The North Carolina legislature, in a Donald Trumpish mood of economic populism, is considering a constitutional amendment to place a new cap on state income taxes.
Similar moves have been carried out in California with Proposition 13 limiting property taxes in 1978 led by Howard Jarvis and in Colorado in 1992 with the passage of taxing and spending limits led by Douglas Bruce.
But the North Carolina effort is not being led by some iconic “I’m-fed-up-and-I’m-not going-to-take-it-any-more" guy. The Tar Heel drive is led by Americans for Prosperity, a group started by the wealthy Koch brothers.
The North Carolina business community has been conspicuously quiet as the constitutional amendment has passed the state Senate and the House Finance Committee. The N.C. Chamber of Commerce, normally a tax cut cheerleader, has not taken a position.
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Some businesspeople are worried that the amendment would deprive future leaders of their ability to deal with future economic problems.
“In my opinion, imposing a constitutional tax cap is fiscally irresponsible, economically unsound and politically motivated by a North Carolina legislative body more concerned over the prospect of losing their supermajority in the next election cycle,” said Bruce Nelson, former CEO of Office Depot, who now runs a 400-acre farm and cafe near Graham, in a teleconference Tuesday. “It’s bad for business. It's bad for the economy. It's bad for the citizens of North Carolina."
The GOP-led legislature wants to lock in the large tax cuts it has passed since it took control after the 2010 election. Right now, North Carolina’s state income tax rate is 5.49 percent — lower than most of our neighbors including Virginia, South Carolina, and Georgia.
North Carolina is by most measures in pretty good shape, and that has been the case under both Republicans and Democrats. It is one of 14 states with an AAA credit rating from Standard and Poor’s — something neither Colorado or California have. North Carolina state government’s fiscal condition was rated above-average by the market-oriented Mercatus Research Center of George Mason University — which is not true of Colorado or California.
North Carolina’s constitution already requires a balanced budget and has a 10 percent limit on state income tax.
But the Republican brass is worried that they could lose their veto-proof supermajority in the legislature in November. So they are attempting to tie the hands of future legislatures by putting into the Constitution a limit of 5.5 percent.
The Republicans believe voters — never happy about paying taxes — would vote for the constitutional amendment if it were placed on the ballot in November.
But how would it work in practice? What happens during the next recession? What happens during a bad hurricane or an environmental disaster?
The best guide is Colorado. That state’s Taxpayer Bill of Rights is more draconian than what is being proposed in North Carolina.
The TABOR says state and local governments in Colorado can’t raise tax rates and can’t increase spending beyond the rate of inflation and population growth without a vote of the public. Excess tax revenues have to be returned to taxpayers.
As a result, Colorado went from being ranked 34th in spending on higher education to 48th. It also now ranks 44th in what it spends on road repair.
To pay for public services, Colorado now turns to a passel of fees, not to mention marijuana taxes.
Still, Colorado did not suffer the financial mess that California faced with Proposition 13 which so hamstrung the state that it faced a $21 billion budget deficit a decade ago.
If North Carolina hit a financial bump after having passed a constitutional tax cap, it would likely have to raise fees, as well as other taxes, such as the sales tax, or the gas tax. Or the cost of more services might be shifted to local governments who would finance it with property taxes.
All of that is likely shift more of the tax burden to the middle and lower classes.
Of course, some conservatives like the Colorado law. One official with ALEC, a conservative legislative group, has called it “the gold standard” of fiscal responsibility. Supporters also argue that the income tax is a volatile source of revenue that drops dramatically during recessions.
Georgia passed a constitutional amendment in 2014 putting a 6 percent ceiling on income taxes. But we won’t know its effects until the state hits a fiscal rough patch.
In pushing a constitutional amendment to cap income taxes, the current legislature is seeking to handcuff future lawmakers.
But critics say future lawmakers should have the same discretion as the current General Assembly — and that they too would be answerable to voters.
“The one thing I’ve learned about business is you never know what the future is going to be,” said Eric Henry, of T.S. Designs, a Burlington apparel firm. “So we need to keep our options open so when those things happen we need to have the ability to change and adapt. Putting a cap on our state income tax handicaps our legislators in the future to addressing what might pop up.“