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Five important uncertainties for N.C. that make this no time to double down on tax cuts

[1]Today at 1 p.m., the North Carolina Senate Finance Committee will take up the Senate’s latest tax cut proposal [2]: a bill that flies under the dubious official title, “Billion Dollar Middle Class Tax Cut.” As was explained in this space earlier this week [3], there are a number of important reasons why new income tax cuts are a bad idea for North Carolina at this time, not the least of which are: a) their proven ineffectiveness in stimulating the economy, and b) the fact that they will further shift the responsibility for funding government away from the wealthy and profitable corporations and onto individuals of low and moderate income.

Even, however, if one sets aside these enormous problems, there is another important overarching reason for North Carolina not to race down the tax cut road yet again in 2017 – namely, the tremendous uncertainty that accompanies our current policy environment.

Simply put, authors of the new tax cut bill have not accounted for the high level of fiscal uncertainty that exists for our state’s future – especially in light of the current environment in Washington. Instead of leaving all tools on the table for future lawmakers to deal with those uncertainties, they would continue to cut taxes for the wealthy and profitable corporations and propose permanently locking in the current maximum income tax rate.

With limits to available state revenue and fewer tools to balance the budget, North Carolina policymakers will face difficult choices that could make the uncertainties below even more harmful to the state. That means either more significant cuts to programs and services that make North Carolina a great place to live or increased sales and property taxes would be necessary to deal with the fiscal strains of these uncertainties.

Here are five significant uncertainties that face North Carolina in the coming months and years.

  1. What will be the cost of federal budget cuts to North Carolina? One in three dollars spent in North Carolina on public services and systems is from federal grants. The recent topline numbers from the Trump Administration suggest increased spending on defense and tax cuts for the wealthy, with cuts to funding for education, health and community economic development. This suggests significant losses in federal dollars flowing to our state.

  2. How will health care costs shift to North Carolina? While the Affordable Care Act has (for now) been declared the law of the land by U.S. House Speaker Paul Ryan, it is still unclear whether congressional Republicans will pursue the restructuring of Medicaid this year. Estimates indicate that proposals like “per capita caps” and block grants could shift as much as $6.6 billion in costs to North Carolina over the next 10 years.

  3. Will North Carolina’s tax code continue to underperform the historic growth rate of revenue? There have been so many changes to the state tax code since 2013 – including annual reductions in taxes through reduced rates and changes to deductions and credits – that it is difficult to determine how the state tax code will perform going forward. There simply aren’t enough years of data in which the tax code has remained consistent to make good calculations. The data that are available show that the state’s revenue is growing slower than historic rates of growth, which could signal problems with the tax code’s ability to keep up with a growing population and economy.
  1. How will North Carolina’s tax code perform in a downturn? We have no evidence of how North Carolina’s tax code under its current design will perform in a downturn. It would make sense to see how job losses, significant profit and wage losses, and depressed consumer demand affect the ability of the state to raise revenue before making further changes.
  2. Can North Carolina responsibly fund its goals in education and economic development? Even as policymakers continued to pursue policies that make uncertain the state’s revenue, priorities have been set out that would commit the state to certain long-term goals, like reaching the national average in teacher pay or ensuring every child is reading proficiently by third grade. It is uncertain whether North Carolina can sustainably achieve these goals and compete against states that, unconstrained by their tax codes, can increase investments in teacher pay, thus driving up the national average.

The bottom line: The United States of March, 2017 is a nation in which economic and policy uncertainties are very high – especially as they apply to state government. At such a time, North Carolina lawmakers would do well to take a deep breath and fully assess the impact of their most recent tax policy changes before launching the state down the same road yet again.

N.C. Budget and Tax Center [4].