Opinion: CJ Opinion

Ask ‘Who pays today?’ before judging impact of proposed tax cuts

A single N.C. taxpayer earning $20,000 a year would see a $124 annual tax cut under a plan touted by N.C. Republican legislators. That same plan would cut taxes by $332 for a $100,000 earner, and $2,672 for a taxpayer earning a cool $1 million.

Your initial reaction to those numbers says a lot about your approach to tax policy.

This observer has absolutely no doubt that some people will read the column’s opening paragraph and conclude: “It’s just as I thought. Those Republicans care only about the rich.”

“How could anyone assert otherwise? A person clearing a million bucks gets a tax break more than 20 times as large as a person making a measly 20 grand? Even the guy with 100K gets a tax cut two-and-a-half times as large as the little guy?”

Take that approach to the numbers cited above, and you’ll fit well within the mainstream of North Carolina’s Democratic Party politics. It’s the same type of reaction leading House Democrat Darren Jackson offered in 2017. Jackson lambasted a Republican plan to lower the state’s flat income tax rate while raising the standard deduction. Higher-income earners were bound to see much larger tax cuts, in Jackson’s view. It was unfair.

The General Assembly ended up approving that plan. Now GOP lawmakers are taking the same approach in 2021. They want to reduce the flat tax rate from 5.25% to 4.99%, while also raising the standard deduction from $10,750 per person to $12,750.

It’s an idea bound to generate criticism from those who focus on the dollar value of potential tax cuts. But others will consider the raw numbers in context. That context helps explain how the proposed changes make a bigger difference for the lower-income earner. A bigger positive difference.

Let’s return to the three taxpayers from our opening example. First, we need to look at their current income tax obligations.

Setting aside any other credits and deductions, the $20,000 earner owes $485 under the current tax code. The $100,000 taxpayer owes $4,685. The $1 million taxpayer owes $51,935.

Thanks to the existing standard deduction, higher earners already pay a larger share of the state’s tax bill. While the effective tax rate for the $20,000 earner is 2.4%, the $100,000 taxpayer surrenders almost 4.7% of his income as tax, and the $1 million taxpayer pays nearly 5.2%, just shy of the 5.25% flat rate.

Consider those numbers another way. Using the $20,000 taxpayer as a base, the $100,000 taxpayer earns five times as much money. But he pays almost 10 times as much income tax. The $1 million taxpayer earns 50 times as much money and pays 107 times as much income tax.

The higher earners clearly foot a larger portion of the state’s income tax burden today than the $20,000 taxpayer. Pool their three incomes together, and the $20,000 earner owes 0.8% of the collected income tax. The $100,000 taxpayer owes 8.2%. The $1 million taxpayer covers the other 91% of the burden.

This context helps illuminate the numbers spelled out in the opening paragraph. Still, the dubious among you might think that this year’s proposed tax cuts will shift the tax burden more toward the bottom

The opposite is true.

Dropping the tax rate and increasing the standard deduction would cut the $20,000 earner’s annual income tax bill from $485 to $361 (the $124 cut noted above). His effective tax rate would drop to 1.8%, and his state income tax bill would fall by more than 25%.

The $100,000 taxpayer would see a $332 cut from $4,685 to $4,353. His effective tax rate would dip below 4.4% as his tax bill dropped by 7%. The $1 million taxpayer would enjoy the $2,672 cut noted at the outset of this column, and his overall income tax bill would decline by 5%. Yet his effective tax rate still would top 4.9%.

Using the $20,000 earner as a base, the $100,000 taxpayer (with five times as much income) would owe 12 times as much tax. The $1 million taxpayer (with 50 times as much income) would owe 136 times as much tax.

Pool the three incomes together again, and the $20,000 earner’s share of the income tax bill drops to less than 0.7%. The $100,000 taxpayer picks up a little more than 8% of the bill. The $1 million earner now carries 91.3% of the load.

Of course, these computations carry caveats. We’ve said nothing about other credits and deductions that would benefit high-income taxpayers more than low-income earners. To the extent that those outside credits skew the tax code, they deserve more scrutiny.

I’ve also limited my discussion to single taxpayers, not married couples or families with kids. The state’s standard deduction and child tax credits do even more to benefit couples and parents at the lower end of the income scale.

All the dollar figures, percentages, and relative tax burdens shouldn’t obscure one key point: Debates about tax cuts require context.

You need to know who’s paying how much of the bill today before deciding who should pay how much of the bill tomorrow.

Mitch Kokai is senior political analyst for the John Locke Foundation.