The saga that North Carolina legislative leaders like to describe as tax reform could be at the beginning of the end. Or is it the end of the beginning?
After weeks of jockeying with the House, and with Gov. Pat McCrory sending signals of his own, the Senate now has approved a tax-cutting plan that President Pro Tem Phil Berger casts as a final, conciliatory effort to solve the tax reform riddle.
The new plan drops some previous ideas that clearly weren’t going to fly, such as making Social Security benefits liable to state income tax, eliminating the income tax deduction for all charitable contributions and reinstating the state sales tax on food. It’s closer to the House tax reform vision, and thus could be a realistic basis for compromise. That could allow legislators to settle on projected revenue figures and finish work on the state budget – their main item of unfinished business this session.
Still, the Senate plan, given tentative approval on July 2, can’t be regarded as a done deal. The House will have to sign off on changes developed by senators with their own set of priorities. The Republicans who control both chambers and governor’s office share a commitment to lower taxes and lower spending, but they’ve been all over the lot as to how to get there.
House leaders and Gov. McCrory have been wary of cutting taxes so deeply that a government already shrunken due to recession-related budget cuts will lose even more of the revenue it needs to meet its obligations. That’s an entirely valid worry – so valid, in fact, that even the somewhat smaller tax cuts the House favors would be harmful.
The Senate would cut the personal income tax to a flat 5.75 percent. That would do away with the tiered brackets that now help distribute the tax load fairly, with those making the most paying a somewhat higher share. The corporate income tax would be phased out altogether by 2018. The sales tax, which House members have wanted to expand to cover various services, would be broadened through the repeal of exemptions.
The Cost of Cuts
The argument for tax cuts is that they’d make North Carolina more attractive to employers and thereby spur the creation of jobs – no small matter in a state with the nation’s fifth highest unemployment rate, and one that has just slashed unemployment benefits.
But according to legislative staff, the Republican majority’s plan would mean a hit to state revenues of an estimated $171 million in fiscal 2013-14, approaching $1 billion in 2016-17. (See the fiscal note here.) At a time when many state programs and services, notably at every level of education, have been squeezed relentlessly as revenues shrank during the recession, that money could be put to very good use. North Carolina teachers, for example, could be given reasonable pay raises instead of being forced to watch their pay drop toward the bottom of the national barrel. The state could stop trying to get by on the cheap with mental health care.
Here’s a summary of some other key provisions in the latest Senate tax plan, which is a rewritten version of House Bill 998:
- Keeps income tax deduction for Social Security benefits. (Same as House plan.)
- Gives taxpayers who itemize deductions the same deduction for charitable contributions that they’re able to claim on their federal tax returns. (Same as House plan.)
- Eliminates special charitable contribution deduction for non-itemizers – not something that charitable organizations such as churches should welcome. (Same as House plan.)
- Allows taxpayers who are married and filing jointly to deduct up to a total of $15,000 for mortgage interest and real estate property taxes. (House favors $25,000 cap.)
- Steps down corporate income tax from current 6.9 percent to zero in 2018. (House would reduce to 5.4 percent.)
- Keeps state sales tax at 4.75 percent; does not expand to cover food and medicine. (Same as House plan.)
- Keeps 2 percent local sales tax on food. (Same as House. A previous Senate plan would have dropped the tax, giving local governments a reinstatement option, but this drew widespread complaints because of the effect on local revenues.)
- Increases sales tax on manufactured and modular homes to the general 4.75 percent rate. The rates are now 2 percent with a $300 maximum and 2.5 percent, respectively. This looks like a tax burden shift that would hurt lower-income homebuyers. (House wouldn’t change current rates.)
- Steps down the sales tax refund that non-profit organizations can claim. By 2018, the refund would be capped at $2.85 million per year. That represents a significant change from an earlier Senate plan putting the cap at $100,000. Supporters of rural hospitals especially argued that they’d be hurt by the lower figure, which also would have affected large churches and those in the midst of building campaigns. (House wouldn’t impose cap.)
At the NC Council of Churches, there’s no enthusiasm for tax measures making it harder for non-profits to fulfill their mission, or those that shift tax burdens away from high-end earners. And the overall thrust of tax reform as it’s taking shape in the General Assembly would not be so much to update a tax code dating from the 1930s, when the state’s economy looked much different. It would be to cut taxes, plain and simple, and limit the growth of government.
Who would be left with the short end of that deal? The Moral Monday protesters know the answer.
— Steve Ford, Volunteer Program Associate