False claims drive the Senate’s proposal for a constitutional income tax cap

False claims drive the Senate’s proposal for a constitutional income tax cap

Tax-FolliesEarlier this week, the state Senate unveiled, debated and passed a new version of House Bill 3 — a proposal to enact multiple changes to the state Constitution. Most notably, the new version of the bill includes provisions that would set low and arbitrary income tax rates in the state Constitution and limit access to the state’s savings account in times of emergency.

Sadly, the Senate floor debate itself was full of false claims and evinced a remarkable failure to grasp the reality of how North Carolinians are doing and communities are faring under the tax-cut-for-millionaires regime of the current General Assembly leadership.

Here are some of the false claims made and key facts missed:

False Claim #1: Cutting the income tax and expanding the sales tax base has given North Carolinians a net tax cut. 

Changes to the tax code have, in fact, resulted in nearly $1.3 billion less in revenue coming in to the state, which has made it impossible for policymakers to provide teachers and state employees the pay raises they deserve, make sure college remains affordable for students with low-incomes, assure that children have textbooks or that at-risk preschoolers are prepared for kindergarten. Those losses in revenue have generated losses for families and communities and the broader economy has missed countless opportunities.

At the same time, the changes have not given every North Carolinian a net tax cut. In fact, those taxpayers with incomes below $34,000 have seen their taxes go up on average, and those with incomes averaging $1 million (the top 1 percent of taxpayers) have seen their taxes cut by $15,000 on average.

False Claim #2: North Carolina’s economic success of late is due to the tax choices made by state leaders.

Many North Carolinians would be surprised to hear Senators suggest that the economy is currently a success. For most workers, wages still haven’t recovered to pre-recession levels, and they continue to fall short of the rising cost of housing and other basics. The majority of counties still have more unemployed workers than job openings and more people out of work and looking than before the recession. Poverty remains persistently high. North Carolina is experiencing the national recovery, but it has yet to adequately deliver for North Carolinians and falls far short of the high mark we should set for our state.

Lastly, there is no evidence that the tax choices made in North Carolina are driving the job growth that is happening. Plenty of states have seen stronger growth and haven’t pursued an aggressive path toward a zero income tax. North Carolina has not consistently outperformed its southern peers—who have not all cut taxes in this period—nor is it consistently set apart. Furthermore, the research is clear that connections between tax cuts and better economic outcomes are tenuous at best and most likely not sustained by the real world experience — particularly at the state level.

False Claim #3: The greatest economies all have a zero income tax rate. 

Actually, tax rates and the health of an economy don’t have much of a relationship at all. What does have such a relationship is the education level of the workforce. Indeed, many states that have higher income taxes on higher income taxpayers actually have more innovation and stronger economic performance. Those economies with zero income tax rates often benefit from natural assets—resources or good climates—that drive their economic outcomes, and most also suffer from significant exclusion from opportunity of middle-and low-income residents. Take Tennessee, which was often held up as the model for North Carolina’s economic future in 2013: There, the jobs being created are primarily low-wage and hold down earnings for all workers. What’s more, the tax code asks the top 1 percent to pay 2.8 percent of their income in state local taxes while the bottom 20 percent pay more than 11 percent.

False Claim #4: A constitutional cap on the income tax rate will make sure taxes don’t go up. 

Wrong. What it will do is lock in the income tax cuts that have primarily benefited the state’s wealthiest. It will force a whole host of other tax and fee increases so that the state can keep up with funding the public services needed in a growing state — taxes and fees that come disproportionately from the pockets of middle-income people. Senators acknowledged as much in the debate: the goal is a zero income tax rate and more sales tax.   

Finally, here is where we agree with the current Senate leadership:

Senate Finance Committee chairman Robert Rucho actually explained with some eloquence the importance of future policymakers having the flexibility to respond to the economic context and make tax decisions — he spoke specifically about raising the standard deduction in future years — based on whatever the current economic reality is.

Such logic should extend, however, to all tax and spending decisions. Future policymakers and future generations of North Carolinians deserve to have their priorities and their economic realities responded to with all the tools available. Changing the state Constitution to limit the options and flexibility of policymaking makes that impossible and sets North Carolina up for more devastating cuts.

Alexandra Sirota is the Director of the N.C. Budget and Tax Center.