- NC Policy Watch - http://www.ncpolicywatch.com -

Tax Cuts’ Costs Becoming Clear

Budget-squeeze1-400 [1]
Since taking veto-proof control of the NC General Assembly in the elections of 2012, members of the Republican majority have labored diligently to fix what they’ve regarded as a broken tax system.

Of course, whether it really was broken is a point many North Carolinians have been quick to dispute. The overall effect of the GOP’s tax-cut binge has been to make it harder for governments at all levels to carry out their public service missions and also to shift tax burdens toward people who are less able to afford them.

That hasn’t deterred the Republicans in their emphasis on lower taxes as the key to economic growth. In fact, legislative leaders seem eager to double down, pushing another wave of cuts – as if putting even more pressure on the state’s revenue stream is what’s needed to reenergize an economy still suffering from a post-recession hangover.

At the same time, there are proposals to tinker with the way some tax revenues are allocated among the counties and municipalities. Why? Because counties in the state’s poorer, rural regions are up against it when it comes to paying for the things they need to pay for. But isn’t that the same problem that’s being foisted on the state as a whole because of rash tax-cutting?

Racing to cut

When it comes to tax policy, it’s hard not to conclude that the legislative wizards on Raleigh’s Jones Street are getting into the kind of pickle familiar to any over-ambitious do-it-yourselfer. Start taking something apart, supposedly to fix a minor problem, and suddenly there’s a clank or a leak or a loose thingamajig that’s worse than what you started with.

All along, the Republican premise was that North Carolina’s income taxes – individual and corporate – were too high in comparison with tax rates in nearby states that are our economic competitors.

So in 2013, the GOP majority undertook a major round of cuts. The individual income tax was lowered and flattened, so that high-end earners pay at the same rate as the less fortunate. The corporate tax was reduced. Meanwhile, the kinds of transactions applied to the sales tax were broadened, making an inherently regressive tax even more so.

The cuts do indeed bring North Carolina more in line with its Southeastern neighbor states. But they’ve punched a hole in state revenues that could approach $600 million during the fiscal year ending June 30. What that means is a state government forced to scrimp on the programs, services and investments – education being at the top of the list — that can do more to boost economic viability and attractiveness than can a bargain-basement tax code.

Now, the state Senate’s top tax-writers want to cut income taxes even more. Under Senate Bill 526 [2], sponsored by Sens. Bob Rucho of Matthews, Bill Rabon of Southport and Jerry Tillman of Archdale, the individual income tax would drop from its current rate of 5.75 percent to 5.625 percent next year and 5.5 percent the year after.

(One bright spot from a fairness perspective is that the plan would include a so-called zero percent bracket allowing the first several thousand dollars of income to go untaxed for residents who don’t itemize deductions. After 2017, a married couple filing jointly with income of $20,000 or less, or a single person earning no more than $10,000, would be completely off the hook.)

Holes in the bucket

Nobody likes to pay taxes, but the state is asking for trouble if it fails to collect enough revenue to meet its responsibilities in program areas ranging from public schools to health care to environmental protection to the courts. Estimates of how much revenue would be foregone under S.B. 526 haven’t yet become public, but consider that the income tax already has dropped from a top rate of 7.75 percent for high-income earners under the old graduated system. And that has cost a bundle.

Rucho, Rabon and Tillman also want to continue lowering the corporate income tax, now at 5 percent, to 4.5 percent in 2016 and 4 percent thereafter. As recently as 2013 the rate was 6.9 percent – a sore point in the business community even though the tax was generating a smaller share of the state’s revenues than in times past.

Tillman’s rationale, as reported in The News & Observer of Raleigh: “We need to get below South Carolina, which this bill will do.” He spoke of being able to out-recruit South Carolina for jobs.

What’s missing from that argument is that tax rates are by no means the sole factor considered by companies deciding whether to relocate or expand. For example, a strong educational system, yielding a skilled and well-prepared workforce, weighs heavily as well – and schools and universities can’t be kept strong if they’re underfunded because revenues have been allowed to erode. Unfortunately, that’s the trend.

S.B. 526’s sponsors hold to the theory that lower income taxes will translate into other kinds of revenue boosts – from sales taxes and tax payments by the newly employed. Perhaps there’s some truth to that. But sales taxes are notorious in their disproportionate impact on the less well-off — people whose spending is focused on necessities. Broadening the sales tax to cover various services, as some legislators want to do, risks making matters worse unless the needs of poor folks for essential services like car repairs are taken into account.

Sales tax tinkering

The sales tax has become a bone of contention between the state’s metropolitan counties and their rural, small-town cousins.

Rural-oriented legislators, mostly Republican but including some Democrats, complain that rural counties are being shortchanged by the present sales tax distribution formula, which favors localities where sales occur. Two bills, Senate Bill 369 [3] and Senate Bill 608 [4], are in play that would alter the formula in favor of localities where people, i.e. shoppers, live. That would help counties lacking big shopping malls that draw folks from miles around.

The overall sales tax now consists of a 4.75 percent state portion and a local portion – 2 percent in most areas. It’s the local portion that would be affected by S.B. 369, sponsored by Republicans Harry Brown of Jacksonville and Brent Jackson of Autryville, along with Democrat Ben Clark of Raeford, and by S.B. 608, sponsored by Sen. Rucho. Both would distribute local revenue solely on the basis of population, eliminating the stream that goes to counties where sales take place.

The sponsors would try to cushion the blow to counties such as Wake, Durham and Mecklenburg. Brown wants to let counties raise their local sales tax by an extra quarter of a percentage point to cover funds they’d lose under the new distribution formula. Rucho is considering an extension of the sales tax to cover an as-yet-undefined menu of services, with the goal of raising an additional $66 million to help urban counties deal with the formula change.

People who understand how poverty and economic malaise have punished North Carolina’s hinterlands, and residents still trying to carve out decent livelihoods in those areas, can sympathize with the urge to provide more support from the state capital

But as the Council of Churches long has recognized, the needs of this state if it is to sustain its vitality are manifold. They reach into every community, rural and urban. They require a tax code that generates enough revenue to avoid pitting communities against each other and that spreads the burden fairly, with the affluent to whom much has been given expected to help accordingly.

Conservative theories about the economic jolt supposedly provided by tax cuts may have some value – but our legislators already have plenty of evidence that they’re following those theories out the window.

Steve Ford, former editorial page editor at Raleigh’s News & Observer, is now a Volunteer Program Associate at the North Carolina Council of Churches [5].