Republican leaders in the General Assembly wore themselves out backslapping and chest thumping over the news that state tax revenues this year have exceeded projections by $400 million. It was an absolute affirmation of supply side economics – cut taxes, spur the economy and tax revenues will increase.
Senate leader Phil Berger couldn’t resist using the occasion to poke fun at all the “Chicken Littles” (read liberals) who warned that a big tax cut would starve the budget and leave the state unable to meet its obligations. Instead, he said, there is plenty of tax revenue, enough to cut taxes even more.
But Berger wasn’t hearing the warnings clearly. The worry isn’t that the sky is falling today. It’s that the prospects for a better North Carolina tomorrow are collapsing.
After years of recession-induced austerity, this is the time to collect and invest in North Carolina. Instead, the state is dipping into a growing economy with a hole in its taxing bucket.
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The losses from tax cuts passed in 2013 were less than projected, but what would have happened if the tax code had gone unchanged? What if profitable corporations and wealthy individuals had paid their previous share of taxes? The answer is that the the state would have a lot more tax revenue than it has now. Agencies and programs that have struggled with reduced funding during the recession and its aftermath could have had their funding restored. There would be money to invest in schools, health care and infrastructure improvements.
Instead of celebrating the not-so-bad effects of tax cuts, North Carolina leaders should be worried about what they’ve given away.
Republicans argue that the tax cuts essentially pay for themselves by stimulating the state economy, but there’s no proof that giving money back to the wealthy and big corporations drove up tax revenue. Instead, the state’s tax revenue reflects a surge in capital gains and corporate profits. That’s why tax revenue also exceeded forecasts in nine other states, including high-tax California where revenue surpassed the forecast by $1.6 billion.
Consider what’s happening at the federal level. Overall, tax revenue is up 9 percent over last year. The Wall Street Journal explained where the rise is coming from. “The taxes that America’s rich are paying on their rising incomes are yielding a windfall for the U.S. Treasury,” the newspaper said. It noted that revenue from payroll taxes is up 6 percent and that revenue from self-employment income taxes and capital gains rose 18 percent. And rising corporate profits have increased corporate tax revenue by 16 percent.
Just as the rich are getting richer, North Carolina decided to tax them less. The upper bracket of the personal income tax rate has dropped from 7.75 percent to a flat of 5.75 percent for all taxpayers. The corporate income tax was cut from 6.9 percent to 6 percent for 2014. It was reduced again to 5 percent for this year. And now that tax revenue has surpassed targets in the tax cut bill, the rate will drop to 4 percent in 2016 and could go to 3 percent in 2017.
The tax cuts are not only badly timed, they are unfair to middle- and low-income taxpayers. Lawmakers shifted the state tax burden downward by eliminating the medical expense deduction for seniors and allowing the Earned Income Tax Credit to expire for low-income workers.
The Institute on Taxation and Economic Policy, a nonprofit research group that focuses on tax fairness, analyzed that shift. Its findings have often been misconstrued to say that 80 percent of North Carolina taxpayers ended up paying more after the tax changes. Instead, the institute found that in 2014 – allowing for the expiration of the EITC and the loss of some key deductions – the average taxpayer in the bottom 80 percent of the income distribution would pay more in state and local taxes. That’s milder than the raw “80 percent of taxpayers” claim tossed around by some Democrats, but it’s still bad.
Meg Wiehe, the institute’s state tax policy director, said there are nuances to the impact of the tax cuts, “but the truth is that, as a share of income, no matter how you slice the data, the wealthiest households got the biggest tax cut and the vast majority of the net tax cut goes to those families.”
Wiehe thinks the “April surprise” of North Carolina’s tax revenue growing beyond projections is likely a one-time jolt. Meanwhile, the effect of falling tax rates will be recurring. Year after year, North Carolina will eventually give up billions of dollars in revenue. The flat state budget will actually shrink compared with where it should be given inflation and population growth.
Republican leaders say a low-tax environment will attract new businesses and encourage job creation. That’s a gamble that is unlikely to pay off. But what is assured is that the legislature has cut the state out of a haul in tax dollars even as it neglects the state’s needs of today and tomorrow.
Editorial page editor Ned Barnett can be reached at 919-829-4512, or firstname.lastname@example.org