For most of the 20th century, North Carolina’s income tax operated on a simple principle – that the bank president should pay at a higher rate than the bank teller.
But the Republican legislature, in 2013, changed the tax laws so that everyone pays income taxes at the same rate – a modified flat tax.
Now the GOP-led legislature – in a move being pushed by Americans for Prosperity, an anti-tax group started by the Koch brothers – is considering enshrining the change in the state Constitution.
That would lock future legislatures into taxing the wealthy and working people at the same rate, unless they were to re-create a graduated income tax by establishing some lower rates.
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Raising the standard deduction can also benefit lower-income taxpayers. The Republican legislature has done that, too – while also eliminating the earned-income tax credit for the working poor.
First, a little history.
North Carolina’s modern income tax has been in place since 1921. The 1919 legislature created the tax system with state income and corporate taxes funding state government, property taxes funding local governments, and a new Department of Revenue to administer and enforce the system. The changes were approved by the voters in a constitutional amendment passed in 1920.
Like the federal income tax, the state income tax was progressive, with rates ranging from 3.6 percent to 7 percent depending on how much a person earned. In later years, tax brackets were added for high-income earners with rates as high as 7.75 percent. The top rate was temporarily increased to 8.25 percent during the economic downturn at the beginning of this century.
The rationale behind a progressive income tax is that those who can afford to pay a greater share of their income should do so, and that democratic societies work better when there is not sharp income inequality and there is a vibrant middle class.
That was North Carolina’s political philosophy through 18 governors and 46 legislatures. That is also the way the U.S. tax code works, as well as most states.
But the progressive income tax never was popular with some of the wealthy, who resented paying higher rates. In addition, some critics argued it was bad policy, saying it deprived high earners of money even though they are responsible for most of the investing, risk-taking and entrepreneurship.
With the election of a conservative Republican legislature in 2010, the GOP lawmakers sought to rewrite the tax code.
They essentially ditched the progressive income tax – which by then had three levels of 6 percent, 7 percent and 7.75 percent – and replaced it with a single rate of 5.499 percent.
Any loss of revenue was made up by the legislature by expanding the services covered by the sales tax – what economists call a regressive tax because the banker and his teller pay the same amount for whatever is bought, taking a greater portion of the teller’s income.
North Carolina last year was one of only eight states in the country with a flat income tax.
To effectively lock in the flat tax for future generations, Americans for Prosperity has launched an effort to pass a constitutional amendment that would cap the state income tax at 5.5 percent.
The state Senate voted March 14 on a constitutional amendment that if approved would go before voters in the November 2018 election. Senators approved the proposal 36-13, sending it to the House.
Americans for Prosperity has launched a statewide campaign, holding town-hall meetings and saying it will call more than 100,000 people across the state.
Donald Bryson, the state director of Americans for Prosperity, said the cap is needed to avoid “the failed tax-and-spend record of prior years.”
Senate leader Phil Berger said the constitutional amendment is needed “to keep spendthrift politicians from returning to the days of high taxes and multibillion-dollar deficits.”
Here are some facts:
▪ North Carolina was not a high tax state. During fiscal year 2012, the state-local tax burden in North Carolina was 9.8 percent, less than then U.S. average of 9.9 percent, according to the conservative-leaning Tax Foundation. That was before the Republican tax cuts.
▪ Nor was the state a big spender. North Carolina ranked 45th in the country in state government per-capita spending in the years between 2001 and 2011, according to a 2013 study by the Tax Foundation.
▪ As for the deficits, North Carolina’s state Constitution requires a balanced budget and the state is one of the few that has maintained a AAA bond rating from Wall Street bond houses.
The Republican leadership argues it is just giving voters a choice – in the form of a constitutional amendment – to permanently cap taxes.
The move comes at a time when numerous national studies have shown a growing income inequality nationally since the 1970s.
That is especially true in North Carolina, where the gap between high- and low-wage earners has grown over the past three decades from $10.44 per hour in 1980 to $15.85 per hour in 2011 in inflation-adjusted 2011 dollars, according to the N.C. Budget and Tax Center, part of the N.C. Justice Center that advocates for the underprivileged.
To put it another way, income for the top 1 percent of families in North Carolina grew 100 percent between 1979 and 2013 – and for the other 99 percent of families it grew 12 percent, according to the liberal-leaning Center on Budget Policy Priorities.
That is certainly not the fault of the Republican legislature. But capping the income tax is likely to shift the tax burden permanently away from the wealthy and more to the middle class.