So, I’ve been meaning to write about tax “reform” in NC for a while, but now that the legislature has finally come to an agreement, I guess I better not put it off any longer. First, the basics via Mark Binker:
The package will reduce both personal and corporate income taxes. It also eliminates the estate tax and preserves the ability of most nonprofits to get refunds of what they pay in sales taxes.
According to an analysis by the legislature’s nonpartisan staff, taxpayers at both ends of the income spectrum will pay less. For example, a married couple filing jointly with two children who make $40,000 a year will pay $80 less under this tax plan. The same couple filing jointly with two children who make $250,000 will pay $2,434 less…
The measure replaces the three-tier personal income tax system with a flat tax of 5.8 percent in 2014, which drops to 5.75 percent in subsequent years. Standard deductions increase to $7,500 for single filers, $12,000 for heads of households and $15,000 for married couples.
Tillis and Senate President Pro Tem Phil Berger said the bill would raise about $500 million less in revenue than the current system over the next two years. That cost would be $2 billion over five years, although Berger quibbled with the term “cost,” pointing out state government spending will still grow under the tax reform plan.
Republicans say that lowering taxes will cause the economy to grow, helping more people to get employed and bringing more money into state coffers.That economic growth, they insist, will mean that the reduction in tax revenue will not be a steep as a “static” model predicts.
So, basically, much like the Bush tax cuts, this is a huge tax cut for rich people that buys off those of more modest means with a very modest tax cut. And it’s not just a big cut for the rich in absolute dollar figures (which it is) as a change to effective tax rate, it is generally richer tax payers who benefit more, as can be seen in this nice document WRAL put together.
According to the Republicans, this is the big change we need to unlock job growth. Evidence, however, suggests otherwise:
“Our goal is to get people back to work,” McCrory said.
But critics of the plan say there’s little evidence to backup that idea.
“It is very likely that as a result of this failure to pursue real, comprehensive tax reform, state sales taxes and local property taxes will go up in the future,” Alexandra Forter Sirota, director of the liberal N.C. Budget & Tax Center, said in a statement. “That’s what happened in every other Southern state that has personal and corporate income taxes that can’t keep up with growing public needs.”
Sen. Mike Woodard, D-Durham, also criticized the proposal for its cuts to state spending in coming years.
“What happens is, if this is not revenue neutral, our citizens lose,” Woodard said. “The services we provide – education, health care – these are going to suffer under this tax proposal.”
Back when this reform was first being discussed, I did some research and discovered the great reports from the Institute on Taxation and Economic Policy. For example, there’s this “Who Pays?” report (nice summary here) that shows that the combination of state and local taxes are typically quite regressive– and that NC is already plenty true to this pattern:

And the evidence seems pretty clear that North Carolina’s tax “reform” will ultimately shift more of the burden to lower-earning tax payers. But don’t worry, this will miraculously bring jobs.
Or not. Here’s a very compelling ITEP report who’s title pretty much sums it up, “States with “High Rate” Income Taxes are Still Outperforming No-Tax States”
One claim often made during these debates is that the nine states without personal income taxes are outperforming the rest of the country, and that their growth can be easily replicated in any state that dares to abandon its income tax. Some have also claimed that the nine states with the highest top income tax rates are experiencing below-average growth. The governors of Indiana, Oklahoma, and South Carolina, as well as high-ranking officials pushing for income tax repeal in Louisiana and North Carolina, are just some of the more influential lawmakers that have attempted to frame the debate in this way.
But these talking points, which have been widely disseminated by the American Legislative Exchange Council (ALEC), Americans for Prosperity, and The Wall Street Journal’s editorial board, are based on an analysis by supply-side economist Arthur Laffer that is extremely flawed. That analysis was first debunked by ITEP in early 2012. In its rebuttal, ITEP explained why Laffer’s simplistic state-by-state comparisons cannot reliably tease out the impact of tax policy on state economies. But ITEP also showed that even if one were to accept Laffer’s methodology as somehow valid, his core finding is simply not true. In reality, the residents of the states that levy income taxes—including residents of those states with the highest top tax rates—are experiencing economic conditions at least as good, if not better, than those living in states lacking a personal income tax. Only by focusing on blunt aggregate measures of economic growth was Laffer able to purport to show the opposite.
And, finally, NC Policywatch underlines this important point and how tax cuts, which lead to cuts in infrastructure and education can very much hurt economic growth:
Supporters claim that tax cuts will actually increase state revenue and boost economic growth. But that’s wrong. Overwhelming evidence says just the opposite. There is in fact no connection between state income tax rates and economic or job growth, a 2012 study by the Congressional Research Service found…
Much more important to a state’s economic success than tax rates are such factors as the kinds of industries that are located there, having a well-educated, high-skilled workforce, and the presence of research centers like major universities. That’s what boosts per capita income growth. And that’s why states that slash taxes likely will suffer in the long run because they lack the resources needed to invest in education and other building blocks of economic growth.”
Yep. But we wouldn’t want to let something as simple as empirical evidence get in the way of Republican tax cut theology. Why bother paying attention to things like research and evidence when you can simply know that tax cuts are always good.
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