RALEIGH — The state Senate has given its approval to a proposed constitutional amendment capping the income tax rate at 5.5 percent, but one lawmaker has a better idea.
Applying some fiscal restraint, said Sen. Jerry Tillman, R-Randolph, could eliminate the urge to increase tax rates in the first place.
Tillman is one of the bill’s primary sponsors and co-chairs the Senate Finance Committee.
“If you will prepare for hard times and not spend it all like our predecessors have, you’ll be fine to weather bad times,” Tillman said. “Bad times will come. You cycle about every eight to 10 years into good times and bad times.”
The current cap on the tax is 10 percent.
Senate Bill 75 got support from nearly all Senate Republicans and even a couple Democrats. It passed by a 36-13 vote, six votes more than the minimum 30 needed to move a constitutional amendment forward.
“On principle, I think that’s a good idea,” Cordato said. “My concern is that this is being used and promoted as a way of expanding the base and maybe even ultimately raising the rate of the sales tax.”
Cordato said he’d prefer to see the constitutional cap expanded to cover the sales tax rate, too .
“I don’t know what it should be on the sales tax, but I’d think no higher than what it is now,” Cordato said. “Make it about the issue of over-taxation generally and not just over-taxation with the income tax.”
Tillman said states that have a hard time with constitutional income tax caps also probably fail to curtail spending, Tillman said.
“If you run away with spending and then hard times hit you, you’ve got no cushion, no reserve, then you have to go to sales tax,” Tillman said. The General Assembly has built up reserves, beefing up the rainy day fund, the unemployment fund and Medicaid reserves, he said.
Donald Bryson, state director of Americans for Prosperity-North Carolina, thinks otherwise. He applauded Senate passage and urged the House to follow suit.
“This bill will protect individuals and families currently paying North Carolina’s lowest tax rate in decades from lawmakers who only see spending increases and tax hikes,” Bryson said.
The potential effect on the state’s credit rating is another aspect lawmakers should consider.
“I believe that this bill puts our triple-A bond rating at risk,” Sen. Jay Chaudhuri, D-Wake, said. “It hamstrings our state’s ability to increase revenue.” He said having to depend on a sales tax means relying on a regressive tax. A lowering of the credit rating could result in higher interest rates for future bonds.
Two Democrats, Sens. Ben Clark of Hoke County and Joel Ford of Mecklenburg County, joined 34 Republicans in supporting the measure. One Republican, Sen. Tamara Barringer of Wake County, voted against it.
If approved in the House with at least 72 votes (60 percent of total members), the proposal would go to voters during the Nov. 6, 2018, general election. If voters ratify the proposed constitutional amendment it would take effect for taxable years beginning Jan. 1, 2019.
In the waning days of the 2016 short session, the Senate passed a proposed constitutional amendment capping the income tax at 5.5 percent. It was part of a constitutional amendment package that included eminent domain protections, a requirement for a rainy day fund, and protecting the right to hunt, fish, and harvest wildlife. That amendment failed in the House.
Since 2013, the General Assembly has reduced the personal income tax and the corporate income tax. In 2013, the state had a three-tiered personal income tax rate, with the highest marginal rate being 7.75 percent. The 2013 tax reform package established a flat rate, which at the time was lowered to 5.8 percent for 2014. It has gradually been lowered to the current 5.499 percent.
The tax reform bill also lowered the corporate income tax rate from 6.9 percent in 2013 to 6 percent in 2014. It has gradually dropped to the current 3 percent.
At the same time, lawmakers have expanded the sales tax to remove some exemptions. Some service contracts, for example, are now subject to sales tax levies. Lawmakers eliminated the back-to-school sales tax holiday weekend and expanded the standard deduction, or “zero tax bracket,” to $17,500 for married couples filing jointly.