Republicans who control the General Assembly have talked a lot about the $550 million budget surplus this year and how they are piling money into the state’s rainy day fund. What they’re not talking about is the latest tax cut for corporations they tucked into a 2013 tax bill signed into law by Gov. Pat McCrory.
That bill lowered the corporate income tax from 6.9 percent to 6 percent in 2014 and from 6 percent to 5 percent in 2015. But the law also contained two “triggers.” If general fund revenue hit a designated level in 2015, the corporate tax would drop by another 1 percent. The same for 2016. Revenue did hit both those marks. In other words, revenue accumulated in part by expanded sales taxes paid by most North Carolinians resulted in corporations getting two more tax cuts, the latest on Jan. 1
Overall, the cumulative corporate tax cuts will cost North Carolina $820 million in 2017. That’s money that could have made a difference in boosting teacher pay, or reducing UNC tuition, or addressing rising childhood poverty, or meeting the shortage of psychiatric beds. Over time, it will add up to billions of dollars forgone, a permanent drain on the state’s ability to meet its needs and obligations.
That this loss is a gain for big corporations that don’t need it and don’t particularly care about it is a scandal. That it’s being done through cuts apart from annual public review makes it doubly so.
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Automatic tax cuts are the focus of a critical new report from the Center on Budget and Policy Priorities (CBPP), a Washington, D.C.-based group that studies the impact of government budget choices on low-income Americans. North Carolina is one of nine states to add triggers to tax cut bills, but it is one of the worst abusers of the mechanism. Other states have also used the automatic cuts for reductions in personal income taxes, but North Carolina has used them only for the corporate tax. The result is the biggest corporate tax cut in the nation – a drop from 6.9 percent to 3 percent, a 56 percent reduction. North Carolina’s corporate tax is now the lowest in the nation.
The report criticizes trigger tax cuts because they are approved without any knowledge of what the state’s needs will be when the cuts take effect. It argues that, “Lawmakers who agree to cut state revenues without knowing whether the cuts will be affordable abdicate their responsibility to prudently manage state finances, often at significant cost to the state’s future.”
That’s the case in North Carolina. After years of austere state budgets there would be strong opposition to another corporate tax cut, but putting the reduction into a 2013 bill with the assurance that it would only happen if revenues are flush avoided that fight.
So the state rang in this new year by tossing a few more hundred million dollars to corporations at a time when North Carolina refuses to pay its public school teachers a decent wage and virtually every area of state government is underfunded.
Republicans justify this giveaway by saying it improves the business climate and creates jobs. Michael Mazerov, a CBPP expert on state business taxes and co-author of the report, said reality doesn’t support that notion. He said most new jobs are created by new companies that plow profits back into research and development and have little or no tax liability. Meanwhile, the corporate tax savings go to older, multi-state and multi-national companies that may spend their savings elsewhere or pass it on to shareholders outside of North Carolina.
“It’s an incredibly wasteful way to stimulate job creation,” Maserov said.
North Carolina has added jobs since Republicans started cutting the corporate income tax, but most of the gains are coming from population growth and an improving national economy, not from corporations responding to lower taxes.
Maserov said, “The states that are going to be successful are those with really well-educated workforces and that’s where a state should be putting its resources, not into tax cuts.”
Needless to say, the legislature’s Republican leaders are not heeding such advice. The only “prosperity” these tax cuts are bringing is a wealth of unmet needs.
Barnett: 919-829-4512, nbarnett@ newsobserver.com