The myths versus the reality of the tax plan

By: - July 17, 2013 1:25 pm


Myth: Everyone in North Carolina will have more money in their pocket under the new tax plan unveiled by House and Senate leaders this week.

Reality: Many people will see fewer dollars in their pockets. With the elimination of the state Earned Income Tax Credit nearly 1 million North Carolinians will likely have less money, including 64,000 military families.

Parents who send their children to child care will no longer be able to claim the child and dependent care credit and that could increase their income tax. If they own a small business, the $50,000 business income deduction is eliminated.

Other ways that the income tax load goes up—no more medical expense deduction, loss of the personal exemption, loss of the standard deduction for seniors and the deduction for retirement income. Read more here.

Myth:  Tax scenarios from the Fiscal Research Division of the General Assembly show that people at all income levels will pay less taxes under the new plan.

Reality: The Fiscal Research analysis looks at sample taxpayers, rather than all taxpayers. When we look at all taxpayers, it turns out that 80 percent of taxpayers will on average see a tax increase. And even the Fiscal Research Division analysis finds many scenarios where sample taxpayers will pay more under this plan, including for example, families with two children who earn $64,000 a year who will pay $2,700 more.

Myth: The best way to evaluate the impact of the tax plan is to run scenarios for individual taxpayers.

Reality: The Fiscal Research Division scenarios provide examples of 24 taxpayers who would see an income tax cut under this deal. But 24 taxpayers’ experience can’t tell us what will happen to all taxpayers. Read more here.

Myth: By lowering the corporate income tax rate and the rate on the wealthiest taxpayers, the plan will spur new economic development in North Carolina and create jobs.

Reality: Cutting corporate and personal income taxes are a poor strategy for boosting the state’s economy. Look at what’s happened to the 6 states with biggest tax cuts in 1990s. They created fewer jobs and generated lower income growth in the 2000s than states that did not cut taxes. Tax cuts for the rich and profitable corporations also are shown to not generate the investments in direct job creation that are promised.

Myth: North Carolina’s current tax structure is responsible for our unemployment rate exceeding the national average.

Reality: The state’s unemployment challenge is due to long-term over-reliance on declining manufacturing industries in comparison to surrounding states—not an uncompetitive tax structure. If North Carolina’s mix of jobs had more closely resembled our neighbors’ in 2000, the unemployment rate would be lower today. We would have up to 108,000 more jobs than if North Carolina had resembled the national average in share of total manufacturing employment.

Myth: States with lower taxes have healthier economies that states with higher taxes on corporations and individuals.

Reality: Lower taxes do not lead to better economic growth. The 9 states with the nation’s highest income tax rates in the 2000s–including California, Ohio, and Maryland—have experienced better economic growth and faster job creation than the 9 states with the lowest income tax rates, including Texas, Tennessee, and Florida.

Myth: The tax plan improves North Carolina’s overall business climate as claimed by the Tax Foundation.

Reality: The business climate rankings produced by the Tax Foundation focus entirely on taxes despite the fact that there are a range of policies needed to support a strong economy. Their business climate ranking bears no relationship to actual economic performance or business success.

North Carolina’s business climate is already competitive, according to the actual corporate executives and consultants who make corporate investment decisions who consistently rank a skilled workforce, infrastructure, quality of life, and K-12 education systems as key to their location decisions and demands for the goods and services as key to their plans for expansion. Read more here.

Myth: The tax plan, while costing $647 million a year when fully implemented, still raises enough money to meet the budget needs of the state in the next five years.

Reality: The revenue losses are significant to the state’s bottom-line and to the experiences of taxpayers in their communities. Just as the state’s population will be growing, aging and seeking training in high-tech careers, there will be a need for the state’s investments to grow as well. This new tax plan reduces available revenue and will not grow with the economy. Any tax system has to grow to be relevant to its core mission of supporting public services but under this tax plan the budget shortfalls will be of policymakers making. Read more here.

Myth:  There is broad consensus among economists that cutting taxes is a good strategy for growth.

Reality: There is no consensus that tax cuts achieve growth. The literature that was used to prop up that argument was misinterpreted and left out a number of academic articles that show that tax cuts have no effect or a negative one. And in the testimony by four of North Carolina’s top academic economists before the Senate Finance Committee, they found no definitive support for this argument.

Myth:  North Carolina is not competitive with our neighbors.

Reality: North Carolina is competing effectively with its neighbors, despite claims that the state’s economy is falling behind. Our state is leading or in the middle of the pack in nearly every major indicator of economic competitiveness, except one: unemployment. And that last category is due to North Carolina’s over-reliance on disappearing manufacturing jobs. Since unemployment is the only area the state is lagging, it’s clear that North Carolina faces a job creation challenge, not a problem of overall economic competitiveness.

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Chris Fitzsimon

Chris Fitzsimon, Founder and Executive Director of N.C. Policy Watch, writes the Fitzsimon File, delivers a radio commentary broadcast on WRAL-FM and hosts "News and Views," a weekly radio news magazine that airs on multiple stations across North Carolina. [email protected] 919-861-2066