Key argument against constitutional amendment assumes large future tax hikes

If there’s a universe in which lowering the cap on North Carolina’s income tax rate amounts to a “tax cut only for the wealthy,” our universe’s rules of mathematics — and language — must not apply.

In this universe, a proposed constitutional amendment lowering the maximum state income tax rate from 10 percent to 7 percent has absolutely no bearing on current tax rates. Nor would it lead to a tax cut, now or in the future, for the wealthy or for anyone else.

That’s not stopping the amendment’s critics from making truly puzzling claims. The rest of this column aims to expose their false narrative.

Article V, Section 2(6) of the N.C. Constitution states: “The rate of tax on incomes shall not in any case exceed 10 percent.” Section 2(6) also allows for personal exemptions and deductions so that only net income faces taxation.

Our state’s fundamental governing document already places a limit on the degree to which government can extract taxes based on the amount of income a taxpayer earns. The proposed constitutional amendment scheduled for the November ballot would lower that limit from 10 percent to 7 percent.

That change would amount to a rate cut for all taxpayers if not for the following fact: The state’s current personal income tax rate already stands at 5.499 percent. The rate will drop to 5.25 percent in 2019. Next year’s tax rate cut has nothing to do with the constitutional amendment. Lawmakers approved their latest rate cut long before proposing the constitutional amendment.

This background information should come in handy as we assess a key claim in a lawsuit challenging the income tax cap amendment.

“The NAACP opposes reducing the state income tax cap from 10 percent to 7 percent because it will prevent the state from adopting a graduated tax rate on people with higher incomes ‘and, over time, will act as a tax cut only for the wealthy,’ the suit says.” The Raleigh News and Observer offered that summary on Aug. 7 of the NAACP’s two stated objections to the tax cap amendment.

Neither objection is based on fact.

Years of academic research suggest N.C. lawmakers made a wise move in 2013 when they dumped the state’s old graduated tax on incomes. They replaced a three-tiered system of 6, 7, and 7.75 percent tax rates with a single flat tax rate of 5.8 percent for 2014. The flat rate dropped again to 5.75 percent the following year. Future votes in the General Assembly led to both the current rate and next year’s planned cut.

But that doesn’t mean a future General Assembly with less regard for the economic benefits of a flat tax rate couldn’t reinstate a graduated income tax. Gov. Roy Cooper proposed that exact idea this year when he asked lawmakers to freeze current tax rates for individuals earning more than $100,000 and families earning more than $200,000.

Taxpayers with incomes below those thresholds would have seen a 5.25 percent rate in 2019, while those above the threshold would have seen a 5.499 percent marginal tax rate. That’s a graduated system. The current 10 percent income tax cap did not block Cooper’s proposal. A 7 percent cap would not have created any obstacles for the governor.

In fact, the income tax amendment would allow a hypothetical spendthrift General Assembly to raise top marginal tax rates as high as 7 percent. Such a rate hike would represent a 33 percent increase over the 5.25 percent flat rate scheduled for 2019. It’s not hard to imagine a cash-hungry future legislature setting a 7 percent rate for top income earners and maintaining current rates for everyone else. Such a scenario represents the very definition of “graduated tax rate.”

To claim otherwise denies clear meanings of words in our English language.

What about the second claim, that “over time” the lower income tax cap would “act as a tax cut only for the wealthy”? In the real world, that assertion remains impossible. A tax cap prevents rates from rising above a set maximum level. It blocks tax hikes. A cap does nothing to cut taxes. Not for the wealthy. Not for the middle class. Not for the poor.

To argue otherwise requires a rejection of basic mathematical principles.

Assuming that the NAACP’s lawyers realize that their claim falls flat if taken literally, one must read their argument in a more figurative sense.

This observer assumes that the NAACP actually hopes to convey the following message: Over time, as government officials want to spend more money, they would be unable to live within the limits proscribed by an income tax cap of 7 percent. Even though raising rates to 7 percent would represent a 33 percent tax hike from current levels.

Unwilling to accept their limits and live within their means, these future government officials would want to raise income tax rates even higher, or they would be forced to turn to increases in other types of taxes. To the extent that these other taxes — primarily the sales tax — hit lower-income residents proportionately harder than they hit higher-income residents, the share of the tax hike borne by the “wealthy” would not be as large as the NAACP would like.

Rather than a tax “cut” for the wealthy, then, the actual effect of the tax cap in this scenario would be a massive tax hike that takes a form not entirely along the lines that the NAACP would prefer.

One can present legitimate arguments against lowering North Carolina’s income tax cap. We are likely to hear those arguments in the weeks ahead.

But this observer suspects that those arguments will fail — and support for the constitutional amendment will grow — if more people realize how the NAACP’s language of “tax cuts for the wealthy” translates into the real world.

Even a 33 percent tax rate hike would fail to generate enough money to satisfy future government officials? Seriously? Then that 7 percent cap looks better and better.

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