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Two competing tax cut proposals symbolize the ideological debate in NC

[1]There are a lot of important public policy issues right now in North Carolina on which right and left diverge in fundamental ways. Medicaid expansion and health care, reproductive freedom, gun violence, education spending, climate change and environmental protection, public transportation, voting rights, immigration policy: the list is a long one.

If, however, one were forced to select a single debate that really captures the essence of the ideological divide – both regarding the role of government and the very idea of what a healthy society looks like – it would be hard to top the battle over tax policy and, in particular, a pair of competing tax cut proposals.

In many ways, of course, this is nothing new. Conservatives have been demanding and winning massive tax cuts for businesses and the wealthy over the sometimes forceful and sometimes tepid resistance of progressives for many years.

Now, however, at a point in time during which the demise of Republican supermajorities has led many to expect a sort of uneasy tax policy truce to prevail in the Legislative Building, a pair of widely divergent proposals are drawing attention and, perhaps, serving as harbingers of where the tax debate could go in years to come.

On the conservative side is a new proposal to reduce the state franchise tax – a tax that companies pay on their net worth each year. Under the proposed Senate Bill 622, the rate for many companies would be reduced and/or capped, thus resulting in an annual state revenue loss of around $140 million.

Bill sponsors have stated that their ultimate objective is to secure complete elimination of the tax in future years – a move that would result in a loss of more than $670 million per year.

To say that this proposal comes during an era in which North Carolina businesses have already been enjoying massive tax breaks would be an understatement.

As a new report from the N.C. Budget and Tax Center [2] points out, the corporate income tax rate has already been slashed from 6.9 percent to 2.5 percent in recent years, and, at last count, North Carolina was tied with Indiana for having the second-lowest business tax levels of any state.

What’s more, corporate tax cuts have not been limited to the area of rates. As the BTC report also points out, corporations have enjoyed favorable changes to the ways that income is apportioned for the purposes of taxation and big cuts to unemployment insurance taxes and privilege taxes.

The proposal to pile still more business tax cuts on top of the long and existing list is, in other words, an utter and unabashed giveaway. Of course, from the perspective of proponents, the term “trickledown economics” is not an insult, but a compliment. Their obvious aim is to end all taxes which target business (something they regard as “double taxation”).

The diametric policy opposite of the senators’ proposed franchise tax cut this year is a proposal championed by many progressive analysts, advocates and lawmakers to enact a fully-fledged state earned income tax credit, or “EITC.”  The EITC, of course, is not a new concept. The federal government enacted the EITC back in the 1980’s with enthusiastic support of both right and left. As was noted in yesterday’s Policy Watch “Monday Numbers” column [3], President Ronald Reagan called the EITC “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”

The basic concept behind the EITC [4] (also sometimes referred to as a “Working Families Tax Credit”) is simple: working families whose income is insufficient to lift them out of poverty are eligible for a credit that reduces or eliminates their income tax bill and reimburses them for some of the other taxes they pay. The EITC can be refundable – that is, if the credit lowers a family’s bill to a sum less than zero, they can get a check for that amount.

In 2016, the federal EITC helped lift three million American children out of poverty and returned $2.2 billion to low income North Carolina families. A state EITC – something North Carolina previously experimented with on a very limited basis – could provide a powerful supplement to the federal credit. If North Carolina followed the lead of several other states by enacting a state EITC set at 20% of the federal credit, it would put another $440 million into the pockets of the state’s most vulnerable families – a group that includes 1.2 million children.

The EITC also has a significant advantage over an idea often advanced by conservatives – increasing the income tax standard deduction – because the EITC targets tax reductions to those most in need, rather than spreading it across the entire taxpaying population.

In short, rather than trickledown, the EITC represents a “bottom up“ brand of economics that seeks to make the free market work better by targeting tax cuts to those who need them most.

Thus far in the legislative session, neither of the proposed tax cuts has advanced and it’s quite possible that neither will become law in the current divided state government. Those looking however, to get a taste of what might be at stake in the 2020 elections, would do well to keep an eye on both proposals.