NC squandered a stock boom on the rich

In North Carolina, the stock market’s boom comes with a second sound – a cracking. It’s the sound of income inequality widening.

Four years ago, the Dow stood at 14,000. It closed Friday at 21,858. That’s a bonanza for the investors who have ridden the rise, and in North Carolina the payoff has been enhanced by tax cuts that favor those who profited the most.

The stock market surge has channeled so much new wealth to the top that you would think that even North Carolina’s trickle-down zealots would be embarrassed that they cut taxes on the rich. (To further enhance those gains, Republicans also did away with the estate tax, even though it only applied to estates valued at more than $5 million.) Instead, they’re proud of lowering the tax burden on the wealthy, and their counterparts in Washington are talking about doing the same at the federal level.

The great giveaway to the prosperous started in 2013 when Republicans eliminated North Carolina’s modestly progressive three-step income tax and replaced it with a flat tax. That meant those on the highest rung of the tax rates would now pay the same as those on the lowest. Everybody’s equal! Except the income tax rate was cut much more for top earners (7.55 to 5.8 percent) and barely reduced for the lowest rung (6 to 5.8 percent). The flat tax will soon drop to 5.25 percent.

In 2013, 92 percent of stock was held by the richest 20 percent of Americans, according to research by NYU economist Edward Wolff. Assuming that percentage is roughly the same in North Carolina, most of the money from the stock boom has gone to one-fifth of the state’s population.

Giving that largesse to the well-off is not without cost. State government spending – already cut to bare-bones levels when Republicans took over as the Great Recession ended – has remained essentially flat after inflation and population growth are factored in.

The result is that schools must get by without adequate textbooks, prisons are understaffed, the underfunded court system imposes onerous and regressive fees, a shortage of mental health beds and treatment resources for opioid addicts goes largely unaddressed, teacher pay remains poor, teacher assistants have been greatly reduced and retired state workers this year got their first cost of living pension increase in several years – a miserly 1 percent.

Republican lawmakers see a different situation. In their eyes, they’ve restrained state spending, prudently added to the state’s rainy day fund, targeted teacher pay increases to have the greatest effect and established a “business friendly” environment of low taxes and reduced regulations.

But even that rosy view doesn’t refute the fact that Republican tax cuts have given the most to those who’ve already benefited the most from the economic recovery. The NC Tax & Budget Center, which advocates for tax fairness, reports that “nearly 80 percent of net tax cuts since 2013 will flow to the top 20 percent of taxpayers.”

With that lopsided distribution, the cuts have widened economic inequality in a state where it was already a serious problem. There is an income (and jobs) gap between rural and urban North Carolina that is drawing population out of rural areas and into cities. But the fast-growing cities also are undermined by income inequality that fuels gentrification and shrinks the stock of affordable housing.

The loss of a progressive income tax will continue to widen the gap between the state’s most prosperous and those in the lower half who can’t find a way up because of stagnant wages, student debt and higher housing and health care costs.

“A flat tax is definitely not the response to inequality,” said Cedric Johnson of the Budget & Tax Center. “A flat tax works in reverse.”

Cuts in corporate income taxes are also contributing to inequality by depriving the state of funds for services and projects that help lower-income people and improve education. Since 2013, the corporate tax has been cut from 6.9 percent to 3 percent, the lowest in the nation. The tax cuts have come even as corporations have enjoyed robust profits during a time of flat wages and low interest rates.

The reductions in personal and corporate taxes will cost the state $3.5 billion annually. That money, if spent on schools, services and transportation could ease economic inequality and expand opportunity. Such spending, especially combined with Medicaid expansion, would help offset the effects of widening income inequality.

Republican lawmakers enhanced the wealth of investors, but they themselves failed to make an investment that would pay off for many more – an investment in North Carolina.

This story was originally published August 12, 2017 at 1:00 PM with the headline "NC squandered a stock boom on the rich."