RALEIGH – When details of the Senate’s $17 billion budget package for next year began surfacing Tuesday, you could quickly see a theme developing: the budget would raise taxes on “working people” while giving a tax cut to “the wealthy” and “business.”
Sure enough, many Tuesday evening newscasts and Wednesday morning headlines used precisely this formulation. “Senate proposal gives rich a tax cut,” began the subhead of a front-page story on the budget in the Raleigh News & Observer. “Everybody’s going to see their taxes go up except the top 1 percent of taxpayers,” said Elaine Mejia, of the NC Budget & Tax Center, in a Winston-Salem Journal piece.
Sorry to ruin a good sound bite, but reality intrudes. The Senate budget, as did Gov. Mike Easley’s earlier proposal, raises taxes on upper-income North Carolinians. The confusion arises because of the imposition years ago of a new top rate of 8.25 percent in the personal-income tax, up from 7.75 percent. This increase first appeared in the 2001 budget bill, where it was called a “temporary” measure to address a short-term fiscal emergency. Rather than expiring in 2003, however, it was reimposed for another two years.
If legislators do absolutely nothing, the 8.25 percent rate falls back down to 7.75 percent. That would be welcome, by the way, since it applies to many investors, entrepreneurs, and high-value professionals who respond to the disincentive effect when making decisions where to work, invest, and live.
In fact, about half a million dollars of the $1.3 billion budget “shortfall” projected by some senators for next year is attributable to the end of two temporary tax hikes: the aforementioned 8.25 percent rate and a half penny on the retail sales tax. So senators recognize that they are working from a baseline in which the top income-tax rate is 7.75 percent for FY 2005-07. They know that any move to keep the tax rate above 7.75 percent next year is a tax increase, one that will raise revenue to fund spending growth.
Unfortunately, they are not being straight about this, and are using misleading language to try to confuse reporters and the general public about what’s going on. It’s kind of funny to see the official budget document report a proposed “reduction” in the top income-tax rate to 8 percent next year – and right next to it an estimated revenue gain of $20 million. Unless the framers of the Senate budget have suddenly become worshippers at the altar of wildly exaggerated “voodoo economics,” they don’t believe that cutting the tax rate will increase revenue.
Their words say “cut” but their math insists “hike.”
As to tax cuts for “business,” this is closer to the truth but not spot on. Corporate-income taxes would indeed fall if the Senate’s plan is fully implemented, but this appears to be contingent not just on passage of the budget bill but also passage of a lottery. Furthermore, for many businesses the net result will be less than meets the eye. Many small businesses are not C corporations, and thus won’t get the rate cut. Others will gain on the rate cut but lose in other areas, bearing some of the cost of the higher retail and individual taxes, for example.
It is true that the Senate budget likely makes North Carolina’s revenue system more regressive, with lower-income folks disproportionately bearing the brunt of higher sales taxes, cigarettes taxes, and lottery taxes. There’s a straightforward solution to that: don’t raise their taxes.
Hood is president of the John Locke Foundation.