of dedicating revenue sources to specific purposes. When revenue comes in above projections, a lack of revenue availability would mean that policymakers would not be able to shift dollars to emerging priorities, for example. Furthermore, reducing General Fund dollars amid existing priorities in education, health and infrastructure likely means that these needs will continue to go unmet.

House Finance members did not acknowledge the broader context in which the tax plan was debated, however. Particularly, the state is operating under a tax code that is failing to adequately meet the range of needs in a state with a growing and aging population, unanticipated needs like rebuilding from Hurricane Matthew, a changing economy that is creating job loss and retraining needs, and redevelopment priorities in rural communities. BTC estimates that the state would have had $2.8 billion more today to invest in these priorities if the old tax code was in place. Read more

NC Senate proposal would expand the sales tax

Correction, posted May 19:

The Budget and Tax Center highlighted below how a proposed bill – Senate Bill 628 – considered and discussed by the Senate Finance this week would make landscaping services and services for driveways and parking lots subject to sales tax as part of clarifications of the sales tax base broadening that has happened since 2013.

Upon further review of the bill language, we acknowledge our error in identifying landscape services as one that would be subject to sales tax, as language exists in the bill that maintains the exemption. Technical changes in the bill alter the content and language of various existing statutes related to the sales tax, and interpretation by the Department of Revenue will ultimately determine the specifics of how this will apply to and affect various services.

We will look forward to the fiscal note for this proposal to understand the full impact of this proposal to change the sales tax and business taxes as well. In the meantime, Senate Finance committee members should be mindful of the implications of revenue law changes on the sales tax in the context of the current tax code. The regressive nature of the sales tax means low- and middle-income taxpayers pay a larger share of their income in state and local taxes compared to the highest income earners in the state and ensuring that more tools are available on the income tax side to address that issue is important.

Posted May 18: 

The devil is in the details. This old saying has become increasingly true for North Carolina, particularly with tax policies passed in recent years. Yesterday’s Senate Finance committee meeting was no different.

Yesterday, members of the Senate Finance committee discussed a lengthy proposed bill (Senate Bill 628) that makes numerous substantive  and technical changes to the state’s revenue laws. Sen. Jerry Tillman, one of the bill sponsors, began the discussion by proclaiming that the bill does not expand the sales tax to include more services. The bill is a very technical read, but a careful assessment of proposed changes to the sales tax reveals that more services would in fact be subject to sales tax under the bill.

Landscaping services, for example, would become subject to the sales tax under the proposed bill. In recent years, lawmakers exempted landscaping services from sales tax as they have expanded the sales tax base to include more services. Under this proposed bill, landscaping services – which includes installing trees, shrubs, or flowers; tree trimming; mowing; and the application of seed, mulch, pesticide, or fertilizer to an area of land – would be subject to the sales tax.

Similarly, services for driveways and parking lots would no longer be exempt from the sales tax under the proposed bill. This means that work done on a homeowner’s driveway and maintenance and repair services provided on parking lots (e.g. debris cleaning, painting parking spot lines, etc.) would be subject to sales tax under the bill.

Tax cuts passed by lawmakers in recent years have largely benefited the highest income earners in the state and profitable corporations. Lawmakers partially paid for these skewed tax cuts by expanding the sales tax base to apply to more services. Sales taxes particularly impact low-income taxpayers since they pay a larger share of their income in state and local taxes than the wealthy. Absent lower sales tax rates or other relief targeted at people of lower incomes (like a state Earned Income Tax Credit), changes that further expand the sales tax base would make the state’s upside-down tax system even worse.

The bottom line: Senate Finance Committee members should revisit the bill and the proposed sales tax expansions and ensure that the measure helps create a state tax system that works for all North Carolinians – not one that further favors those at the top.

Changes to child tax credit in Senate budget hurt middle class taxpayers

The Senate’s budget includes costly tax cuts that proponents claim are targeted towards middle class taxpayers. The tax cuts will cost $324 million for the upcoming fiscal year and will balloon to more than $800 million within five years. Rather than targeting middle class taxpayers, the proposed tax cuts largely benefit the highest income earners in the state and profitable corporations.

The proposed change to the existing Child Tax Credit included in the Senate’s budget makes this reality clear. Eligible taxpayers with dependent children currently get a tax credit of either $100 or $125, depending on the taxpayer’s income level. The Senate’s budget replaces this tax credit with a deduction, which allows the eligible taxpayer to deduct a portion of their taxable income. Under this tax change, middle income taxpayers will fare worse compared to the Child Tax Credit under current law.

