Tax cap: What does NC constitutional amendment do?
When small town mayors in North Carolina talk, we all should listen. They are, for the most part, among the least partisan elected officials in the state. They want to pick up the garbage on time, keep their town safe, and provide ball fields and community centers for exercise and play. There’s nothing Republican or Democratic about local government priorities.
So when Garner Mayor Ronnie Williams and Morrisville Mayor T.J. Cawley spoke recently against a constitutional amendment that would cut the maximum state income rate, their message should be heeded. “The Jones Street group is trying to tell us what to do,” Williams said of state legislators.
The amendment, which is on this fall’s ballot, would lower the current 10 percent cap on personal and corporate state income taxes to 7 percent. The current tax rate on corporate income is 3 percent; it will drop to 2.5 percent in January. The current rate on personal income is 5.5 percent and will be reduced to 5.25 percent next year.
The amendment sounds good at first until you look closer. Our public schools illustrate the problem. Most North Carolinians think our schools are underfunded; a recent poll by the conservative Civitas Institute showed that 72 percent of respondents thought North Carolina’s public schools don’t receive sufficient funding to properly educate children.
Many school buildings are in bad shape. But top Republican lawmakers declined to put a statewide school bond on this fall’s ballot (North Carolina hasn’t had one since 1996). State lawmakers also have mandated smaller classes, which increases the pressure to add classrooms.
Local boards could raise taxes to upgrade school buildings and provide better local salary supplements for teachers. But their main sources of revenue are property taxes and local sales taxes, and many local boards, especially in rural areas, think they can’t go higher on either. Property tax rates have been raised in 74 of 100 counties since 2012, according to 38 Triangle mayors, council members and commissioners who oppose the tax cap constitutional amendment (and five other amendments).
So local governments are out of options. And the state is limiting its options if it can’t raise income taxes beyond 7 percent.
We need a new tax structure in North Carolina. The sales tax is too high — 6.75 percent in many counties and as much as 7.5 percent in others (4.75 percent is from the state and the rest is local). The sales tax hurts people in the bottom half of income because they spend a higher share of their income on necessities. Income taxes reflect your ability to pay; if your income goes down, you pay less.
A better idea would be to cut and then cap the sales tax. It says much about Republicans’ priorities that they propose lowering the cap on the income tax but do not propose capping the insidious sales tax.
Our tax system could bolster lower-income people by cutting the state sales tax and returning to a graduated state income tax in which wealthier North Carolinians paid a higher share of their income. Depending on how much the sales tax was cut, that could require the wealthiest residents to pay 7.75 percent, which they once did.
The state limits its option to modernize and improve its tax code if it mandates that the top rate can’t be more than 7 percent. Lowering the tax cap also could tie the state’s hands in a fiscal emergency, which makes it more likely that the state could lose its AAA bond rating, a sign of fiscal responsibility that North Carolina has maintained under Democratic and Republican leadership.
At first glance, lowering the tax cap is shiny and sparkly. But in the long term, it’s bad for state and local tax policy. The mayors are right.