Garner’s state senator and his challenger have sparred over teacher pay, education spending, environmental issues, and conflict of interest rules. But it might be possible to distill their fundamental philosophical odds into one one issue: their views on the new tax code.
The state’s tax code hadn’t been fundamentally altered since the 1930s, and both parties had made attempts to fix antiquated elements before. But it wasn’t until the Republicans gained control of the legislature and governor’s mansion that a major overhaul passed.
The income tax rate was flattened to 5.8 percent from a progressive rate that ranged from 6 to 7.75 percent, and will drop to 5.75 percent in 2015. The corprate income tax dropped from 6.9 percent to 6 percent and will fall to 5 percent in 2015. Some tax breaks were eliminated to reduce the lost revenue.
The left decried the revenue losses and said the bulk of the savings will be realized by the wealthy and corporations. Barefoot called it a much needed reform that puts more money in everyone’s pockets and encourages job creators to a state with lower taxes and a simpler structure with fewer breaks for special interests.
Sign Up and Save
Get six months of free digital access to The News & Observer
“We’ve passed tax reform. Our economy is growing so our revenues will be growing,” Barefoot said. “It’s not fair to call it tax cuts. People got personal income tax rates lowered. Exemptions removed on the backside. It’s not fair to say this was a give-away to the rich. A lot of those companies enjoyed sales tax loopholes.”
The tax changes on the whole still carved a projected half-billion out of the $21 million revenue. Crawford said the loss will bar the state from investments in education and other services needed to make the state an attractive place to live, even if projections are met. And the wealthy, she said, gain the most since their taxes, and tax rates on a higher percentages of their income, dropped the most.
“We need to revisit that. The tax code that got put into law in 2013, fails the three principals: stabilicy, adequacy and fairness,” Crawford said. “It does not provide adequate resources we need to fund for the pbulic good. It does not provide stability.”
She alleged a pending shortfall of nearly a billion dollars. There has been a shortfall in revenue, though arguably not nearly a billion. In addition to the GOP-planned half-billion less, revenues have come up $313 million short in the first three months of the new fiscal year – but not nearly that short of what the administration expected.
Because of the rearrangement of the tax code and therefore collection timing, budget driector Lee Roberts has said the state is really just $61 million behind expectations on the $21 billion budget.
“It's like being 10 minutes into a basketball game and being down by a point,” he said.
Roberts said it is too early to tell whether there’s cause for concern, so the degree of the shortfall will not be known until after the election.
Down the road to Kansas?
A sizeable deficit would play into Crawford’s argument that the tax cuts would mirror those enacted in Kansas in 2013, a year before North Carolina’s cuts went into effect.
That state badly overestimated revenues after its sharp tax reductions, and the state with a budget less than a third of North Carolina’s has been trying to chip away at a $334 million budget deficit from now through June 2016, recently trimming about a third of it.
“Kansas did what we’re doing now, a little bit ahead of us. And now they are suffering. I believe if we continue down this path, we are going to be where Kansas is,” Crawford said.
Barefoot called that comparison meaningless.
“I don’t work in Kansas. I don’t live in Kansas. Are we going to have a debate about North Carolina or Kansas?” Barefoot said.
Kansas had different ecnomic problems, Barefoot said. He called the comparison of the tax reform an overgeneralization, and said just because something with some similiarities in one state didn’t work doesn’t mean a largely different plan won’t in a largely different state.
“We ain’t Kansas. We’ve created 225,000 new jobs,” Barefoot said, citing the rough increase in employed North Carolinians since the 2010 elections that gave the GOP the house. “This is so much more complicated than low tax rates.”
He touts the tax overhaul as philosophical reform of a broken system rather than tax cuts. He blamed the old tax mechanisms and philosophy on the state’s above-average fall to 2010, and credited the GOP legislature’s about face for the above-average growth since. He said the simplifcation of the code, aside from lowering rates, helped businesses who could spend less time on compliance.
Crawford said mistakes were made by prior governments, but not fundamental philosophical ones and not by her.
“One of the reasons we were in a (budget) situation as bad as other states is that we had not invested in our unemployment insurance. We ended up having to borrow money to float our unemployment in ways that other states did not have to do,” Crawford said.
Competing with who?
Barefoot touts competing with the rest of the Southeast on taxes, and lauds growth that puts the state in the top quartile over the last few years. But Crawford said what has kept North Carolina ahead of other Southeastern states has been the stragegic investments that tax revenue of the type the GOP sacrificed afforded it.
In GDP per capita, North Carolina, though slightly below average, outpaced its southeastern neighbors both in 2008 before the Recession and currently.
“Based on the conversations I’ve had with businesses, tax rates are not the first thing they’re going to look at,” Crawford said. “Cutting education is a sure way to the bottom.”
Barefoot cringes whenever someone accuses the GOP of cutting education. Democrats, he said, were the ones who cut funding during the recession. He said they set the budget up to fail. Since the GOP took over, per-pupil spending has increased during the recovery, including during his only two years in office.
Spending has still not reached pre-recession levels, even before adjusting for inflation. Crawford said schools continue to go without textbooks, supplies, and raises for experienced teachers, and Barefoot cost the state an opportunity to get back to pre-recession levels quicker.
The two also disagree on the reliance on the sales tax. Barefoot said over-reliance on the income tax made the budget more vulnerable to recession. He also said sales tax, now with loopholes cut out, collects money from those who move into the state but have yet to get jobs (or who are retired; he also praised the repeal of the estate tax to make the state more attractive to retirees.)
Crawford pointed out that the sales tax is regressive and takes a higher proportion of income from low-income residents. Barefoot also notes that the increase in the standard deduction from $3,000 to $7,000 will disproportionally help low-income residents.
Benjamin Brown of the NC Insider contributed to this story.