The promise of a massive tax cut from Raleigh is meeting skepticism outside the capital as a nuanced picture of the winners and losers begins to emerge.
Take Tom Daughtry, a 72-year-old from Smithfield. He is likely to save money under a Senate plan that slashes income taxes in exchange for a broader sales tax that applies to food, prescription drugs and 130 services that are currently exempt.
But he isn’t convinced by the math. “I’m for just leaving the taxes like it is,” Daughtry said as he fingered two fishing lures in the sporting goods section at Walmart on Wednesday. “Even if you lower the income taxes, you are just going to pay more when you are out shopping. It doesn’t make a difference.”
The majority of taxpayers likely would see a tax increase after the plan is fully implemented, according to early long-term projections from legislative fiscal researchers who analyzed the potential legislation – not a tax break as Senate Republican leaders suggested when announcing the plan this week.
A taxpayer with a federal adjusted gross income below $51,000 could pay an average $100 to $200 more in the 2017 tax year. Based on current tax brackets, 2.3 million taxpayers would fit that category, according to the analysis, while 1.8 million taxpayers could expect an average $300 to $3,000 tax cut that year.
In announcing the plan Tuesday, Senate leader Phil Berger, an Eden Republican, emphasized that the legislation was not yet finalized, but said the “vast majority,” or roughly two-thirds of taxpayers, would initially get a tax cut as a result of the legislation.
The draft fiscal analysis, obtained by The News & Observer, is still a working document, said Barry Boardman, the legislature’s economist. “The details pertaining to 2017 have not been worked out at this stage,” said Amy Auth, a Berger spokeswoman.
Analysis: Savings won’t last
For the first three years, most North Carolinians would pay less, the analysis shows. But it won’t last.
The plan includes a temporary “working families” tax break for middle-income households that will sunset in 2016. A calculator Senate leaders created to allow taxpayers to estimate their tax savings ends in year 2016 and doesn’t take into account what could amount to a tax increase for families making $30,000 to $75,000 the next year.
Even in the first years, the tax plan produces mixed results.
The Senate’s projections show lower-income families and those with three or more children likely would get a tax increase, while taxpayers making more than the state’s $46,000 median household income, particularly those without children, would save money.
“The plan is not family friendly,” said Sabra Faires, an attorney at Bailey & Dixon in Raleigh and the former assistant secretary for tax administration at the state Department of Revenue. “You pay more tax for every child you have. ... This plan favors people with no children as opposed to families.”
At a Target in Durham, Lisa Leary, a 40-year-old mother of four children, said when she heard about the plan she wanted to support it. But the calculator suggests that she could pay more in taxes. Instead, she wants state leaders to focus on cutting spending.
“I just think we are so taxed to death,” she said Thursday. “I just think some people are so dependent on the government that we have to tax people more.”
The Senate proposal lowers the personal income tax rate to a flat 4.5 percent, from a top bracket of 7.75 percent. It also cuts the corporate tax rate to 6 percent from 6.9 percent and adjusts how it is calculated.
To raise new money to offset the cuts, the plan applies a 6.5 percent combined state and local sales tax to prescription drugs and more than 130 services that are currently tax-free, such as haircuts, lawn services, car repairs and professional help such as attorneys, accountants and doctors.
In addition, the sales tax on food, currently a 2 percent local tax, is raised to the combined sales tax of 6.5 percent. The current state sales tax is 4.75 percent; most counties charge an additional 2 percent.
The tax shift toward consumption is what hurts lower-income people and large families. “That’s pretty significant,” said Rollin Groseclose, an Asheville certified public accountant. “That is one of the concerns, that the wealthier may be coming out a little better off.”
‘It’s a trial balloon’
Sen. Bob Rucho, a Charlotte Republican helping to lead the effort, cautioned against reaching final conclusions before the bill is finished. “It’s a trial balloon,” he said of the tax plan. “This is just the starting point.”
But to see all the benefits, Rucho said taxpayers need to look at the bigger picture. He believes the Senate plan will boost the state’s economy and create higher-paying jobs for low-income earners. “The fact is everyone will be better off because the economy will be expanding and they will have an opportunity for more jobs and better jobs,” he said.
To help low-income earners, the Senate plan in the first year exempts those who make less than $10,000 from paying any income tax. It gradually increases the threshold to $15,000 in 2017.
Mark Shanahan, a 46-year-old software engineer with a wife and three kids at home in Raleigh, could save good money under the plan.
As he ate lunch in Cary on Thursday, Shanahan said he supports the general concept but worried about what it means for folks who makes less than him.
“I don’t like the idea of taxing basic food or prescription drugs,” he said. “There are certain things that are like minimal staples.”