Not-so-hidden tax hikes

The General Assembly leadership has embraced the idea that raising taxes on low- and middle-income families is the way to reform the state’s tax code. In plan after plan, a pattern has emerged: tax cuts for the wealthy paid for by tax hikes on the rest of us.

The Senate and House tax plans would both cut North Carolina’s personal income tax, which would primarily help the rich, while expanding the sales tax, which will hit hardest those North Carolinians who are struggling in the current economy.

This is not only bad policy that will place an unfair burden on those who can least afford it; it will also be bad for our economy.

Of course, lawmakers are promising that these changes will lead to economic growth and new jobs. Unfortunately, decades of economic research and experience of other states reveals these promises to be empty. The simple truth is that income tax cuts don’t improve economic growth or generate increased savings.

Moreover, research from the Budget and Tax Center confirms that North Carolina’s unemployment rate has been driven largely by the unique mix of industries that existed in our state prior to the recession, not by our tax policies.

The proposed tax cuts would make it extremely difficult for North Carolina to make vital investments in the state’s future and its economy. Essential structures like schools and universities that produce a skilled workforce and safe, stable communities where people want to live and work would suffer.

The state’s ability to make these key investments would be jeopardized under these tax plans. They cut income taxes, which are both more reliable than the sales tax over the long term and a more consistent source of funding for vital public structures and services. The sales tax grows more slowly than the income tax, especially during times of rapid economic growth. This makes it impossible for a revenue system that is overly-reliant on the sales tax to keep up with the economy and cover the cost of basic state investments.

And, a flat personal income tax rate – as is proposed by both the House and Senate – is far inferior to a graduated income tax system that requires those at high income levels to pay more than low-income people. This is because the revenues generated by flat tax system will grow more slowly during periods of economic growth as compared to a graduated income tax.

Because the state must balance its budget each year, any short-term economic benefit from an income tax cut is cancelled out by economic damage that results from the need to match each dollar of tax cuts with a hike in taxes elsewhere or a cut in state investments. In the case of the House and Senate tax proposals, average North Carolinians would see both tax increases and cuts to services that would affect their daily lives.

The Senate plan would result in a revenue loss of $1 billion over three fiscal years—an amount equivalent to North Carolina’s funding for the entire community college system. The House plan announced last week will cost the state nearly the same amount over five years. Our investments in North Carolina universities, public schools and natural resources – the things that have set our state’s economy apart from our neighbors – are already at historic lows, but these tax cuts would drag them down even further.

As lawmakers head into the final weeks of the 2013 legislative session, it will be critical for them to rely on facts rather than ideology in drafting budget and tax laws. If lawmakers continue to pursue the empty promise of job creation through the tax cuts currently under consideration, it won’t be long before North Carolina is no longer a leader in the South.

Alexandra Sirota is the Director of the N.C. Budget and Tax Center.