RALEIGH – After Gov. Beverly Perdue’s sudden, clumsy sabotage of the emerging tax-hike deal in the General Assembly late last week, there was a wave of predictions that legislative leaders would have to start all over, that the Senate might return to its sales-tax-on-services position and refuse to budge, and that budget negotiations might last well into August or even September.
Count me as unconvinced.
The broad outlines of the state budget Perdue and the legislature are going to pass this year have been evident for weeks. They will spend a little over $20 billion in General Fund and federal-bailout dollars. They will raise taxes primarily by hiking the retail sales taxes by a penny, gouging cigarette and alcohol users some more, and applying a surcharge to state income-tax bills.
The legislature had a deal late last week that assumed the income-tax surcharge would apply to virtually all taxpayers. But after the Raleigh News & Observer published a front-page story predicting that the surcharge would be highly unpopular, Gov. Perdue appears to have panicked and come out against it. “I saw a proposal that stunned me, quite frankly,” she told reporters. “Who in the world thinks in these trying, challenging times for families that you can raise income tax on working families and middle-class families?”
Now, it’s true that in Perdue’s own proposal earlier this month to impose a surcharge, she limited it to taxpayers with incomes above half a million dollars. So her opposition to the legislature’s broader surcharge plan isn’t, technically speaking, inconsistent with her previous position. However, her reasoning is entirely inconsistent, as reported by the Associated Press:
“The clock is ticking,” Perdue said in a message to legislators. “Do the job you were elected to do and produce us a budget that protects public schools and doesn’t raise taxes on the middle class.”
The only way her statement makes any sense is if one assumes that the “middle class” doesn’t pay sales taxes – which make up the vast majority of the tax increases that both Perdue and the legislature favor. That is, of course, false. Middle-income North Carolinians pay most of the sales taxes. They pay the taxes using money they receive in income. The sales tax is simply a tax on income that is consumed rather than saved.
The income-tax surcharge is about $200 million out of the $1 billion tax plan. Narrowing it to upper-income taxpayers could shrink that amount by half or more. So, are we to believe that jacking up income taxes on middle-class North Carolinians by $100 million is bad but sticking them with several times that amount in higher sales taxes is good?
Perdue’s position is for show. Like her earlier efforts to ingratiate herself with the teachers union and other Democratic base voters by calling for a $1.5 billion tax hike, the governor’s last-minute demands are theatrical policy, not fiscal policy. She will eventually sign a budget virtually identical to what the Democrats in the General Assembly have concocted. The income-tax surcharge will survive in some form. Most of the new revenues will come from the sales-tax hike. Republicans will vote against the deal en masse, joined in their position by most North Carolina voters.
And it won’t take until September to make this deal – unfortunately.
Hood is president of the John Locke Foundation