Here are examples that highlight how taxpayers fare worse under the proposed tax change based on income levels and tax filing status:

  • Under the existing tax code, single filing taxpayers with adjusted gross income between $30,000 and $40,000 get a $100 tax credit for each child. Under the Senate’s budget, the proposed deduction equates to an $80.25 tax benefit for these taxpayers (under a reduced income tax rate of 5.35% included in the Senate budget).
  • Under the existing tax code, taxpayers filing as Head of Household with an adjusted gross income between $50,000 and $60,000 get a $100 tax credit for each child. Under the Senate’s budget, the proposed deduction equates to an $80.25 tax benefit for these taxpayers (under a reduced income tax rate of 5.35% included in the Senate budget).
  • Under the existing tax code, married taxpayers filing jointly with an adjusted gross income between $60,000 and $80,000 get a $100 tax credit for each child. Under the Senate’s budget, the proposed deduction equates to an $80.25 tax benefit for these taxpayers (under a reduced income tax rate of 5.35% included in the Senate budget).

The examples highlight that this proposed tax change in the Senate budget makes middle class taxpayers with children worse off, not better. As the saying goes, the devil is in the detail. Read more

Senate’s proposed budget falls short of truly promoting safe and healthy communities

The Senate’s proposed Justice & Public Safety budget for fiscal year 2018 includes is a modest 2.6% percent increase in state funding compared to the current fiscal year budget. Beyond additional funding for pay raises for some state employees, the Senate’s budget falls short in boosting investments that promotes safe and healthy communities.

Here are notable takeaways from the Senate’s proposed budget for Justice & Public Safety.

  1. Provides $33.7 million in additional state funding for pay raises to public safety state employees. The Governor’s budget provides a total of $65.5 million in state funding for pay raises one-time bonus payments for permanent full-time state Justice & Public Safety employees.
  2. No additional state funding provided for indigent individuals to have access to private counsel representation. The Governor’s recommended budget includes $2.9 million in state funding for fiscal year 2018 to increase compensation paid to private counsel representing people who are indigent.
  3. Provides $250,000 for a limited pilot project with the City of Wilmington to address the needs to opioid and heroin overdose victims. Governor Cooper’s recommended budget provides $2 million in one-time state funding for grants to local law enforcement to combat opioid abuse.
  4. No additional funding provided for initiatives that support the Justice Reinvestment Act. The Justice Reinvestment Act (JRA) was passed in 2011 and made major changes to sentencing and corrections in North Carolina in an effort to reduce state spending on corrections and to reinvest the savings in community programs that decrease crime and strengthen neighborhoods. The Governor’s budget includes a total of $4 million in state funding for various support initiative that continues the implementation of JRA.
  5. Provides no additional state funding to enhance access to mental illness services for offenders. By contrast, the Governor’s recommended budget provides $5.8 million for fiscal year 2018 to enhance services for mentally ill offenders, with the goal of decreasing the likelihood of post-release mental health challenges and associated costs.
  6. Provides no state funding to support “Raise the Age” initiative. The Governor’s budget, by contrast, provides $14.2 million of state funding for fiscal year 2018 to support proposed “Raise the Age” legislation that would raise the age of juvenile criminal jurisdiction and to build a new youth development center.

For more news and analysis during the budget debate, follow the Budget & Tax Center on Twitter @ncbudgetandtax.


Senate’s budget continues to underinvest in public education

All North Carolina students deserve a high quality education, no matter where they reside in the state. Ensuring access to a high quality education means not only adequately compensating educators, but also making sure our schools have the resources and support needed to educate the more than 1.5 million students in public classrooms.

The Senate’s proposed budget for public schools for fiscal year 2018 falls well short of promoting this shared value. State support for public schools under the proposed budget would stay around 2008 pre-recession levels, despite an additional 81,000 students in classrooms today. Here are some takeaways from the Senate’s proposed budget for public schools.

  • The major big-ticket new spending item is for pay increases, which is meant to address the fact that average teacher pay remains in the bottom half of states, even after accounting for teacher pay increases provided in recent years. Lawmakers use lottery dollars, rather than General Fund dollars, to pay for school-based administrators pay increases.
  • The budget includes less in actual new spending for public schools than what meets the eye. For example, there appears to be $11.1 million in additional state funding for textbooks and digital material, but $10 million of that represents one-time funds provided to schools last year that remains in the budget. Only $1.1 million are new dollars, and these are one-time dollars. That means that the textbook funding included in the Senate’s proposed is really just keeping funding at last year’s level. Under the Senate’s proposed budget, state funding for textbooks would be 77 percent below peak 2010 level.
  • The Senate’s proposed budget continues to forego boosting investments in the classroom. State funding for classroom materials and instructional supplies, for example, is less than half its peak 2010 investment level. Furthermore, no additional state funding is provided for schools to meet state-mandated class size reduction requirements – creating an unfunded mandate that passes the buck down to local communities.

Ensuring that all students receive a high quality education in North Carolina is becoming more of a challenge. Lawmakers’ appetite for more and more tax cuts means less revenue is available for public schools and other public investments that contribute to a high quality education. The Senate’s tax plan includes more tax cuts that largely benefit the wealthy and profitable corporations, and it will reduce available revenue by $323.7 million for fiscal year 2018. This is what underinvesting in public education looks like – tax cuts that favor the few over investments that would benefit 1.5 million students.