Senior Vice President for State Fiscal Policy
The radical tax bill that North Carolina lawmakers passed today—and that Governor Pat McCrory is expected to sign — has two dangerous implications for other states.
Let’s look at each of these points in turn.
Redefining “tax reform.” The bill eliminates or caps a few deductions or exemptions, some of which clearly deserved to be eliminated. But it doesn’t merit the name “tax reform” that supporters have given it because it shifts tax burdens from the most well-off to the middle class and poor and because it slashes revenues at a time when state government is already strained for funds.
North Carolina’s bill gives enormous new tax breaks to the wealthiest taxpayers and most profitable corporations while raising taxes on many lower- and middle-income households. The legislature’s own fiscal research agency says a family of four with income of $250,000 will get an income tax break of $2,434, while a family of four with income of $20,000 will get a tax cut of $3 — which will be more than offset by the state’s planned elimination of its Earned Income Tax Credit.
In fact, because the bill also raises sales taxes, the independent North Carolina Budget & Tax Center estimates the net result will be higher taxes for the 80 percent of North Carolina families with incomes below $84,000.
Meanwhile, the plan will cost the state over $600 million per year. North Carolina doesn’t have anywhere near large enough a budget surplus to pay for that, so Governor McCrory initially recommended that tax reform be revenue-neutral. But he later abandoned that idea, and both houses of the legislature have passed budgets that would cut K-12 staff, raise college tuition, cut funding for affordable housing, and make other cutbacks, in part to pay for the new tax bill.
Threatening a new tax-cut war among the states. North Carolina’s economy outperformed the nation’s last year, but its current unemployment rate of 8.5 percent is among the nation’s highest. State leaders argue that cutting taxes (particularly income taxes) will provide a competitive edge. There are two problems with this argument, however.
As neighboring states seek to mimic North Carolina, any advantage the state might have hoped to gain over the others will disappear. When every state enacts the same tax break, all they’ve done is ratchet down their ability to pay for good schools, roads, police and fire protection, and all the other critical services that make them places where people and businesses want to stay for the long haul.