A stroll down memory lane of recent budgets, tax cuts are the guide rails
Tax changes passed since 2013 have not only significantly reduced revenue available for public investments, but also shifted the tax load to low- and middle- income taxpayers and away from the wealthy and profitable corporations. The tax burden on low income taxpayers increases on average by $30 while it decreases by around $15,000 on average for millionaires once all tax changes are fully in place.
These tax changes mean the amount of revenue raised through the state’s three main tax revenue sources – the personal income tax, the corporate income tax and the sales tax – was reduced by billions of dollars. Simply put, state leaders lowered the bar of possibilities for North Carolina. Thus, better-than-projected revenue of $330 million above projections still means we have less than we would have had and less than we need to build a solid foundation for prosperity for North Carolina.
This reality is reflected in the low spending target agreed to by leaders in the House and Senate – which is below the Governor’s modest budget proposal. There simply aren’t enough dollars to go around to fulfill even the modest stated priorities in an election year. It’s wishful thinking that NC will have enough funds to be able to boost its economy by making smart public investments that prepare every child for success, support every family’s health and well-being and deliver on a vision where every community in the state can thrive.
Here’s a recap of the sequence of tax policies passed in recent years. It is worth repeating that under these changes taxes, once they are fully in place, annual revenue loss will total at least $2 billion – much needed dollars given the growing needs of the state.
In 2013, state leaders included a package of tax changes in their approved state budget that made significant changes to the state’s tax system. These consequential tax changes included:
- Replacing graduated personal income tax (PIT) structure based on ability to pay with a flat tax and lowered tax rate. The flat PIT rate was set to be reduced to 5.75% by 2015 from a top marginal rate of 7.75% under then-current tax law.
- Cutting the corporate income tax (CIT) rate to 5% by 2015 from 6.9%. A further reduction of the CIT rate to as low as 3% by 2017 was allowed to occur if state revenue collections met relatively low thresholds.
- Eliminating Estate Tax which only applied to the wealthiest individuals in the state with estate values that exceeded $5.25 million in 2013. For 2012, the latest tax year for which data was available at the time, only 23 tax filers were subject to the estate tax in North Carolina.
- Eliminating State Earned Income Tax Credit (EITC), which helped North Carolinians who earn low wages keep more of what they earn. For tax year 2013, more than 927,000 North Carolinians claimed the state EITC, benefiting more than 1.2 million children. Allowing the state EITC to go away served as a tax increase for these North Carolinians.
- Expanding Sales Tax base to include services that were not subject to sales tax at the time. These services included maintenance agreements, repair contracts and similar agreements or contracts by which the seller agrees to maintain or repair tangible personal property.
- Expanding Sales Tax to admission charges to entertainment activities. These activities subject to Sales tax include live performances, motion pictures or films (e.g. movie theaters), museums and guided tours, among other activities.
In 2015, state lawmakers passed additional tax changes in their approved state budget that included:
- Further reduction of PIT rate to 5.499% from 5.75% to be phased in beginning January 2017.
- Further reduction of CIT rate to 4 percent from 5 percent. Further reduction of CIT rate to 3 percent from 4 percent guaranteed to kick once revenue collection reaches a relatively low threshold. Policymakers changed the requirements for meeting this threshold to ensure that the CIT rate is further lowered.
- Changed how profitable multi-state corporations are taxed and in doing so created an uneven playing field for small, home-grown North Carolina businesses that don’t benefit under this tax change.
- Further expansion of Sales Tax base to repair, maintenance, and installation services. These services include shoe repairs, jewelry repair, tire repairs (patches, plugs, etc.), clothing repair or alteration, carpet installation and a range of other services.
State leaders’ insatiable appetite for tax cuts over reinvestment created the constrained revenue landscape North Carolina now faces as well as the false choices North Carolinians are now told we face by policymakers who say they can’t invest. This does not have to be case.
State lawmakers can begin to turn the tide and create a tax system the works for everyone. Stopping scheduled income tax rate reductions and restoring the state EITC are immediate steps lawmakers can take. Returning to a graduated PIT rate structure that takes into account one’s ability to pay and bringing back the Estate Tax would go even further to ensure that all communities can thrive and broadly shared prosperity reaches all corners of the state.
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