The tax plan recently signed into law by Governor Pat McCrory falls far short of true tax reform, according to a new report from the Budget & Tax Center, a project of the North Carolina Justice Center. The plan fails to make the changes North Carolina needs to create a modern, adequate, and fair revenue system that can boost the state’s economy and strengthen services such as education and health care that families need to grow and prosper.
The plan falls short on three key principles of tax reform, the report said:
- Fairness: The tax plan fails to ensure that state taxes are based on ability to pay, and in fact shifts the tax load further to middle-class and low-income taxpayers as a result of changes such as allowing the state Earned Income Tax Credit to expire, while expanding the sales tax to more goods and services, which hits middle-class and low-income taxpayers the hardest. Wealthy individuals and profitable corporations get huge tax cuts under the plan.
- Adequacy: The plan reduces the amount of revenue available for public investments by $650 million annually. As a result, further cuts are likely to be made to public schools, higher education, health care, public safety, transportation and other public services in the years ahead. These are the very services that create a strong foundation for a growing economy.
- Simplicity: The tax plan fails to meaningfully reduce the number, and dollar amount, of tax loopholes. These preferential tax provisions will continue to reduce the amount of revenue raised each year, even though many of them may fail to serve a useful purpose.
The state’s existing tax system has not been comprehensively updated in the decades since its initial inception in the 1930s to reflect fundamental changes in the economy, the report said. As such, North Carolina’s tax system is unable to raise adequate revenue for public investments and is susceptible to wide fluctuations in the amount of revenue raised from year to year. The system is also upside-down, as low- and middle-income taxpayers pay a greater share of their income in state and local taxes than higher income taxpayers.
“The governor and the Legislature missed an opportunity to fix these harmful flaws,” said Cedric Johnson, policy analyst with the Budget & Tax Center and author of the report. “This failure will make it more difficult for North Carolina to gain a sound footing in its recovery from the recession and become a full participant in the 21st century economy.”
The majority of taxpayers, on average, will see their taxes increase under the plan, while wealthy individuals and profitable corporations will receive huge tax cuts. As such, the tax plan shifts more of the costs of paying for North Carolina’s schools and other public services to middle-class and low-income taxpayers, and away from the wealthy and corporations. The plan is particularly damaging to the finances of low-income families in North Carolina because it allows the state’s Earned Income Tax Credit (EITC) – one of the state’s most effective tools for fighting poverty – to expire at the end of 2013.
The new tax plan will hamstring the state’s ability to invest in public services that promote economic opportunity for all North Carolinians, the report said. By reducing the amount of revenue available for investment in public schools, health care, and public safety, the tax plan will continue to hamper our ability to meet the needs of a growing and changing North Carolina.
Much more work remains to be done to bring the state’s tax system up to par with a 21st century economy in a manner that is fair, produces adequate revenue to meet our growing needs, and is stable from year to year.
To read the the Budget & Tax Center’s full report, click here.