North Carolina’s tax shift saga continues with the House’s new tax plan, which increases the tax load on middle- and low-income tax payers while providing tax cuts for the wealthy a profitable, a new report finds.
The new plan would convert the state’s personal income tax to a flat rate. Such a proposal would make North Carolina more reliant on the sales tax and shift the tax load to the majority of North Carolinians, said a report released Wednesday morning by the Budget & Tax Center, a project of the North Carolina Justice Center.
“The House proposal would weaken North Carolina’s tax system and the broader economy by asking more from taxpayers who are already struggling in our slowly recovering economy,” said Alexandra Forter Sirota, director of the Budget & Tax Center and author of the report. “It also jeopardizes our future by undermining the long-term ability of our state to maintain the building blocks of a strong economy, like pre-K-12 schools and higher education.”
Switching to a flat income tax rate and expanding the sales tax base to more goods and services would cut taxes for the state’s most affluent households and shift responsibility to the middle class and poor North Carolinians, the report said. Yet the state already asks more of middle- and low-income taxpayers than those with the highest incomes. Overall, the bottom 80 percent of North Carolina households currently pay 9 to 10 percent of their income in state and local taxes, versus 6.5 percent for the top 1 percent.
As the House puts together its budget, it is also critical to note that the tax plan would weaken North Carolina’s ability to raise adequate resources for key investments, as income taxes perform better than the sales tax over the long term. The bill’s sponsors anticipate their plan will result in $1.2 billion less in revenue over five years, but the annual revenue loss could amount to as much as $573 million upon full implementation, the report said. Such an amount is roughly the equivalent to the state’s annual investment in funding for early education, child development, aging and adult services, and social services, among other key programs’ budgets.
“Everyone will suffer over the long-term under this plan,” Sirota said. “It will compromise North Carolina’s schools, courts, public safety, and other key investments that are important to wealthy and low-income families. Businesses and the wealthy rely on well-educated workers and good schools, their wealth and communities are protected by the courts and police, and their prosperity is further enhanced if North Carolina has a strong, thriving economy.”
Last week the Budget & Tax Center also examined the NC Senate’s $20.6 billion budget for fiscal year (FY) 2013-14.
BTC analysts note that the Senate’s spending plan would fall far short of what is needed to maintain current service levels in several important areas, including the K-12 and higher education systems.
The Senate budget is particular stingy when compared to pre-recession budgets: the FY2014 budget would spend 8.5 percent less than the last state budget approved before the onset of the Great Recession (FY2007-08) when adjusted for inflation.
Worse, the budget fails to reinvest in revenue growth. Instead, budget plans set the stage for a tax reform effort that would cut taxes for the wealthy and profitable businesses—according to a preliminary analysis—and would dramatically reduce resources to pay for vital services.
“With North Carolina slowly easing into economic recovery, this budget falls far short of what is needed to support growth,” said report author Tazra Mitchell, a public policy fellow with NC Budget & Tax Center. “Services that support children, families and communities across North Carolina would suffer.”
The Senate could have lessened this gap, Mitchell writes, by fully reinvesting the slight uptick in revenue collections into their budget. Instead, they chose to include a tax plan that would cause a $770.2 million loss over the biennium—and an additional $229.8 million in the fiscal year following the biennium—in broadly shared public investments that create economic opportunity for all North Carolinians.