North Carolina voters this November will be asked to approve or reject a proposed state constitutional amendment that would cap the state’s top income tax rate at 7 percent. (It is now 5.49 percent.)
Any student of history knows that in a capitalist society, the economy will go through cycles of boom and bust, some gyrations being more severe than others. In addition, recent history shows us that natural calamities such as hurricanes may occur, which might make additional spending by the state necessary.
It is important that our elected officials be able to adjust their fiscal policy to changes that occur. Accordingly, a cap on the income tax rate does not belong in the state Constitution.
Constitutional caps on taxation have been enacted in other states, and the results should give us pause.
The most famous was Proposition 13 in California, enacted in 1978. The measure limited property taxes to 1 percent of assessed valuation. It barred reassessments until the property was sold, and capped increases at 2 percent per year. The effect of the proposition was to distort the housing market. It made citizens averse to selling their homes because they had a low property tax locked in. It also has caused the California legislature to rely on income taxes and sales taxes to replace the lost revenue.
Another constitutional amendment restructuring taxation was the Taxpayer Bill of Rights (TABOR) enacted by the citizens of Colorado in 1992. Under TABOR, state and local governments cannot raise tax rates without voter approval and cannot spend revenues collected under existing tax rates without voter approval if revenues grow faster than the rate of inflation and population growth. In effect, it seeks to lock in tax revenues to population growth plus inflation.
The problem is overall population growth does not take into account the demographic make-up of the changing population. All states spend more on children and the elderly than they do on the middle aged. So if a state’s population increase is skewed towards the young or the old, the TABOR mechanism will not take this into account.
These constitutional tax caps deprive elected officials of the flexibility they need to answer the crises of the day. The caps also deprive future electorates from expressing their collective philosophy through the election process.
Moreover, by zeroing in on the income tax, this constitutional amendment would guarantee that if increased revenues are needed in the future, the legislature would be looking at the sales tax or property tax to make up the difference.
From the standpoint of the citizens, the property tax is the most blunt form of taxation. Most people will owe the total annual tax liability even if they got sick or lost their job. This is not a supple form of taxation.
The sales tax is regressive. Its burden grows heavier the lower your income.
The income tax, on the other hand, does change with your financial circumstances.. If you lost your job due to illness, were laid off or took time off to care for a child or aging parent, your income and hence your tax liability will go down.
From the standpoint of the state, this constitutional amendment will make it harder for future sessions of the legislature to grapple with the fiscal and economic conditions of the day or natural disasters, tying their hands to our collective state of mind in 2018.
From the standpoint of the citizen/taxpayer, this amendment makes it more likely that state and local governments will rely upon sales taxes and property taxes if increased revenues are needed in the future. These forms of taxation are less sensitive to the current income of the taxpayer.
The tax cap amendment is a lose-lose proposition for the government and the taxpayer and should be rejected.
Richard Nordan is an attorney and CPA with the law firm of Wallace & Nordan in Raleigh.