Voters would decide whether to add a 5.5 percent cap on income tax rates to the state constitution under a bill approved Tuesday in a N.C. Senate committee.
The constitutional amendment wouldn’t affect the current rate – which will drop from 5.75 percent to 5.499 percent next year – but would effectively prevent the legislature from raising income taxes. The constitution now includes a maximum rate of 10 percent.
Democrats are opposing the measure, saying it could tie the hands of legislators in a recession and lead to a major sales tax increase. And the state treasurer’s office argues that it could hurt North Carolina’s AAA bond rating.
The proposal has similarities to a proposed Taxpayers’ Bill of Rights, or TABOR, that passed the Senate last year but didn’t get a vote in the House. That bill would have gone further, capping the income tax at 5 percent and tying annual state spending increases to the rate of population growth and inflation.
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Senate Republicans said they expect the 5.5 percent cap will pass if the legislature schedules a referendum for the November election.
“All this does is save taxpayer money,” said Sen. Jerry Tillman, an Archdale Republican. “It’s going to keep spending at a reasonable level. You won’t get your spending out of hand if you don’t have the money.”
But Sen. Floyd McKissick, a Durham Democrat, said the tax cap could prove harmful to the state’s budget.
“Reserving the flexibility for this General Assembly in the future is the best course of action we could take,” he said. “Why would we want to put our financial handcuffs on when we don’t have to do so?”
The bill’s sponsor, Republican Sen. Bill Rabon of Southport, said the state is well equipped for a recession without tax hikes. He noted that legislative leaders have been adding to the state’s rainy day fund, and that sales taxes would be a faster way of raising revenue in a crisis.
“If you need money in a hurry, income tax is not the way to go, because you have a one-year lag,” he said.
State Treasurer Janet Cowell’s office gave senators a memo outlining “serious concerns” with the amendment.
“While the department cannot say that adopting this legislation would definitely result in a credit downgrade, the state would clearly be losing one of its strongest rating factors,” the memo said. “A credit downgrade would force North Carolina to make higher interest payments and pushes up the cost of new bond-financed projects.”
Senate Finance Committee Chairman Bob Rucho said the memo was “false”; he did not allow a representative from the treasurer’s office to speak. Cowell is a Democrat.
Senators also criticized the treasurer’s assertion that similar tax limits weren’t successful in other states. The memo said that only Colorado has a “tight” constitutional limit, but voters there decided to suspend the cap for five years.
Rabon pointed to Georgia, which approved a similar constitutional amendment in 2014 that imposes a 6 percent tax cap.
“Georgia has done just fine, and we will do just fine,” he said. “It will not affect our bond rating.”
Liberal advocacy groups are lobbying against the tax cap, which will be on the Senate floor for a vote on Wednesday. Progress N.C. Action is referring to it as the “Millionaire Protection Act” and plans to hold a news conference Wednesday morning in a Capital Boulevard parking lot, using two limousines as props to drive home the group’s point.
“A ‘Millionaire Protection Act’ will do nothing to bring (teacher assistants) back, and it’s likely to cement our state in the basement for public school funding,” said Gerrick Brenner, the group’s executive director.
It’s unclear if House leaders will push the tax cap this year. House Rules Chairman David Lewis said Tuesday that the House GOP caucus hasn’t discussed the plan yet.