Cooper, not lawmakers, divides N.C. taxpayers by income

Recent rhetoric from Gov. Roy Cooper attempts to pit North Carolina taxpayers against one another. His comments target individuals earning more than $100,000 and married couples earning more than $200,000.

The Democratic governor suggests Republican leaders of the N.C. General Assembly favor those groups over people with lower incomes. But the facts show that the governor bears responsibility for trying to divide North Carolinians by income level.

Turn the clock back to 2013. Cooper was starting his fourth and final term as state attorney general. At that time, he confined most of his public policy pronouncements to warnings about scams and state crime rates.

Meanwhile, Republican legislators who had spent much of the previous two-year period battling a Democrat in the state Executive Mansion were looking forward to a period of greater cooperation with a new Republican governor, Pat McCrory.

GOP legislative leaders and McCrory rallied around the idea of tackling the most significant reform of North Carolina’s tax code in decades.

Rather than tinker with an existing system of three personal income tax rates — set at 6, 7, and 7.75 percent — reformers scrapped the tiers completely. Instead they wanted North Carolinians to face a single flat tax rate.

To ensure that every taxpayer would enjoy a rate cut, lawmakers set the new flat rate at 5.8 percent for 2014. The initial plan also dropped the rate to 5.75 percent for 2015.

In future years, lawmakers cut the flat rate even further. It stands now at 5.499 percent. It drops to 5.25 percent in 2019.

Each of these rate cuts affected every taxpayer paying state personal income tax. Lawmakers made no distinction among taxpayers earning $40,000 or $400,000. Each dollar subject to state taxation faces the same tax rate.

This is not to say that every taxpayer saw an immediate tax cut. Other changes to income tax credits and deductions, along with changes to other state taxes, meant that some families did not see immediate savings in 2014. But the vast majority of North Carolinians have saved money in recent years because of changes the Republican-led General Assembly has implemented.

Counting savings linked to Republicans’ decision in 2011 to reject Democrats’ proposed extension of a temporary state sales tax, North Carolinians have seen as much as $13 billion in tax relief from 2012 through the budget year that ends June 30. That’s according to John Locke Foundation Senior Fellow Joseph Coletti, who expects another $2.8 billion in tax reform relief in the next budget year.

At the same time, nothing related to the institution of a flat tax rate pits one set of taxpayers against another. A flat rate, by itself, forces one taxpayer earning 10 times as much income as his neighbor to pay 10 times as much tax.

Why then does a May 30 fundraising email from Cooper’s political campaign accuse lawmakers of protecting tax breaks for “people making over $200,000 per year”? Why does the governor suggest repeatedly that Republicans want to “protect” those breaks rather than increase government spending?

That figure has nothing to do with lawmakers. Instead, the governor set that dividing line himself. In his most recent budget proposal, Cooper urged lawmakers to use that number while reinstating a tiered income tax system.

Under Cooper’s plan, individuals earning less than $100,000 and married couples earning less than $200,000 would be able to take advantage of the new 5.25 percent income tax rate in 2019. Those earning more income would have been taxed at the 2018 rate of 5.499 percent.

In other words, Cooper wanted lawmakers to reinstate a version of the tax system they scrapped five years ago.

It’s no surprise that lawmakers rejected the governor’s plea.

Had Cooper wanted to ensure that higher-earning North Carolinians pay an even larger share of the state’s tax burden than they do today, he could have looked at a different dividing line. It exists in the current tax code. It’s set now at $20,000.

One of the least-discussed elements of North Carolina’s recent tax reforms involves the continual, substantial increase in the standard deduction. That’s the amount of money taxpayers subtract from their incomes before applying the tax rate. Some supporters call it the “zero tax bracket.”

Before the 2013 reforms, North Carolina’s standard deduction stood at $3,000 for individual filers and $6,000 for married couples filing jointly. While setting the new flat tax rate, lawmakers more than doubled the standard deduction to $7,500 for individuals and $15,000 for married couples. They’ve continued to increase that deduction while lowering rates. In 2019 the deduction will stand at $10,000 for individuals and $20,000 for married couples.

Lawmakers have more than tripled the standard deduction in the span of five years. Yet Cooper and his ideological allies never emphasize this piece of North Carolina’s tax reform package. They rarely mention it all.

Their silence is disappointing, especially since the larger deduction produces disproportionate benefits for lower- and middle-income taxpayers. A brief example explains how.

Had lawmakers made no change to the 2013 standard deduction, a married couple with $20,000 of income would pay $735 of state income tax under the new 5.25 percent flat tax rate scheduled for 2019. That’s an effective tax rate of less than 3.7 percent. Meanwhile, a couple making $200,000 would pay a tax totaling $10,185. That’s an effective tax rate of 5 percent. Making 10 times as much income, the higher-earning couple would pay nearly 14 times as much income tax.

With the higher standard deduction actually built into the law next year, the couple with $20,000 of income will pay no state income tax. The higher-earning couple will pay $9,450. Yes, both families save $735 because of the increased standard deduction. But the higher-earning couple’s effective tax rate of 4.7 percent is much higher than the lower-income couple’s new rate: zero.

If the governor wants higher-earning taxpayers to pay an even larger share of the state’s tax burden, he doesn’t have to create a higher tax rate at $100,000 for individuals and $200,000 for married couples. He doesn’t have to manufacture a new complication in the tax code.

Instead he could lobby lawmakers to raise the standard deduction again. He could focus on raising the current dividing line of $20,000 between those married couples who pay no state income tax and those who bear some income tax burden.

Lower- and middle-income earners would see more tax relief. Higher-income earners would bear more of the tax burden. Yet North Carolina would still reap the economic benefits of having one flat income tax rate. Earning an additional dollar of income would not subject higher earners to the disincentive of progressively higher state taxation.

Cooper wouldn’t pit one set of taxpayers against another. He might even secure some bipartisan support.

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