State Sen. Jerry Tillman, R-Randolph, said the Senate will push again in the next legislative session to pass a constitutional amendment lowering the cap on the personal income tax rate from 10 percent to 5.5 percent.
Imposing a 5.5 percent income tax ceiling was one of three constitutional amendments in House Bill 3. It passed the Senate 31-18, but the House failed to act on it in the recently concluded short session. The current cap is 10 percent.
The tax cap in H.B. 3 was combined with a provision creating an Emergency Savings Reserve Fund along with two other constitutional amendments — one barring the public taking of private property for transfer to another private person for economic development, and a third enshrining the right to hunt and fish.
“I don’t know where that opposition came from,” Tillman said of House inaction by referring H.B. 3 to the House Rules Committee, which often is a legislative graveyard.
“The House ran out of time, and maybe they ran out of nerve,” Tillman said. “I don’t think they were as gung ho as we were to do these things, but I do think we’ll get them eventually. Probably next year you’ll see them again. The House will see them again.”
While there were three constitutional amendments under consideration, Tillman said the other measures in H.B. 3 “pale in comparison” to capping the income tax rate. “Eminent domain will come back, I feel sure,” and would be his second priority, followed by the hunting and fishing amendment.
“Nothing to me is as important as saying this is the maximum amount we’ll take from taxpayers, and let individuals and businesses know how to plan their budgets, family budgets, business budgets, and everything else,” Tillman said.
The Office of State Treasurer opposed the income tax cap, saying that could have a negative impact North Carolina’s AAA bond rating, the highest possible, which would drive up state costs for borrowing money.
During floor debate in the Senate, Sen. Jay Chaudhuri, D-Wake, former general counsel for the state treasurer, said that agency’s strategic plan has been “to apply conservative debt management practices to maintain the state’s AAA bond rating,” and has challenged both Democratic and Republican governors and legislatures on their fiscal policies.
“This proposed constitutional amendment impacts two areas for credit rating agency assessment,” governance and financial strength, Chaudhuri argued, and rating agencies could downgrade the state’s bond ratings because the cap “hamstrings our state’s ability to increase revenues.”
“It makes no sense to me for a treasurer to say it will hurt the bond ratings,” Tillman said. “I don’t believe it will as long as we keep spending in check, and so far we’ve been keeping spending in check since the Republicans have been in control,” with the state running surpluses between $200 million and $400 million a year, he said.
Sen. Bill Rabon, R-Brunswick, was another critic of State Treasurer Janet Cowell’s letter, pointing out that she mentioned five states negatively affected by lowered income tax caps, but omitted Georgia, where the constitutional limit of 6 percent was passed in 2014, and has been successful.
Sen. Mike Lee, R-New Hanover, made the same point during floor debate that Georgia did not suffer a credit downgrade. Republicans countered Cowell by noting she cited states that did not control spending while cutting taxes, causing the income tax caps to backfire.
The Republicans’ position has now been supported in an investigation by Ballotpedia, a nonpartisan political and electoral online encyclopedia.
“Rabon is correct,” wrote Paul Brennan. “All three major ratings agencies — Standard and Poor’s Rating Services, Moody’s Investor Services, and Fitch Ratings — gave the bonds their highest ratings both before and after the introduction of the income tax cap” into 2016.
In 2015 Moody’s described Georgia as having a “strong governance framework and financial management practices [that] have helped to support the state’s Aaa rating over many years,” and issued Georgia its highest rating, AAA, Brennan wrote.
Standard and Poor’s 2015 report said Georgia’s amendment had “no impact on the projected state income tax revenues,” Brennan wrote.
Fitch’s 2015 report said Georgia’s income tax ceiling “limits the state’s revenue-raising ability, although not in a manner that threatens current financial flexibility,” Brennan wrote.
North Carolina’s Republican leadership has pushed to lower the income tax while expanding the sales tax base.
“In the long term, economically speaking, you will have a stronger economy with a shift from income-based tax to a consumption-based tax. That’s well established in the literature,” said Brent Lane, director of the UNC Center for Competitive Economies at the Kenan-Flagler business school on the Chapel Hill campus.
“That’s a different question than is it good for the state fiscally in terms of its budget, or certainly very different from is it good for our state credit rating, bond rating, to do it constitutionally,” Lane said.
“I’ve been an advocate for a focus on a shift from [taxing] income to consumption,” Lane said. “The issue of capping things constitutionally is not one I’ve not gotten into.”
He said if he were to propose a constitutional amendment, “it would be to make our tax code less vulnerable to amendments. Maybe there’s a similar attitude in there about setting the levels, but I am more concerned about the erosion of the simplicity of our tax code as special interests get more exemptions put back in there.”
The state’s goal should be “to make tax policy as irrelevant as possible in people’s day-to-day and market decisionmaking,” not by eliminating the income tax, but in applying it “with consistency and simplicity … so that we aren’t distorting market behavior, we’re not intervening in market behavior,” Lane said.
He believes all income ought to have the same tax rate, whether it’s high or low, “and in general we should not discourage what we want to increase, like income, and that means you have to shift toward consumption in the varied forms it comes in.”