It’s doubtful that many of you readers would recommend raising income tax rates by 90 percent to help communities coping with the impact of Hurricane Florence.
Yet one of the state’s loudest left-of-center advocacy groups implies that a major tax hike is one of the best steps state government could take in the face of a natural disaster.
In an email to reporters last week, N.C. Policy Watch suggested the following story idea: “Will legislators rethink tax cap amendment in aftermath of Hurricane Florence?”
The amendment in question appears on the November ballot. Voters will decide whether to lower the state constitution’s existing cap on the state income tax rate. The cap stands now at 10 percent. The amendment would drop that cap to 7 percent.
For perspective, North Carolina has not assessed an income tax rate higher than 7 percent since 2013. At that time, any taxable income higher than $10,625 faced a 7 percent rate. Taxable income of more than $50,000 faced a 7.75 percent rate.
For 2014, the Republican-led General Assembly scrapped both of those rates (along with a lower 6 percent rate on income less than $10,625) and adopted a single flat tax rate of 5.8 percent. In successive years, lawmakers have dropped the rate three more times. By 2019, the rate will stand at 5.25 percent. (At the same time, legislators raised the standard deduction — or “zero tax bracket” — to ensure taxpayers with the lowest incomes saw proportionally greater cuts to their income tax burdens.)
So lawmakers have shaved roughly one-third (32 percent) off the state’s top income tax rate in six years. Many have expressed interest in continuing down that tax-cutting path. Some even profess a long-term goal of eliminating the state’s personal income tax completely, following the lead of Texas, Florida, and neighboring Tennessee.
While cutting tax rates, lawmakers have continued to increase state government spending each year. They also have built up North Carolina’s “rainy-day” savings reserve. Even after pulling roughly $100 million from that reserve in 2016 to deal with the immediate aftermath of Hurricane Matthew, the fund has grown to about $2 billion today. A state law adopted with near-unanimous support calls on lawmakers to continue building that fund.
It’s clear that lowering tax rates has not stopped lawmakers from setting aside money to address a literal “rainy day” — even the multiple rainy days associated with Florence.
Yet some left-of-center activists seem to ignore these facts. In nudging media outlets toward its favored hurricane-related follow-up story, Policy Watch argues: “Hurricane Florence’s devastation should have state lawmakers rethinking this week how the proposed income tax rate cap amendment to the state constitution could hamstring future legislatures when a natural disaster strikes.”
The group cites “real costs” associated with lowering the cap, “most notably by limiting a key revenue source available to policymakers to support communities across the state,” according to a budget analyst.
It is correct that if voters approve the amendment, the state would face a new limit on a potential revenue source. That’s the intent. Supporters want to block future legislatures from imposing tax rates so high that as much as 10 cents of every dollar earned would head to the tax man in Raleigh.
But other aspects of Policy Watch’s argument prove more suspect. First, there is no “real cost” associated with the constitutional amendment. The 2019 tax rate of 5.25 percent falls far below the current cap. It also falls far below the proposed cap. Lowering the cap, by itself, has no impact on the state’s tax rate.
In fact, ideological allies of these left-of-center activists made this exact argument in a lawsuit challenging the amendment. They contended that the ballot language would mislead voters into thinking they were voting for a nonexistent tax cut. Judges dismissed the argument. Now the amendment’s critics seem to be making a 180-degree turn to complain about the amendment’s “real costs.”
Next, let’s explore the degree to which the amendment would “hamstring” future legislatures. There is no question that the current income tax cap leaves future legislatures a great deal of latitude to raise rates. Raising the rate to the current cap would represent a 90 percent income tax hike. No serious observer is recommending that course of action today.
Even an increase to the proposed 7 percent cap would amount to a 33 percent income tax hike. Some activists might prefer that option. But they’re keeping their opinions to themselves — at least during this election campaign season.
If a tax cap that preserves the possibility of a 33 percent tax hike creates an obstacle that “hamstrings” future legislatures, one shudders at the prospects of a future legislature with more leeway, less fiscal restraint, and taxation ideas consistent with those espoused by left-of-center activists.
As for “supporting communities across the state,” one suspects that many voters would argue that recent tax cuts have done much more to achieve that goal than a tax hike ever could. Lower tax rates have attracted more entrepreneurs to North Carolina and encouraged existing businesses to expand. Tax revenue generated in a growing economy has helped produce the $2 billion rainy-day fund that will help the state pay bills related to its latest natural disaster.
That’s why legislative leaders are unlikely to rethink their tax cap amendment. Voters will share their own thoughts about the amendment in November.
Mitch Kokai is senior political analyst for the John Locke Foundation.