Cooper’s tax hikes hide beneath the surface

Gov. Roy Cooper’s latest budget proposal wouldn’t raise tax rates. But his plan still calls for tax hikes.

Reconciling those two apparently contradictory statements requires a brief review of the budget Cooper signed into law in November 2021.

It was the state’s first new budget document since 2018. During a standoff that lasted more than two years, Cooper and other advocates of increased government spending were unable to secure major increases in appropriations. At the same time, Republican legislative leaders and other fans of a more competitive tax code were unable to take any steps to reduce tax rates.

The November 2021 budget deal broke the logjam. Lawmakers agreed to a spending increase, while Cooper signed his name to a document that lowered tax rates over time.

Individual income taxpayers are seeing the first impacts of that legislation as they fill out returns this year. The state’s flat tax rate dropped from 5.25% to 4.99% for the 2022 tax year. The rate will continue to drop each year until it hits 3.99% in 2027.

On the corporate side, the income tax will begin to drop from its current rate of 2.5% in 2025. By 2030, the corporate income tax rate will disappear.

While Cooper does not recommend raising any rates in his recent budget plan, he calls for freezing current rates in place. In other words, he wants state lawmakers to reverse tax cuts already embedded in state law.

The proposal prompted an interesting March 16 exchange on Twitter.

Legislative staffer Brent Woodcox posted a table showing future individual income tax rates: 4.75% in 2023, 4.6% in 2024, 4.5% in 2025, 4.25% in 2026, and the 3.99% rate scheduled to take effect in 2027.

“This is the tax rate under current law,” Woodcox noted. “@RoyCooperNC signed that law. The Governor’s budget changes that law in order to take more money from taxpayers to give it to the state. For people who don’t live in a fantasy land, we call that a tax increase.”

The governor’s spin team responded.

“If there’s any body on earth that has proven that things aren’t real until they happen, it’s the NC General Assembly,” wrote Ford Porter, Cooper’s communications director. “North Carolina taxes currently are what they currently are. We don’t think they should increase. We also don’t think big business/wealthy people need more breaks.”

It’s certainly true that taxes — more precisely, tax rates — “are what they currently are.” It’s also true that current state law calls for a lower tax rate next year, and the year after, and the year after that.

To change that law, as the governor advocates, would raise tax rates already scheduled to take effect in future years. As Woodcox noted, that change would amount to a tax increase.

Note also the words Porter used to defend stealth rate hikes. “We,” meaning the governor and his team, “don’t think big business/wealthy people need more breaks.”

The cuts in individual income tax rates benefit every person who pays income tax. Combine those rate cuts with recent increases in the standard deduction, and tax code changes Cooper signed into law in November 2021 have a much larger impact on reducing tax burdens for those at the lower end of the income scale.

It’s lucky for taxpayers that lawmakers who will craft the actual state budget will see through the governor’s spin.

Those who’ve been working long enough at the General Assembly will remember a similar scenario in 2011. Then-Gov. Beverly Perdue, a Democrat working for the first time with a Republican-led General Assembly, wanted to change existing state law.

Rather than let a temporary 1-cent sales tax expire as scheduled, Perdue submitted a budget proposal to preserve 0.75 cents of the disappearing tax. Perdue’s team characterized the idea as a tax cut.

How? The existing sales tax rate for the current budget year would fall by 0.25 cents in the new budget year. A lower rate must mean a tax cut, right?

Not so fast. Republican lawmakers reminded Perdue and her supporters that state law — written by Democratic lawmakers and signed by the governor — called for a sales tax rate one full cent lower than the current rate and 0.75 cents lower than the rate Perdue recommended.

She was calling for a tax hike. Lawmakers rejected her plan. They preserved existing state law. The decision helped all taxpayers.

Taxpayers will benefit again when legislators ignore the current spin about freezing tax rates. Cooper proposes a tax hike. The General Assembly will say no.

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