It could be said that the elephant – symbol of the Republicans who control North Carolina’s General Assembly and governor’s office — has labored and brought forth a mouse. But this is a mouse with sharp teeth.
After weeks of effort, the legislature’s Republican majorities and Gov. Pat McCrory have agreed on a spate of changes to the state’s tax laws centered on cuts in personal and corporate income taxes. The cuts aren’t as deep as some conservatives wanted. Still, they will sap revenues that finance the entire portfolio of state programs and services.
As for hopes that the antiquated tax system could be “reformed” by broadening the base and closing loopholes, besides lowering rates — well, that kind of reform proved to be a riddle no one could solve.
Gov. McCrory settled for changes that will mean less drastic revenue losses than under some previous plans but that fall far short of his goal of keeping revenues essentially stable. He ended up echoing legislative leaders committed to the doctrine that lower taxes are the key to greater economic growth and job creation.
It’s a brave idea, but one that fails to reckon with the human costs when state services are underfunded and with the value to industry when all North Carolinians have access to good schools, decent health care and strong communities – all requiring ample state investment.
The new plan also backs away from principles that keep taxes progressive – i.e., that apportion the burden in keeping with people’s ability to pay. The personal income tax will be reduced to a flat 5.8 percent starting in 2014, and 5.75 percent from then on. No longer will there be three brackets, with the rate set at 7.75 percent for those with the highest incomes. Almost everyone stands to save some money, but high-end earners will see a disproportionately greater benefit.
The plan cuts the corporate income tax to 6.0 percent next year and 5.0 percent in 2015, down from 6.9 percent. Further cuts are contingent on the flow of state revenues. The moves are intended to make the state more attractive as a place to do business, but the benefits accrue mainly to big, profitable companies, many of them based elsewhere. Since North Carolina’s overall business climate already ranks high, these cuts amount to trying to fix something that isn’t broken and doing damage in the process.
Other proposed tax code overhauls emerging from the House and Senate in recent weeks featured hot-button changes such as taxing Social Security payments, extending the sales tax to cover a wide variety of services and reimposing the state sales tax on food. None of those ideas survived – just as well, even though the intent was to mitigate revenue losses from broad income tax cuts.
The stripped-down package now on the fast track to becoming law mitigates those losses by not cutting as deeply as some legislators favored. One earlier plan, for example, would have scrapped the corporate tax altogether. Still, the impact on revenues is considerable. That impact will be felt as the state budget is now finalized.
Including the cost of repealing the estate tax – a needless bow to the very wealthy – the package is expected to reduce tax collections by these amounts over the next five fiscal years: $171.0 million, $512.8 million, $715.1 million, $697.5 million and $727.8 million, or a total of $2.82 billion.
That’s money no longer available to support state programs and services that already have been put on a strict diet during the long recession from which North Carolina finally shows signs of emerging, despite a stubbornly high unemployment rate.
Agreement on the tax plan was announced July 15 by McCrory, Senate President Pro Tem Phil Berger and House Speaker Thom Tillis as another “Moral Monday” crowd prepared to gather outside the Legislative Building in protest of a Republican agenda aimed at shrinking the size and scope of government. The GOP chiefs publicly have given the protests a brush-off. Yet it’s fair to wonder whether, absent the furor, they might have put forward a tax plan even more hostile to the interests of ordinary folks.
Here are some other key provisions in the plan, which will go to McCrory as a compromise version of House Bill 998:
Personal Income Tax
- Sets standard deduction at $15,000 for married couples filing jointly, $12,000 for head of household, $7,500 for single filers.
- Taxpayers can claim either the standard deduction or an itemized deduction. If a taxpayer chooses to itemize, the only deductions that carry over from the federal tax return are charitable contributions (without limit) and a total of no more than $20,000 in mortgage interest and property taxes.
- Those claiming a standard deduction on their federal returns no longer will be able to claim a state deduction for charitable contributions, a disincentive for some to contribute and a setback for charitable groups such as churches.
- The deduction for up to $50,000 in small business income (a break that went also to partners in big law firms, among others) is repealed, generating $1.83 billion in additional revenue over five years.
State Sales Tax
- Remains at 4.75 percent. (An additional 2 percent local sales tax is levied in most parts of the state.)
- Will be imposed on entertainment events for which admission is charged.
- Will be imposed on service contracts.
- Will be imposed on electricity sales; local tax also applies.
- Will be imposed on sales of piped natural gas; local tax also applies.
- Will be imposed at the general rate on manufactured and modular homes sold at retail, up from 2 percent with a $300 maximum and from 2.5 percent, respectively.
- Annual sales tax holiday for back-to-school items is repealed.
- Annual sales tax holiday for Energy Star appliances is repealed.
- Nonprofits such as churches and hospitals will retain a sales tax refund that was at risk under previous tax plans. The refund will be capped at $45 million, affecting only the very largest organizations.
Net revenue losses from the tax plan will hamper state services that are crucial to many North Carolinians, especially those who struggle with poverty. The plan also shifts the tax burden toward consumers who pay sales taxes. The jobs bonanza that this state’s elected leaders, perhaps carried away by wishful thinking, envision will be spurred by their tax cuts can’t come too soon.
–Steve Ford, Volunteer Program Associate