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Bad for North Carolina’s bottom line

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It is hard to understand why some in the General Assembly are trying to constitutionally cap our state income tax rate.  As North Carolina’s former State Treasurer and as someone who cares deeply about our future, I offer our current leaders some advice – don’t do it – it’s a BAD move.

Cutting the Constitutional income tax cap to where the income tax rate is today would expose our state to financial risk, threatening the economic and physical wellbeing of North Carolinians across the state.

By capping the primary source of revenue of the state, the income tax, North Carolina legislators would be putting at risk our coveted bond rating that allows us to borrow to build great things at a reasonable interest rate.

Rating agencies don’t like Constitutional tax and spending limits because policymakers then have fewer options repaying debts while maintaining public investments critical to a strong economy.

Of particular importance is that the tax cap would limit income tax rates, which are the largest source of the state’s revenue and best able to support the state in keeping up with the needs of a growing population and respond to the demands during an economic downturn.

When Georgia, the only state to use its Constitution to thwart future rate increases, passed a similar proposal in November 2014, the ratings agency Moody’s immediately made its misgivings clear. According to Moody’s [2], “A significant strength of state [Georgia] management lies in its broad powers and resources to manage its finances in the face of volatility… Georgia’s constitutional cap has stripped the state of that option with respect to its personal income tax.”

They are not alone in raising concerns about using the Constitution to eliminate fiscal flexibility in an uncertain economic world.  The Fitch rating agency observes that “inflexible statutory or constitutional operating limitations are potential credit risks, as they constrain an issuer’s ability to react to negative developments”[1] [3]

The impact of tax limits and choices on investor opinion is not abstract either.  In May 2016, Moody’s dropped the credit outlook for Kansas from stable to negative, signaling that it could once again downgrade the state’s bond rating.[2] [4]  Kansas was already downgraded in 2014 because its revenue failed to keep up with immediate investments in public schools and long-term investments in pensions. Kansas’ credit picture improved over the last year after the Republican-led legislature repealed some of the recent tax cuts and raised $1 billion in revenue.[3] [5]  If we dramatically lower the tax cap by Constitutional amendment in North Carolina, we could find ourselves without the ability to change course as Kansas was ultimately forced to do.

Our pension system is in fairly good shape.  Bond rating for the state and our cities and counties remain strong – why risk messing that up?   Voters already approved the Connect NC Bond Act, and other capital needs have been identified including billions of dollars in needed school building improvements, enormous repair and renovation backlogs in many other state agencies, and years of work on roads, bridges, and waterways.  We need the best bond rating possible to make our tax dollars go as far as possible.

Fiscal discipline has long been part of North Carolina’s stock and trade.  An income tax cap would violate that tradition of sound fiscal stewardship and set us on a crash course with the unforeseen. Hopefully, wiser heads will prevail this time around, as they often have in the past, and safeguard North Carolina’s fiscal house so that we can deal with the unexpected and build for the long-term.

[1] [6] Fitch Ratings. (2016). “U.S. Tax-Supported Rating Criteria.” http://www.vermonttreasurer.gov/sites/treasurer/files/cash-investments/Fitch%20US%20Tax-Supported%20Criteria%20April%2018%202016.pdf [7]

[2] [8] http://www.kansas.com/news/politics-government/article75347912.html#storylink=cpy

[3] [9] Topeka-Capital Journal. (2018). http://www.cjonline.com/news/20180504/sampp-upgrades-kansas-rating-from-negative-to-stable [10]

Richard Moore served as the North Carolina State Treasurer from 2001–2009. He is also a member of the board of directors of the NC Justice Center, the parent organization of NC Policy Watch.