Behind NC tax surge is a tax shift

Well, what about that? Arthur Laffer was right about supply-side economics: Cut taxes, spur the economy and tax revenue goes up.

That, at least, is the story North Carolina’s Republican leaders will tell in this election year. They cut personal and corporate income taxes, and General Fund receipts for the first six months of the 2016 fiscal year (July to December) have increased by $588 million or 6.1 percent over the same period a year ago.

But that is only part of the story. The tax changes approved by the Republican-led General Assembly and Republican Gov. Pat McCrory also expanded the sales tax. What’s driving the revenue increase is more people working – largely an effect of the national economic recovery – and people paying more in state sales tax.

The other story that the revenue numbers tell isn’t about a revenue surge. It’s about a shift in the tax burden. To see the shift, it helps to compare not year over year, but this fiscal year to the 2013 fiscal year, a year before the tax changes took hold.

Cedric Johnson of the N.C. Budget and Tax Center, a budget analysis group that is part of the progressive N.C. Justice Center, made that comparison in a blog post Friday. His numbers show that personal income tax receipts have fallen by 0.5 percent while sales and use tax receipts have climbed by 23.8 percent. That shift will get even more pronounced in March when the sales tax is extended to include maintenance services such as automobile repairs.

Growing tax revenue doesn’t mean happy days are here again for most North Carolinians. It means the wealthy and big corporations are paying less and middle- and low-income earners are paying more. Johnson notes, “The regressive sales tax hits low-income families and individuals particularly hard, as they spend a larger share of their income on goods and services subject to the sales tax. Thus, to point to increased revenue as evidence that low- and middle-income North Carolinians are better off is an inaccurate assessment of reality.”

The revenue numbers are not only about a shift in the tax burden. They are also about what’s missing. Had the General Assembly’s tax changes been revenue neutral – as McCrory originally requested – the state would be seeing a much larger revenue increase as the economy recovers.

A bigger rise in state revenue would have supported salary increases for teachers and state employees, reduced pressure on tuition at UNC campuses and allowed for overdue investments in roads, water and sewer systems and other forms of infrastructure. The tax revenue that could have helped the state restore funding cut during the recession is instead being given back disproportionately to the wealthy and large corporations in the form of tax cuts.

Arthur Laffer’s trickle-down theory has been proven a fairy tale of riches from nothing since the Reagan administration first sold it as fact. But that won’t stop the tax cutters from telling it as true once more.